No wrath like that of a free trader scorned

Martin Wolf's review of two books that favor trade protection for developing countries has led to an interesting debate, including a contribution from Ned Phelps. I find some of the comments there astonishing. Here are a couple.

Arvind Panagariya:

few free-trade advocates argue that free trade by itself is enough to launch a country into high-growth orbit. My own forthcoming book India: An Emerging Giant (OUP, NY) is 500-pages long precisely because it carefully spells out the reforms needed in various areas to achieve and sustain a double-digit growth in India.

Panagariya has apparently set a new length record for the list of complementary reforms that ensure trade liberalization works. With such a comprehensive list, we can always blame countries ex post for having neglected reforms on p. 325 and 483 in case their reforms come to nought...

Anne Krueger:

economists and policy makers [in the 1950s and 1960s] regarded trade protection as a major policy instrument for achieving rapid growth through industrialization. Much sad experience has shown that not to be the case. Many countries adopted policies of “import-substitution”, protecting new industries (indefinitely) with import prohibitions or very high walls of protection. There is enough experience to show why that strategy does not work.

...

It was not neoclassical economic theory, but primarily the failures of the “import-substitution” strategies that resulted in unsatisfactorily low growth rates. In country after country, high-cost domestic monopolies or duopolies were developed in industry after industry. They achieved little total factor productivity growth, and remained high cost behind high walls of protection.

I cannot believe Krueger is not aware of the actual TFP numbers. Why does she say things that are, at best, misleading?

Martin Wolf sounds like a very wise man in his response. And you should also read Ha-Joon Chang's comments, which I think get it exactly right. I agree with him when he says "Trade is simply too important for economic development to be left to free trade economists."

Comments

[Justin Rietz]

"Trade is simply too important for economic development to be left to free trade economists."

I would extend this to say economists in general - no offense Dani :-)

Having taken a look at the TFP numbers, I'm not sure they support one position over another. They are high level aggregates that don't reveal details about a myriad of factors that may have played underlying roles. Also, perhaps Krueger is using country-by-country stats? Having had her as my professor for undergrad international economics, I too would be shocked if she ignored such data.

As I have stated before, I think a country that already has strong protectionist policies in place would be loathe to suddenly throw off all trade restrictions in "shock therapy" fashion. The results of post-communist Europe should be ample evidence for this.

In regards to Panagariya, perhaps he can lend a copy of his book to Sachs?

[jonfernquest]

Ha-Joon Chang's reaffirmation of history and human agency is truly a breath of fresh air:

"...economies develop in the particular ways they do because someone somewhere makes a conscious decision to 'invest acquire skills, and gain knowledge' in particular areas. In the same way in which business managers often go deliberately against market signals in making such decision...governments can, and often should, go against market signals."

Yes, if you read the exact description of why and how Park Chung Hee originated the HCI drive, this becomes obvious, not only foreign exchange rationing but credit rationing directed at specific promoted export sectors, amking market prices irrelevant, accompanied with riot police, KCIA, and strict monitoring and control, massive subsidization until the end of the Vietnam war, to suggest that HCI did not work is ridiculous, it is exactly what distinguishes Korea from, for instance, Southeast Asian states that rely on joint ventures for these inputs, but I think the massive cold war subsidies and post WWII war indemnities from Japan, as well as the oppressive authoritarian control are exactly what make it infeasible today, but at the same time this history does define one possible feasible solution that worked

[Mark Weisbrot]

Dani,

thanks for your insightful comments on the FT discussion. As Ha-Joon Chang is a Senior Research Associate at CEPR (www.cepr.net ), we posted the discussion along with a plug for his book, Bad Samaritans, on our web site.

To me the one of the most interesting parts of the discussion was Martin Wolf's concession that developing countries ought to be able to choose their own policies and make their own mistakes. This is a concept that is rarely given consideration in Washington. But, as I argue in a recent article, it is one that the world is increasingly approaching as the IMF and associated institutions (including the IMF's dominant shareholder, U.S. Treasury) continue to lose influence over developing countries.

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