Measuring Trade Liberalization in Africa

Abstract

Central to any approach to evaluating the impact of economic policy reforms is the chosen measure of the implementation of reform. Adjustment has often been described as ‘getting prices right’ and, without implying that this means completely free markets, we accept this succinct definition: the broad purpose of adjustment, and more generally liberalization, is to remove price distortions so that agents (public and private) can perceive and react to the correct relative incentives, i.e. to ensure that prices convey correct signals regarding relative (social) opportunity costs. It follows that a true measure of implementation should capture the price effect of reform, and the impact is how the economy responds to the relative price changes (as these alter incentives). In some cases the price effect of liberalization is easy to measure, notably where the reform is to a price (e.g. the exchange rate or decontrol of regulated prices). In other cases, such as tax reform, a summary measure of the price effect should be calculated; and in yet others, such as initiating reform of parastatals or reducing public spending, there may be no immediate price effect (but the reforms will affect the future functioning of the price mechanism). In this chapter we take the case of trade liberalization to detail the problems inherent in attempts to measure the implementation of reforms; for convenience, we limit attention to sub-Saharan Africa (SSA), but the arguments can be generalized to other LEs.

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