THE RHETORIC AND REALITY OF TRADE
LIBERALISATION IN DEVELOPING
COUNTRIES
A. P. Thirlwall
(University of Kent)
Luigi Einaudi Lecture,
Italian Economics Association,
Matera, Italy 19th October, 2012
As Stiglitz says in his powerful book Making Globalisation Work:
‘Advocates of liberalisation cite statistical studies claiming
that liberalisation enhances growth. But a careful look at
the evidence shows something quite different - - - - - it is
exports – not the removal of trade barriers – that is the
driving force of growth. Studies that focus directly on the
removal of trade barriers show little relationship between
liberalisation and growth. The advocates of liberalisation
tried an intellectual slight of hand, hoping that the broadbrush discussion of the benefits of globalisation would
suffice to make their case’.
SUMMARY OF OBSERVATIONS
• There is nothing in the theory of trade liberalisation
which shows that liberalisation by itself will launch a
country on a higher sustainable growth path. It
depends on what countries specialise in.
• All the historical evidence shows that countries now
developed became rich not on the basis of free trade
but by protecting and fostering industrial
development.
SUMMARY OF OBSERVATIONS (Continued)
• Trade liberalisation has raised the growth of exports,
but has raised the growth of imports more, worsening
the balance of trade as a percent of GDP and the tradeoff between growth and the balance of payments.
Orthodox trade and growth theory ignore the monetary
consequences of trade.
• Empirical evidence on the growth effects of trade are
mixed, and not robust, depending on the time period
and the sample of countries taken.
• Trade liberalisation has not been accompanied by a
reduction in world poverty (in absolute numbers).
SUMMARY OF OBSERVATIONS (Continued)
• Trade liberalisation has increased the degree of wage
inequality and worsened the distribution of income
within countries, contrary to orthodoxy.
• Trade liberalisation has almost certainly increased
international inequality.
• There are perfectly respectable economic arguments
for protection.
• In general, the promises expected from trade
liberalisation in poor countries have not materialised.
There is a divorce between rhetoric and reality.
• Bhagwati, the high priest of free trade, even for
developing countries, frankly admits:
“those who assert that free trade will lead
necessarily to greater growth are either ignorant of
the fine nuances of the theory and the vast quantity
of the literature to the contrary or are basing their
argument on a different premise [namely] where
theory includes models that can lead in different
directions --[they] chose the approach that
generates favourable outcomes for growth when
trade is liberalised.”
• As Stiglitz says:
“without protectionism, a country whose static comparative
advantage lies in, say, agriculture risks stagnation; its
comparative advantage will remain in agriculture, with limited
growth prospects. Broad-based industrial protection can lead
to an increase in the size of the industrial sector which is,
almost everywhere, the source of innovation; many of these
advances spill over into the rest of the economy as do the
benefits from the development of institutions, like financial
markets, that accompany the growth of an industrial sector.
Moreover, a large and growing industrial sector (and the
tariffs on manufactured goods) provide revenues with which
the government can fund education, infrastructure and other
ingredients for broad-based growth” (Making Globalisation
Work).
Equation Specifications
Export Growth Equation:
Xt = a0 + a1(rert) + a2(zt) + a3(dxt) + a4(libt)
Import Growth Equation:
Mt = b0 + b1(rert) +b2(yt) +b3(dmt) +b4(libt) + b5(libyt) + b6(librert)
Balance of Trade/Payments Equation:
(TB/GDP)t and (BP/GDP)t = c0 + c1(zt) + c2(yt) + c3(rert) + c4(dxt) +
c5(dmt) + c6(ttt) + c7(libt)
Pooled Data, 1977-2002
25.0
20.0
15.0
10.0
5.0
0.0
-26.5
-21.5
-16.5
-11.5
-6.5
-5.0
-1.5
TB/GDP
-10.0
-15.0
-20.0
-25.0
-30.0
-35.0
-40.0
-45.0
-50.0
-55.0
-60.0
GDP grow th
3.5
8.5
13.5
18.5
•
Results for 17 Latin American countries 1977-2002
TB/GDP = -3.203 – 0.315 (y)
(-6.3) (-3.3)
TB/GDP = -1.387 – 0.258 (y) – 3.61 (LIB)
(-2.1) (-2.7) (-4.2)
where LIB is a dummy for the start of trade liberalisation
The sign on the LIB dummy is negative, not positive.
MAJOR STUDIES ON TRADE LIBERALISATION AND
GROWTH
• S. Edwards (1992) ‘Trade Orientation, Distortions and Growth
in Developing Countries’, Journal of Development Economics,
July.
• S. Edwards (1998) ‘Openness, Productivity and Growth: What
Do We Really Know’, Economic Journal, March.
• D. Dollar (1992) ‘Outward Oriented Developing Countries
Really do Grow More Rapidly’, Economic Development and
Cultural Change, April.
• F. Rodriguez and D. Rodrik (2000) ‘Trade Policy and Economic
Growth: A Sceptic’s Guide to the Cross-National Evidence’ in
B. Bernanke and K. Rogoff (eds), Macroeconomics Annual 2000
(Cambridge MA: MIT Press)
MAJOR STUDIES ON TRADE LIBERALISATION AND
GROWTH (continued)
• D. Dollar and A. Kraay (2004) ‘Trade, Growth and Poverty’,
Economic Journal, February.
• S. Dowrick and J. Golley (2004) ‘Trade Openness and Growth:
Who Benefits?’, Oxford Review of Economic Policy, Spring.
• J. Sachs and A. Warner (1995) ‘Economic Reform and the
Process of Global Integration’, Brookings Papers on Economic
Activity No.1.
• R. Wacziard and K. Welch (2008) ‘Trade Liberalisation and
Growth: New Evidence’, World Bank Economic Review, No.2.
• D. Greenaway, W. Morgan and P. Wright (2002) ‘Trade
Liberalisation and Growth in Developing Countries’, Journal of
Development Economics, February.
Absolute Poverty 1981-2005 (PPP, millions)
Region
$1 a day
1981
1990 2005
$1.25 a day
1981
1990
2005
$2 a day
1981
1990
2005
East Asia and
Pacific
921.7
623.4
175.6
1,071.5
873.3
316.2
1,277.7
1,273.7
728.7
of which China
730.4
499.1
106.1
835.1
693.2
207.7
972.1
960.8
473.7
3.0
4.1
10.2
7.1
9.1
17.3
35.0
31.9
41.9
28.0
29.0
30.7
42.0
42.9
46.1
82.3
86.3
91.3
5.6
3.8
4.7
13.7
9.7
11.0
46.3
44.4
51.5
South Asia
387.3
381.2
350.5
548.3
579.2
595.6
799.5
926.0
1,091.5
of which India
296.1
282.5
266.5
420.5
435.5
455.8
608.9
701.6
827.7
Sub-Saharan
Africa
169.4
245.2
304.2
213.7
299.1
390.6
294.2
393.6
556.7
1,515.0
1,286.7
876.0
1,896.2
1,813.4
1,376.7
2,535.1
2,755.9
2,561.5
784.5
787.6
769.9
1,061.1
1,130.2
1,169.0
1,563.3
1,795.1
2,087.9
Eastern
Europe and
Central Asia
Latin America
and
Caribbean
Middle East
and North
Africa
Total
Total
excluding
China
Source: Chen and Ravallion (2008).
A Comparison of Gini Ratios
International Inequality
Year
1820
1870
1890
1913
1929
1938
1952
1960
1978
1988
1993
1998
2000
Unweighted
Population
weighted
0.20
0.29
0.31
0.37
0.35
0.35
0.45
0.46
0.47
0.50
0.53
0.54
0.12
0.26
0.30
0.37
0.40
0.40
0.57
0.55
0.54
0.53
0.52
0.50
Source: adapted from Milanovic (2005b), Table 11.1
Global (or World) Inequality
Bourginon
Milanovic
and
Sala-i-Martin
(2005b)
Morrionsson
(2002)
(2002)
0.50
0.56
0.59
0.61
0.62
0.64
0.64
0.66
0.62
0.65
0.64
0.66 (1992)
0.66 (1970)
0.65
0.64
0.63
0.63
Conclusions and Policy Recommendations
Main Conclusions:
•
Trade liberalisation has worsened the trade balance and the trade-off
between growth and the balance of payments
•
Positive growth effects of liberalisation are hard to detect
•
Trade liberalisation has had little or no effect on reducing world poverty
•
Liberalisation has almost certainly worsened the domestic and international
income distribution
Trade Advice:
•
Take care in the sequencing of liberalisation
•
Process, or add value, to natural resource endowments
•
Acquire new comparative advantage
•
Explore replacement for imports
•
Poor countries need time and policy space for structural change
• As Rodrik says:
“No country has [ever] developed simply opening itself up to
foreign trade and investment. The trick has been to combine
the opportunities offered by world markets with a domestic
investment and institution–building strategy to stimulate the
animal spirits of domestic entrepreneurs”.
“the fact that the world’s most successful economies during
the last few decades prospered doing things that are most
commonly associated with failure (e.g. protection) is
something that cannot easily be dismissed”.
TANTE GRAZIE PER VOSTRA ATTENZIONE