TRADE LIBERALISATION AND THE POVERTY OF NATIONS

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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
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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
broad-brush discussion of the benefits of
globalisation would suffice to make their case.

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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.

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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 trade-off 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).

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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.

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• 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.

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• 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).

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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)
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• 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.

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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 Sceptics Guide to the
  Cross-National Evidence in B. Bernanke and K.
  Rogoff (eds), Macroeconomics Annual 2000
  (Cambridge MA MIT Press)

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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.

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Absolute Poverty 1981-2005 (PPP, millions)
Source Chen and Ravallion (2008).
14
A Comparison of Gini Ratios
Source adapted from Milanovic (2005b), Table 11.1
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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

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• 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 institutionbuilding strategy to
  stimulate the animal spirits of domestic
  entrepreneurs.
• the fact that the worlds 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.

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TANTE GRAZIE PER VOSTRA ATTENZIONE