Openness to trade boosts economic growth rates in developing countries –
but not indefinitely. That is the central conclusion of Professor Alan Winters,
writing in the February issue of the Economic Journal. What’s more, reaping
the full benefits of trade liberalisation requires that other policies – such as
sound public finances – and strong institutions – such as secure property
rights – provide a favourable environment.
‘Liberalise your international trade’ has been a very common piece of policy
advice given by economists to developing countries over the last two
decades. Many benefits are claimed for it, including that it helps to alleviate
extreme poverty by stimulating economic growth. Lots of popular comment,
including from churches and NGOs, disputes this assertion and even
economists squabble about the quality of the evidence in favour of it.
Professor Winters takes a new look at the evidence and concludes that the
true link appears to be between having an open trade regime and having
higher incomes. Even though higher incomes encourage countries to open up
their trade, the evidence pretty firmly supports a causal chain running from
trade to income.
Open trade does not appear to boost economic growth rates indefinitely,
however. When a country opens up by cutting tariffs and removing other
barriers, economic growth increases for a period while incomes climb to their
new higher level but then settles back to its underlying rate.
Critics of this view dispute the direction of causation and whether it is trade
liberalisation rather than other policies – such as sound public finances – that
really matter. Ultimately we do not have enough information to be certain –
because, for example, trade liberalisation and sound finances so often go
together.
But we do know that opening up trade boosts productivity, a fundamental
determinant of income. Moreover, there is no consistent evidence that trade
barriers have boosted economic growth in the post-war world.
Winters considers explicitly the role of other policies and institutions in
connecting trade openness to income. While trade liberalisation alone is
unlikely to be sufficient to boost growth significantly, in two important
dimensions it appears to improve other policies.
Open economies appear to have less corruption – partly because if borders
are open there are fewer opportunities to extort bribes in return for favours –
and also to have lower inflation.
Both of these factors, as well as the opportunities to sell goods abroad that an
open economy affords, help growth by stimulating investment. Plenty of
evidence suggests that this is a key step in translating trade liberalisation into
growth, and that anything that prevents investment from taking off will tend to
reduce the benefits – for example, a shortage of savings, penal tax rates or
insecure property rights.
Property rights are an illustration of the importance of general economic and
social institutions in permitting growth. Winters argues that openness to trade
helps institutional development, and indeed that it is one of the few things that
reliably does so.
The process must, however, be spontaneous and locally driven. The external
imposition of institutions on unwilling developing country governments such as
has sometimes been associated with the Bretton Woods institutions or WTO
rounds of trade talks, is almost bound to fail.
All of this discussion leads to a simple policy message. International trade
policy needs to be as open and simple as possible: for example, low uniform
tariffs offer a means both of achieving transparency and predictability for
traders and of releasing skilled administrative and political resources for other
tasks like institution-building.
ENDS
Notes for Editors: ‘Trade Liberalisation and Economic Performance: An
Overview’ by Alan Winters is published in the February 2004 issue of the
Economic Journal.
Winters is Professor of Economics at the University of Sussex and a
Research Fellow of the Centre for Economic Policy Research (CEPR).
The paper is part of a symposium on ‘Trade Liberalisation and Economic
Performance in Developing Countries’ organised by Amelia Santos-Paulino of
the Institute of Development Studies at Sussex University and Tony Thirlwall
at the University of Kent.
For Further Information: contact Alan Winters on 01273-877273 (email:
L.A.Winters@sussex.ac.uk); or RES Media Consultant Romesh Vaitilingam
on 0117-983-9770 or 07768-661095 (email: romesh@compuserve.com).