Despite the turmoil in Asian financial markets, no one can question their superior economic performance over the past few decades. Were India, for example, now confronted with a choice – either to pursue policies guaranteeing the Korean growth rates of 1967-97 over the next 30 years followed by a financial crisis as severe as Korea”s; or to continue its own growth rate of the past 30 years over the next 30 – no one can doubt that the Korean-style growth would be preferable. So argues Professor Anne Krueger of Stanford University in the September issue of the Economic Journal.
Krueger contends that trade liberalisation was a major factor in enabling the rapid growth of Korea, Taiwan and other Asian economies over the past few decades. An open economy in itself enables higher living standards, as the ”best” entrepreneurs can use their talents to reach a broader market, and as markets can focus resources on the goods and firms with a comparative advantage, often using the relatively large amounts of unskilled labour in the early stages of growth. But perhaps even more important is that the very high costs of protectionism in developing countries have become starkly clear with several decades of experience in India, other South Asian countries, Latin America and Africa:
- l Protectionism enabled high-cost producers to stay in business and become even highercost, without the spur of competition.
- The small sizes of domestic markets – even in poor countries with large populations – resulted in uneconomic sized factories and production runs and little competition.
- Equally important, the control given to bureaucrats to issue licenses for imports, investments and for virtually any change in economic activity, resulted in the wasteful erection of costly rent-seeking practices, which ate up much of the increases in output that did occur.
Ironically, protection was initially justified on the grounds that open economies were economically efficient in a static sense, but were ”dynamically” inefficient. Experience has shown that protection is even more dynamically inefficient than it is statically inefficient, as the effects of sheltered domestic monopoly positions, rent-seeking and isolation from international developments are highly cumulative.
”Why Trade Liberalisation is Good for Growth” by Anne Krueger is published in the September 1998 issue of the Economic Journal. Krueger is Professor of Economics at Stanford University in California.
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