A path to trade and investment liberalization (Indonesia, India, Brazil)

Why did many countries liberalize their trade and investment policies in the 1980s and the 1990s? Trade and investment liberalization in a country with a plural polity is likely to occur when a balance of payments crisis occurs in the presence of a pro-liberalization executive. The balance of payments crisis lands the executive in the lap of the International Monetary Fund (IMF), when a country is faced with a severe shortage of foreign exchange. This empowers the IMF to push for trade and investment liberalization. It is difficult for the IMF alone to forge a social consensus in favor of liberalization in a society with vested interests in import substituting industrialization (ISI). The task is daunting even for a pro-liberalization executive in the absence of a balance of payments crisis. However, when a pro-liberalization executive is dependent on the IMF for finance at the time of a severe balance of payments crisis, it can make use of this dependence to push for trade and investment liberalization. This characterizes a situation of synergy in a two level game between the IMF, the executive, and the domestic society. It is a situation where the executive attempts to gain domestic approval for a policy by linking it to the perceived benefits of an international agreement.; The argument has been tested on four periods of economic crises in India, and one crisis period in Indonesia, and, one in Brazil. I compare differing responses to severe foreign exchange crises (India: 1991 & 1966; Indonesia: 1966), minor foreign exchange crises (India: 1973 and 1980), and, normal times (Brazil: 1990--1992). These are hard cases for trade and investment liberalization. The large home market and natural resources should have made the practice of economic self-reliance relatively easy in these countries. The Indian cases allow me to vary the level of crisis and the orientation of the executive, while controlling for other possible causes such as the nature of the political regime. The Indonesia and Brazil cases allow me to examine the political economy of policy change in relatively authoritarian regimes.