Download Is the claim that trade liberalisation predominantly leads to the

Is the claim that trade liberalisation predominantly leads to the exploitation of
developing countries by developed countries valid, or are there other reasons for
why some countries seem to have benefited less from trade liberalisation than
others?
By Nora Frydenberg
Third Year, Third Prize
Introduction
International trade has been a heated topic, among economists and politicians alike,
for several hundred years. After the Second World War, many countries valued
economic independence strongly, and it became common to implement a trade policy
of import-substitution. Particularly less developed countries justified such policies
with the argument of “infant industry protection” – meaning they were obliged to
protect their new domestic industries with tariffs and quotas until they were strong
enough to compete internationally. For most countries, however, by the 1970s it was
clear that the predicted spectacular increase in economic growth had not
materialised. Encouraged by the IMF and the World Bank, countries started evaluating
policies that were more open to trade and decreased trade barriers. In the decades
that followed, an increasing number of countries worldwide implemented trade
liberalisation policies, reducing tariffs and quotas drastically. Developing countries`
trade volumes increased dramatically, and these countries` proportion of
manufactured goods in exports overall increased - at the expense of agricultural
goods. However, the free trade debate has grown increasingly controversial, as it has
become clear that not all countries are managing to take advantage of the new
international trends to an equal extent. While many Asian countries, such as South
Korea and Taiwan, have displayed impressive growth rates in the past 30 years, many
African countries have not been able to take international free trade and turn it into
their own economic success story.
This essay will examine the claim that free trade predominantly exploits developing
countries, and examine alternative explanations for why some countries have
benefited relatively less from trade liberalisation. Although acknowledging the
importance and relevance of international and bilateral trade agreements, this essay
will examine the issue at hand from a broader perspective. The essay will emphasise
countries` socioeconomic development levels at the time of trade liberalisation as an
important factor of whether a country is able to benefit from increased trade. The
essay will first present data attempting to portray the gains from trade liberalisation
of chosen Western, Asian and African countries. The latter part of the essay will
evaluate the data presented and examine various arguments for why some developing
countries seem to not have gained from trade liberalisation.
2.1 The impact of trade liberalisation in the western developed countries
The countries in the Western world were among the first to reduce tariffs and
champion trade liberalisation. The North American countries, and most of Europe, had
relatively strong domestic industries already by the beginning of the 1970s, which
weakened the argument of infant industry protection. Especially in Europe, increased
trade and lowering of tariffs was encouraged as a measure to prevent a new world
war. Linking economies together seemed like an effective way of making war more
costly. The two next tables show Euro Area and US GDP levels. Comparing these tables
to tables presented later on in this essay, we see that the Euro Area and US levels of
GDP have grown to a much higher levels since the 1970s than what most Latin
American and Sub-Saharan African countries have. GDP of both the US and the Euro
Area has increased rapidly since the 1980-90s.
Figure 1: Euro Area GDP, in billions of US dollars, 1969-2013. Source:
Figure 2: United States GDP, in billions of US dollars, 1969-2013. Source:
In the table below, it is clear that trade has increased significantly since the late 1980s
for both Northern American, European and Central Asian countries. This indicates
lower tariff rates and increased exports, as a result of trade liberalisation.
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2.2 The impact of trade liberalisation on the Asian “tiger” economies
The increase in exports of manufactured goods from developing countries is among
the greatest changes in the world economy in the last few decades, with Asian
economies playing a central role in this development. Hong Kong, Singapore, South
Korea and Taiwan have been labelled “the 4 Tiger Economies” due to their spectacular
growth rates in the past 50 years. Taiwan and South Korea`s economic success will be
emphasized here. In South Korea and Taiwan, the liberalisation of trade followed a
period of increased levels of investment (Rodrik, 1994). Investors were taking
advantage of the governments` sustained emphasis on education, which had resulted
in high returns to capital. This enabled both countries to emphasise the export of
goods that were high-skilled in production. The rapidly increasing proportion of
exports relative to GDP for South Korea and Taiwan from the beginning of the 1970s
is illustrated in the graph below.
Figure 3: Export/GDP ratios for South Korea and Taiwan. Source: Rodrik, 1994. Page
4.
The increase in exports came about at the same time as trade barriers – mainly tariffs
and import quotas - were reduced and imports increased as a consequence, which is
illustrated for both South Korea and Taiwan in the two tables below.
Figure 4: Imports and Investment, Taiwan. Source: Rodrik, 1994. Page: 18.
Figure 5: Imports and Investment, Korea. Source: Rodrik, 1994. Page 17.
Another Asian economy whos’ economic growth has been of the most bespoke in the
past few decades is India`s. India had its economic take-off in the 1990s, following a
series of reforms opening the country`s economy to international trade and
emphasising export-led growth. One of India`s main advantages in terms of
international trade is the country`s vast population. Following Ricardo`s principle of
comparative advantage, India`s exports were dominated by products that were
labour-intensive products. To begin with, this was mainly labour-intensive services
within the communication, finance and business sectors (Gordon and Gupta, 2013).
Below is a table showing the average annual growth rates of the Indian economy
during selected periods. Note in particular the increase in average growth rates after
the introduction of reforms, compared to pre-1991 reforms (Panagariya, 2005).
Figure 6: Average Annual Growth Rates during Selected Periods. Source: Panagariya,
A., 2005. Page: 4.
Similar to the experiences of Taiwan and South Korea, the Indian ratio of exports to
GDP increased dramatically post economic reforms – doubling from 7.3 to 14% over
the period 1990 to 2000.
Figure 7: Figure compiled with data from IECONOMICS. Values in US dollars.
2.3 The impact of trade liberalisation on Latin American economies
The impact of trade liberalisation and free trade policies on many of the Latin
American countries has been significantly different from that of the “Asian Tiger”
economies. Most countries have not seen economic “take-off” comparable to the
Asian ones, despite introducing trade liberalisation measures.
Implementing policies of trade liberalisation already in the 1970s, Chile was the first
of the Latin American countries to introduce such policies. This came as a surprise to
many, seeing the country`s long history of high trade barriers. Brazil and Argentina
followed soon after, both countries entering free trade agreements by the mid-1980s
(Dornbusch, 1992). Peru and Venezuela are other countries that followed the
liberalisation trend, and even Colombia made it an official goal of the government to
open their economy to international trade entirely by 1992 (Pinto, 1993).
Below are two tables presenting key growth indicators for Chile and Bolivia. It is clear
that Chile, despite lagging behind the Asian tigers in terms of economic growth, has
managed to benefit from trade liberalisation to a greater extent than what Bolivia has.
Although the time periods being different, which complicates direct comparison of the
values in the two tables, it is evident that while Bolivia has had periods of negative
GDP growth, Chile has had an increasing growth rate since the 1970s. This illustrates
that differences in the gains from trade liberalisation are not only between regions,
but within regions.
Figure 8: Source: Pinto, 1993.
Below is a graph which illustrates selected Latin American countries` growth rates.
Although data constraints do not allow for evaluation of the trade liberalisation
policies at the time of their implementation, one can see that there are countries that
are still lagging behind in terms of economic growth. Comparing the graphs below to
the similar graph for South Korea and India in the previous section of this essay, it is
clear that Latin American countries continue to lag behind in terms of GDP per capita
and have not been able to benefit from trade liberalisation to the same extent.
Figure 9: Figure compiled with data from IECONOMICS. Value in US dollars.
A rising issue in Latin American economies is inequality. The economic gains from
trade have not trickled down to society as a whole, and inequality has increased
dramatically in the past 30 years. It is difficult to blame trade liberalisation entirely for
this, however it is possible to argue that income inequality is an important economic
indicator of welfare that free trade has failed to counter. There is evidence that trade
liberalisation and industrialisation negatively impacts the earnings of manual labour
workers, despite the earnings for skilled workers having increased.
2.4 The impact of trade liberalisation on Sub-Saharan Africa economies
Looking at the table below and comparing these graphs to the similar ones in the two
previous sections, it is evident that countries in Sub-Saharan Africa have not
experienced the economic growth trade liberalisation promised. Apart from Nigeria
and South Africa – and Botswana in some respects – most Sub-Saharan countries have
not been able to benefit from the international trend of trade liberalisation.
Figure 10: Source: Figure compiled with data from: IECONOMICS. Value in US dollars.
In the case of Kenya, research has suggested that trade liberalisation policies have
negatively affected growth, due to how the sudden economic openness increased the
cost of intermediate inputs of production. The textile and automobile industries
suffered in particular, with many factories being forced to close down as they were
unable to compete with cheap imports. The agricultural sector also faced large
challenges from foreign producers (Musila and Yiheyis, 2015). In addition, as was the
problem in many Latin American countries, the level of inequality has only increased
in the past decades.
1. Evaluation and discussion of the data
The graphs and tables in the above section point out distinct differences in the
economic gains from trade liberalisation, here measured in terms of GDP per capita.
This section of the essay will attempt to analyse the various reasons for why the
differences in gains appear.
As the above section shows, there seems to be regional differences in how much
countries have grown economically after their implementation of trade liberalisation
policies. The table below, which show the 10 countries with the fastest and 10
countries with the slowest growth rates in the time period 1960-90, seems to support
this claim. Many of the countries that have had the highest growth rates since the
1960s are Asian countries, and the majority of the countries with the lowest growth
rates are Sub-Saharan African (Temple, 1999).
Figure 11: Growth Miracles and Disasters, 1960-90. Annual Growth Rates of Output
per Worker. Source: Temple, 1999. Page:120.
Rodrik (1994) argues that one of the reasons for the regional differences lie in each
countries differences in socioeconomic development at the time when the countries
introduces trade liberalisation policies. He argues that there are several underlying
criteria that must be completed for countries to be able to gain from the opportunities
that free trade brings, with education, literacy and inequality being some of those
criteria.
A common factor for the Asian economies discussed in this essay, is that at the time
when they opened up to international trade, the countries` respective governments
had heavily intervened in the education sector and promoted higher education. This
was also true for South Korea and Taiwan, as can be seen in the table below:
Figure 12: Source: Rodrik, 1994. Page:20.
As the tables above shows, in 1960 South Korea and Taiwan both outperformed
countries with higher GDP per capita, in terms of socioeconomic development. Both
countries had at that time almost reached universal provision of primary education,
and had literacy levels double of what comparable countries had. Both countries were
able to set up export industries that were internationally competitive, which would
have been difficult without an educated work force. The countries` low levels of
inequality ensured that economic growth benefited vast majority of the population,
leading to further social and economic development. Rodrik (1994) thus argued that
having relatively high levels of socioeconomic development at the time of trade
liberalisation enables countries to better take advantage of the new opportunities,
and thus achieve higher levels of growth. South Korea and Taiwan`s initial conditions
explain almost 90% of their economic growth, as is seen in the diagram below:
Figure 13: Source: Rodrik, 1994. Page: 21.
If Rodrik`s argument holds, it can explain why countries with lower levels of
socioeconomic development at the introduction of trade liberalisation have
experienced lower levels of socioeconomic growth.
Rodrik`s findings also support Temple`s (1999) research. Temple found that between
countries that were relatively poor in 1960, there has been a more varied experience
of economic growth than among the countries that were relatively better off in the
1960s. He also claimed that free trade had not led to a conversion of GDP per capita,
as is illustrated below. The table below shows the GDP growth per capita and initial
income of several countries in the time period 1960 to 1990. If free trade benefitted
all countries and if trade liberalisation leads to a conversion of GDP per capita, one
would expect a negative slope. The slope in the table below is not coherent, which
indicates that such conversion is not an overall international trend (Temple, 1999).
Figure 14: Growth and initial income, 1960-90. Source: Temple, 1999. Page: 117.
Another factor which affects the extent to which countries are able to gain from trade
liberalisation, is the countries macroeconomic situation at the time. As the Asian
economies opened their borders to international trade, their economies had reached
a macroeconomic stability level higher than comparable Latin American countries.
Furthermore, the Asian economies had strengthened their exports industries before
they fully opened up their borders. Many Latin American countries, on the other hand,
reduced their import barriers significantly in a time where they were in
macroeconomic instability and were thus less able to benefit from the increase in
trade. Combining increased trade with macroeconomic stabilisation processes
resulted in slow capital formation for most countries (Pinto, 1993).
Others have argued that especially African countries are not open enough, and that
this lack of sufficient openness is one of the reasons for why they haven’t been able
to take advantage of the international trade liberalisation trend. Dollar`s (1992)
research on the degree of openness includes 95 developing countries, whose degree
of openness can be seen in the figure below:
Figure 15: Outward Orientation Rankings for 95 Developing Countries. Source: Dollar,
1992. Page:
Dollar`s (1992) research shows that the majority of the most open countries include
all of the Asian Tiger economies, while the quartile of most inward countries include
many Sub-Saharan Africa countries. Dollar argues that many African countries could
gain 2.1% per capita by adopting the level of outward orientation of the majority of
the Asian economies. Interestingly, Dollar finds that when controlling for development
levels, African countries have much higher price levels than Asian countries, which
hinders these countries` economic growth significantly.
2. Concluding remarks
Despite differences between countries in rates of economic growth, it is clear that
during the past decades of trade liberalisation, more people than ever experienced
improvements in living standards. Admittedly it is difficult to quantify just how much
of this development that free trade can account for, but it is impossible to entirely
dismiss its benefits, in both developed and developing countries.
From the data presented in the above paragraphs, and from the evaluation and
discussion of the data, one can conclude that trade liberalisation has not
predominantly lead to the exploitation of developing countries by developed
countries. Reasons why some countries have benefited less from trade liberalisation
than others seem to include initial socioeconomic development levels and the degree
of outward openness of the countries.
References:
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Rapidly: Evidence from 95 LDCs, 1976-1985. Economic Development and Cultural
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Dornbusch, R. (1992). The Case for Trade Liberalization in Developing Countries. The
Journal of Economic Perspectives. 6 (1), 69-85.
Gaur, S. (1997). Adelman and Morris Factor Analysis of Developing Countries. Journal
of Policy Modeling. 19 (4), 407–415.
Gordon, J. and Gupta, P. (2003). Understanding India`s Services Revolution. The
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10th March 2015.
Jolliffe, D. and Lanjouw, P. (2014). A Measured Approach to Ending Poverty and
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March 2015.
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http://www.sciencedirect.com/science/article/pii/S0161893815000137. Last
accessed 10th March 2015.
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