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Exposeing the myth of market liberalization
A comparison of Vietnam and Mexico reveals one booming economy and one struggling. Which followed the free-trade route?
Expect much gnashing of teeth in Hong Kong this week, The chances of securing a comprehensive trade deal are non-existent, with the talks now really about damage limitation and the apportionment of blame.
The development charities will ay that the selfish behavior of the developed world has condemned poor nations to further penury.
Washington and Brussels will say the negotiation have been stymied by the obduracy of India and Brazil. Economists will have a field day explaining hoe the world is turning its back on millions of dollars’ worth of extra growth, and that the poor countries will be the ones who will really suffer if the global economy lapses back into a new dark age of protectionism.
That’s certainly the accepted view, An alternative argument is that the trade talks are pretty much irrelevant to development and that in as much as they do matter, developing countries may be buying a pup.
The Harvard economist Dani Rodrik is one trade ceptic. Take Mexico and Vietnam, he says. One has a long border with the richest country in the world and has had a free-trade agreement with its neighbor across the Rio Grande. It receives alot of inward investment and sends its workers across the border in droves. It is fully plugged in to the global economy. The other was the subject of a US trade embargo until 1994 and suffer from trade restrictions for years after that. Unlike Mexico, Vietnam is not even a member of the WTO.
So which of the two has the better recent economic record? The question should be a no-brainer if all the free-trade theories are right – Mexico should be streets ahead of Vietnam. In fact, the North American Free Trade Agreement (NAFTA) deal with the US and Canada in 1992, its annul per capita growth rate has grown by around 5 percent a year for the past two decades. Poverty in Vietnam has come down dramically; real wages in Mexico have fallen.
Rodrik doesn’t buy the argument that the key to rapid development for poor countries is their willlingness to liberalize trade. Nor, for that matter, does he think boosting aid makes much difference either.
Looking around the world, he looks in vain for the success stories of three decades of neo-liberal orthodoxy: nations that have really made it after taking the advice – willingly or not – of the IMF and the World Bank.
Rather, the countries that have achieved rapid economic take-off over the past 50 years have done so as a result of policies tailored to their own domestic needs. Vietnam shows that what you do at home is far more important than access to foreign markets. There is little evidence that trade barries are an impediment to growth for those countries following the right domeatic policies.
Those policies have often been the diamestic opposite of the orthodoxy. South Korea and Taiwan focused their economies on exports, but combined that outward orientation with high levels of tariffs and other forms of protection, state ownership, domestic-content requirements for industry, directed credit and limits to capital flows.
"Since the late 1970’s, China also followed a highly unorthodox two-track strategy, violating practically every rule in the guidebook. Conversely, counties that adhered more strictly to the orthodox structural reform agenda – most notably Latin America – have fared less well. Since the mid-1980s, virtually all Latin America countries opened up their economies, privatized their public enterprise, allowed unrestricted access for foreign capital and deregulated their economies. Yet they grown at a fraction of the pace of the heterodox reformers, while also being buffeted more strongly by macroeconomic instability," Rodrik says.
This is an argument taken up by the Cambridge University economist Ha Joon-chang in a recent paper for the South Center, the developing countries’ untergovernment forum. Chang argues that "there is a respectable historical case for tariff protection for industries that are not yet profitable, especially in developing countries. By contrast, free trade works well only in the fantasy theoretical world of perfect competition."
Going right back to the mid-18th century, Chang says Pitt the Elder’s view was that the American colonists were not to be allowed to manufacture so much as a horseshoe nail. Adam Smith agreed. It would be better all round if the Americans concentrates on agricultural goods and left manufacturing to Britain.
Alexander Hamilton, the first US Treasury secretary, dissented from this view. In a package presented to Congress in 1791, he proposes measures to protect America’s infant industries. America went with Hamilton rather than Smith.