THE RHETORIC AND REALITY OF TRADE LIBERALISATION IN DEVELOPING COUNTRIES A. P. Thirlwall (University of Kent) Luigi Einaudi Lecture, Italian Economics Association, Matera, Italy 19 th 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 broad- brush 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 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).

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: X t = a 0 + a 1 (rer t ) + a 2 (z t ) + a 3 (dx t ) + a 4 (lib t ) Import Growth Equation: M t = b 0 + b 1 (rer t ) +b 2 (y t ) +b 3 (d mt ) +b 4 (lib t ) + b 5 (liby t ) + b 6 (librer t ) Balance of Trade/Payments Equation: (TB/GDP) t and (BP/GDP) t = c 0 + c 1 (z t ) + c 2 (y t ) + c 3 (rer t ) + c 4 (d xt ) + c 5 (d mt ) + c 6 (tt t ) + c 7 (lib t )

Results for 17 Latin American countries TB/GDP = – (y) (-6.3) (-3.3) TB/GDP = – (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 (PPP, millions) Source: Chen and Ravallion (2008).

A Comparison of Gini Ratios Source: adapted from Milanovic (2005b), Table 11.1

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