“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.”
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.