In this paper, an incomplete financial market model was built to illustrate the impacts of the market incompleteness on the benefits of trade liberalization. Particularly, it will focus on the investigation of the impacts of different sequences of opening up the goods market. That is, should the government open up international trade simultaneously with the opening up the domestic trade, i.e. implementing a “shock therapy” approach? Or should the government liberalize the domestic goods market first, then to deregulate the international trade, i.e. following a “gradualism” approach? This paper proves that the gradualism approach by opening domestic goods market before liberalization the international trade can guarantee the successive improvement of everyone’s welfare. Therefore the gradualism approach is a Pareto improvement sequence.
Ma, Y. (2007). The sequence of economic liberalization in a developing country with incomplete financial market (CPPS Working Paper Series No.181). Retrieved from Lingnan University website: http://commons.ln.edu.hk/cppswp/85/