By Nora Frydenberg Third Year, Third Prize. Introduction

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1 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? Introduction By Nora Frydenberg Third Year, Third Prize 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

2 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 s. Figure 1: Euro Area GDP, in billions of US dollars, Source: Figure 2: United States GDP, in billions of US dollars, 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. Error! Not a valid link.

3 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, 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.

4 Figure 4: Imports and Investment, Taiwan. Source: Rodrik, Page: 18. Figure 5: Imports and Investment, Korea. Source: Rodrik, 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).

5 Figure 6: Average Annual Growth Rates during Selected Periods. Source: Panagariya, A., 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 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).

6 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, 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.

7 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.

8 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 , 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, Annual Growth Rates of Output per Worker. Source: Temple, 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.

9 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, 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, Page: 21.

10 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 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, Source: Temple, 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)

11 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, 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.

12 References: Dollar, D. (1992). Outward-Oriented Developing Economies Really Do Grow More Rapidly: Evidence from 95 LDCs, Economic Development and Cultural Change. 40 (3), Dornbusch, R. (1992). The Case for Trade Liberalization in Developing Countries. The Journal of Economic Perspectives. 6 (1), Gaur, S. (1997). Adelman and Morris Factor Analysis of Developing Countries. Journal of Policy Modeling. 19 (4), Gordon, J. and Gupta, P. (2003). Understanding India`s Services Revolution. The International Monetary Fund - Paper prepared for the IMF-NCAER Conference. IECONOMICS database (No date) Available: Last accessed 10 th March Jolliffe, D. and Lanjouw, P. (2014). A Measured Approach to Ending Poverty and Boosting Shared Prosperity: Concepts, Data, and the Twin Goals. Available: Last accessed 10th March Musila, J. W. and Yiheyis, Z. (2015). The Impact of Trade Openness on Growth: The Case of Kenya. Available: Last accessed 10th March Panagariya, A. (2005). The Triumph of India s Market Reforms - The Record of the 1980s and 1990s. Policy Analysis. 554 Pinto, A. (1993). Trade Liberalisation in Latin America. CEPAL Review - United Nations Chile. 50 Ricardo, D (1817). On the Principles of Political Economy and Taxation. London: John Murray. Rodrik, D. (1994). Getting Interventions Right: How South Korea and Taiwan Grew Rich. NBER Working Paper Series Temple, J. (1999). The New Growth Evidence. Journal of Economic Literature. 36 (1),

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