Free trade, economic growth and poverty reduction: thoughts on a failed doctrine

“Modern growth is…not tied to free trade. Higher manufacturing growth rates have been typically associated with higher export growth rates (mostly in countries where export and import shares in GDP grew), but there is no statistical relation between either of these growth rates and the degree of trade restrictions. Rather, almost all of the successful export-oriented growth has come with selective trade and industrialization policies. In this regard, stable exchange rates and national price levels seem to be considerably more important than import policy in producing successful export-oriented growth. Conversely, there “are no examples of countries that have achieved strong growth rates of output and exports following wholesale liberalization policies”. Japan, South Korea, and Taiwan are the classic cases of successful development through the application of “highly-selective trade policies.” On the other hand, Chile (1974-1979), Mexico (1985-1988) and Argentina (1991) did follow wholesale liberalization, which not only wiped out weak sectors but also potentially strong ones, often at great social cost over a long period of time. Chile’s economy grew at less than 1% per capita from 1973 to 1989. Mexico suffered similar setbacks and slowdowns. And Argentina, which was lauded as being a good ‘globalizer’ as recently as 2002 ended up mired in deep crisis from which it recovered precisely by not following the rules. What is true is that economic growth is correlated with reductions in poverty in countries where the distribution of income remained stable. Unfortunately, income distribution does not generally remain stable in the developing world so growth does not necessarily produce poverty reduction. On the other hand, poverty reduction is generally good for growth. Thus, the high correlation between growth and poverty reduction does not tell us the causation, and certainly does not guarantee that the former will produce the latter.”

Anwar Shaikh

To sum up, trade liberalization has not helped poor countries industrialize and ‘catch-up’ with rich ones, and the latter have tended to try to ‘kick away the ladder’ that they themselves climbed, once they have become rich. Free trade has allowed them to dominate the global economy and has prevented the poorest nations from following their development path. Of course, state intervention has a chequered history, and there have been successes as well as failures in the developing world. But this does not mean that liberalization is the only option. Rather, industrial and trade policies should take account of what is possible given the politics of the country in question.

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4 thoughts on “Free trade, economic growth and poverty reduction: thoughts on a failed doctrine

  1. I find this a very interesting topic. I recall Nick in our economics lectures that this apparent paradox was discussed on numerous occasions. The reason of course is that liberalism requires all parties to cooperate for all parties to attain maximum benefit. Which makes the paradox all the more complex because surely more developed nations would do better (as would those who are poorer) if they didn’t adopt a “protect yourself once you’ve made it” stance (as you suggested) and rather concentrated on capitalising on those goods and services in which they enjoy a comparative advantage, in a fully liberalised trade world.

    • Thanks for your comment Will. The argument for selective protectionism for developing countries is really for ‘infant industries’, and in successful cases has evolved as the companies and sectors became internationally competitive so that support could be withdrawn once they could export profitably onto the world market. Governments needed to be able to make support conditional on improved ‘capabilities’ achieved through learning-by-doing processes, which can take years. Such intervention often failed where the threat by the govt was not conditional, and ended up supporting failing industries that never ‘grew up’. All the same, comparative advantage in manufacturing industries has been created by policy in countries such as South Korea and Japan, rather than existing in some latent fashion.

      Re developed countries, I think you are referring to the Prisoner’s Dilemma in Game Theory. Both parties agreeing to liberalize in this case might lead to gains for both sides, or at least for some industries, and the result will typically be uneven across the economy. Even so, rich countries, despite the liberalization of trade between them, find other ways to promote new industries eg the military industrial complex in the US which has produced spin-off applications of publicly funded research in household consumer markets. The internet, touch screen, sat nav etc were all initially funded by the state but were subsequently put together in an attractive way by Apple to create the iphone.

      It’s an interesting area of study, and subject to various myths and misinterpretations!

  2. Ha-Joon Chang has a book named: Bad Samaritans: rich nations, poor policies, and the threat to the developing world. The first chapter (The Lexus and the olive tree: revisited) is completely devoted to globalisation and how in the name of free trade the rich nations actually took advantage of the poorer nations. In fact, while they advocated free trade for the developing world, they never practiced it themselves.
    It’s quite an interesting read. Have a look at it if you have time

    • Hi thanks for your reading suggestion. I read the book a few years ago, and agree with you that it is interesting. I can also recommend Chang’s ’23 Things they don’t tell you about capitalism’ which is also very readable. I have posted about some of its chapters on this blog. Thanks again.

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