The Protection Racket
Development activists finally realize that free trade is not evil. When do they plan to tell the poor?
It has been encouraging to watch advocates for the world's poor become more sophisticated about the benefits of trade liberalization in recent years. It is now rare to find groups, such as Public Citizen, that are against all forms of liberalization. Most, including Oxfam, Christian Aid, and ActionAid, agree that poor countries would benefit if rich countries lowered their trade barriers. What remains puzzling is why these same organizations resist following their logic any further. Why do those speaking on behalf of the poor fail to realize that developing countries will also benefit from their own liberalization? Why do so many otherwise knowledgeable voices still recommend that developing countries practice poor-world protectionism?
It has been encouraging to watch advocates for the world’s poor become more sophisticated about the benefits of trade liberalization in recent years. It is now rare to find groups, such as Public Citizen, that are against all forms of liberalization. Most, including Oxfam, Christian Aid, and ActionAid, agree that poor countries would benefit if rich countries lowered their trade barriers. What remains puzzling is why these same organizations resist following their logic any further. Why do those speaking on behalf of the poor fail to realize that developing countries will also benefit from their own liberalization? Why do so many otherwise knowledgeable voices still recommend that developing countries practice poor-world protectionism?
Development activists are slow to accept that liberalization by poor countries — even if rich countries don’t respond in kind — increases exports and thereby strengthens developing-country economies. For instance, when Bangladesh lowers its trade barriers, it makes the domestic market less profitable in relation to the world market, therefore encouraging its people to export more. Opening the door to world markets can also usher in new technology and bring out the best in a country’s entrepreneurs by encouraging competition with the world’s most efficient suppliers of high-quality products.
South Korea’s and India’s roads to development are good examples of the choice many poor countries face today. Until 1960, the two countries tried to grow by protecting fragile national industries. Then South Korea switched to an export-oriented strategy and proceeded to dismantle trade restrictions across the board. The results weren’t long in coming. Seoul produced impressive annual growth rates of 23.7 percent in exports, 18 percent in imports, and 6.3 percent in per capita income between 1961 and 1980. The country’s exports as a proportion of gross domestic product (GDP) umped from 5.3 to 33.1 percent during the same period.
India, on the other hand, toyed with liberalization in the 1960s but never got serious about encouraging its exporters or eliminating restrictions on imports. The government kept an array of domestic industries on life support, without regard to their inefficiency or comparative advantage. India’s trade regime was so repressive that (excluding cereal and oil) its imports as a percentage of GDP fell from 7 percent in 1958 to just 3 percent in 1976. Despite stable politics and a highly capable bureaucracy, India saw its per capita GDP grow at a slothful 1.1 percent between 1961 and 1980.
It’s tough to find an example of a developing country that has grown rapidly while maintaining high trade barriers. Some have argued that India’s and China’s recent growth spurts buck the trend. True, protectionist policies were in place when the two countries began to grow rapidly, but they sustained their booms only through massive trade liberalization. And because the liberalization occurred over at least 20 years, the two countries managed to escape some of the most painful social side effects.
Unable to muster empirical support for their positions, today’s apologists for protectionism contend that agriculture — now the critical trade issue — is somehow different. Successive Indian commerce ministers, for example, have argued that they cannot risk the lives of the 650 million Indians who depend on agriculture for their livelihood. Oxfam has made similar arguments about countries such as Vietnam and Ghana. Acknowledging that economic liberalization must proceed gradually and with proper safety nets for dislocated farmers hardly supports the protectionist position. There is no reason to believe that the benefits that flow from competition in every other industry do not exist in agriculture, too. Yes, rich countries massively subsidize their own agriculture. But poor countries lose from their trade barriers with or without rich-country subsidies.
Chile’s agricultural exports, for example, grew from $1.2 billion to $4.9 billion between 1991 and 2001 as it liberalized. Even India, which has only halfheartedly opened its agricultural sector by removing export restrictions and eliminating exchange-rate overvaluation, saw its agricultural exports rise from $3.4 billion in 1991 to $7.4 billion in 2004. Importantly, this expansion occurred without a significant reduction in agricultural trade barriers in developed-country markets.
It’s an illusion to believe that rich countries will simply lift their trade barriers without demanding the same of their trading partners in the developing world. Recent history is evidence enough. In 1965, developed countries committed to eliminating trade barriers that were particularly harmful to poor economies. Yet, with the developing countries opting out of direct negotiations, barriers to imports of agricultural products, textiles, and clothing rose rather than declined. It was only when developing countries joined the Uruguay Round of trade talks through what is now the World Trade Organization that developed countries abolished import quotas on textiles and clothing.
Like South Korea and India before them, today’s poorest countries face a choice. They can either wait in vain for rich countries to unilaterally drop their trade barriers, take the time to negotiate mutual concessions, or liberalize their own markets — regardless of what the rich countries do. Getting developed countries to simultaneously liberalize will allow developing countries to multiply the benefits of their own liberalization, but that welcome prospect shouldn’t be cause for delay. Unilateralism may be harmful when it comes to matters of peace and war, but when it comes to trade and development, it can be all to the good.
Arvind Panagariya is a professor of economics and the Jagdish Bhagwati professor of Indian political economy at Columbia University.
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