The Hindu Business Line : International trade and economic growth

THE opponents of globalisation view growing international trade as inimical to the interests of the developing countries. Yet, this is far from the truth. Over the last two decades, few developing nations have grown rapidly without simultaneous increase in both exports and imports. And, virtually, all developing countries that have grown rapidly have done so under open trade policies or declining trade protection. India and China are the best recent examples of countries that started with relatively closed trade policy regimes in the 1980s but subsequently achieved accelerating growth while opening up their economies.

Openness to trade promotes growth in many ways. Entrepreneurs are forced to become more efficient to survive. Openness also affords access to the best technology and allows countries to specialise in what they do best rather than produce everything. The fall of the Soviet Union was in no small measure due to this failure to access cutting edge technology. Even as large an economy as the US today specialises heavily in services, which account for 80 per cent of total US output.

Of course, openness to trade is not by itself sufficient to promote growth. Macroeconomic and political stability and other policies are needed as well. So some countries that have opened only a tip of their markets have still not seen commensurate increases in economic growth. That has been particularly true of African countries, such as the Ivory Coast, during the 1980s and the 1990s. But such instances hardly disprove the process of growth well enough to predict precisely when the opportunity will knock on a country's door. But when it does knock, an open economy is more likely to seize it — a closed one will miss it. Even globalisation sceptics such as economists Dani Rodrik and Joseph Stiglitz recognise this point; neither chooses trade protection over freer trade.

On average, poor countries have higher tariff barriers than high-income countries. For instance, rich nations' tariffs on industrial products average about 3 per cent, compared to 13 per cent for poor countries.

Even in the textiles and clothing sectors, tariffs in developing nations (21 per cent) are more than double those in rich countries (8 per cent). And while textiles and clothing are subject to import quotas in rich economics, such restrictions are due to be dismantled entirely by January 1under, existing World Trade Organisation (WTO) agreements.

Overall, the countries that stand to benefit most from greater competition and openness are nations that display the highest protection, including most countries in South Asia and some in Africa.

Labour-intensive products, such as textiles, clothing, leather, and footwear, which developing countries also export to each other, attract high duties in countries, such as Brazil, Mexico, China, India, Malaysia, and Thailand.

Newly industrialised economics, such as Hong Kong, Singapore, South Korea and Taiwan, have all been free of poverty for more than a decade, according to the dollar-a-day poverty line.

By contrast, during the 1960s and the 1970s, India remained closed to trade, grew approximately 1 per cent annually (in per capita terms), and had no drop in poverty levels.

Trade helps produce rapid growth, and rapid growth helps the poor through three channels. First, it leads to what the Columbia University economist, Prof Jagadish Bhagwati, calls the active "pull-up" rather than the passive "trickle-down" effect. Sustained growth rapidly absorbs the poor into gainful employment.

Second, rapidly growing economies can generate vast fiscal resources that can be used for targeted anti-poverty programme. And finally, growth that helps raise incomes of poor families improves their ability to access public service such as education and health.

If developed countries eliminate all forms of agricultural protection, including subsidies to domestic producers and quotas on foreign imports, their agricultural production will decline and the worldwide price of agricultural products will rise. Therefore, poor countries that are efficient agricultural producers will benefit from higher prices and access to new export markets.

Some may argue that even if the poor countries pay higher prices for agricultural imports, their poor farmers will still not benefit from the increased prices. But, in fact, high domestic prices do not require high world prices.

Even under current world trading rules, the least developed countries can offer higher than world prices to their farmers. In India, for example, the government buys food grain from farmers at prices higher than (and unrelated to) world agricultural prices.

Trade-oriented East Asian economies, such as Hong Kong, Singapore, South Korea and Taiwan, have registered excellent export performances since the early 1960s. By contrasts, relatively protectionist countries, such as India, China, Argentina and Egypt, have hurt their own export growth and, as a result, stifled their overall economic performance in those years.

Contrary to popular belief in developing countries, the WTO is the best friend available to exporters in poor nations

The WTO's strength has helped developing nations deflect pressures from rich nations to link further trade opening to the creations of stronger labour standard in poor nations. Without the WTO, developed countries simply could have resorted to unilateral trade sanctions to enforce their desired standard. Moreover, at Cancun, this rules-based bargaining allowed developing countries to delay negotiations on investment and competition policy.

Trade forces can hurt the global environment. For instance, the rapid expansion of coastal shrimp farming in several countries in Asia and Latin America in the 1980s, driven principally by the demand for exports, led to the contamination of water supplies and destruction of surrounding mangrove forests. But trade opening can bring environmental benefits as well. For example, the WTO 's Doha negotiations would not only bring economies and efficiency benefits by shifting producers from high-cost to low-cost producers, but also yield environmental benefits by replacing Europe's pesticide intensive agriculture with manure-intensive products in developing countries.

When trade produces adverse environmental effects, the solution is not to ban or restrict trade. Instead, governments should adopt appropriate environmental policies to achieve environmental objectives and allow trade policy to target economic objectives.

In the shrimp farming case, producers should be taxed for the pollution they create but then left to trade freely. Such a policy normally will reduce exports and economic output, but that result would be offset by reduced pollution. Reliance on a single instrument (trade policy) to target both economic and environmental objectives is like trying to kill two birds with one stone.

Just as governments should not subsidise trade to help the environment, neither should they restrict it to avoid harming the environment.

(The author is Chennai-based management consultant.)

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