Trade liberalization and the budget deficit

The reluctance of many developing country governments to liberalize their t rade regimes is partly due to fears that this will exacerbate their fiscal difficulties. This paper examines the relationship between trade liberaliza tion and the budget deficit, relating some popular but incomplete approache s (such as analysis of the foreign exchange budget) to a more comprehensive approach using Bn applied general equilibrium model. The argument is illus trated using data from Kenya, as well as a number of stylized cases. The co nclusions are that liberalization may be budget enhancing, in certain circu mstances strongly so; however, the dynamic adjustment may be problematic, w ith the budget deteriorating in the short run, even when the reform program is fiscally benign in the longer run. (C) 1999 Society for Policy Modeling . Published by Elsevier Science Inc.