economics project (4th sem)- srijan chakravorty
TRANSCRIPT
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FREE TRADE AND DEVELOPMENT
SUBMITTED TO: MRS. SHIVANI MOHAN,
FACULTY FOR ECONOMICS
SUBMITTED BY: SRIJAN CHAKRAVORTY
ROLL- 474
B.A. LL.B (HONS.), 4TH
SEMESTER
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TABLE OF CONTENTS
1. ACKNOWLEDGEMENT.3
2. RESEARCH METHODOLOGY..4
3. INTRODUCTION ..... ...5
4. TRADE POLICY AND DEVELOPMENT: A HISTORICAL
OVERVIEW ..6
5. RECENT TRENDS IN TRADE AND DEVELOPMENT IN DEVELOPING
NATIONS10
6. TRADE LIBERALIZATION AND THE MILLENIUM DEVELOPMENTGOALS..17
7. CONCLUSIONS..24
8. BIBLIOGRAPHY25
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ACKNOWLEDGEMENT
I would like to take this opportunity to express my humble gratitude to
the faculty of Economics, Mrs. Shivani Mohan for assigning such an
interesting topic to me. I would also like to thank my parents for their
support in encouraging me to work harder on this assignment. I would
further extend my heartiest regards to the authors of the books and
articles on the Internet which I have referred to in my project work as
their information provided vital insights in the course of making the
project.
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RESEARCH METHODOLOGY
AIMS AND OBJECTIVES:
The aim of the project is to present an overview of Free Trade and
Development through various writings and articles. The aim has been to
identify the relationship between free trade and development and their
relevance in the economic growth of a country.
SCOPE:
Though the study of Economics is an immense project and pages can be
written over the topic but due to certain restrictions and limitations I was
not able to deal with the topic in detail.
SOURCES OF DATA:
The following secondary sources of data have been used in the project-
1. Websites
2. Books
METHOD OF WRITING:
The method of writing followed in the course of this research paper is
primarily analytical.
MODE OF CITATION:
The researcher has followed a uniform mode of citation throughout the
course of this research paper.
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INTRODUCTION
One of the foremost challenges facing the world this century is dealing
with the persistent problem of world poverty. A world in which a majority
of the globes population lives in impoverished conditions is unacceptable.
What Adam Smith, wrote in relation to a country applies to the world at
large:
No society can be flourishing and happy, of which the far greater part
of the members are poor and miserable.1
In past decades, various schemes have been proposed as the key to
promoting economic growth and development: development aid,population control, capital accumulation and investment in heavy
industry, and the like.2 Each of these schemes has failed to unlock the
door to greater prosperity in the developing world. As a result, the search
for a single universal measure that will stimulate economic growth has
given way to the less ambitious, but more realistic, search for the
combination of policies that tend to encourage, though not guarantee,
economic development.
One clear lesson from the past several decades, however, is that
countries taking advantage of the tremendous expansion in world trade
have also made substantial progress in promoting economic development
and reducing poverty. Experience has shown that there are many
different ways in which countries can take advantage of the opportunities
provided by trade, but nearly all involve some liberalization of domestic
trade policies. While trade liberalization often poses difficult political
challenges to governments, the tangible economic payoff to countries that
undertake such reforms makes it imperative that countries seriously
consider moving forward with new policies.
1The Wealth of The Nations (1776)
2 See William Easterly, The Elusive Quest for Growth , Cambridge: MIT Press, 2001.
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This paper reviews this link between trade and development. It
provides an overview of the recent evidence on the relationship between
trade and growth, trade and poverty reduction, and trade and income
distribution. The aim is to provide the background context for tackling
more specific issues, such as the agenda for trade negotiations in key
sectors such as agriculture and services, and the role of the World Trade
Organization in fostering the interests of developing countries.
TRADE POLICY AND DEVELOPMENT: A HISTORICAL
OVERVIEW
One of the oldest and most important questions in all of economics is the
relationship between a countrys trade policy and its economic
development. Simple economic analysis informs us that international
trade is not an end unto itself, but a means to an end, a vehicle for
achieving a higher standard of living through the more effective use of
national resources. If openness to trade helps improve economic
conditions in developing countries, then the policy implications are
relatively straightforward governments should pursue trade
liberalization as part of a general framework of policies aimed at
improving economic performance. Alternatively, if openness poses an
obstacle to economic development or if there are important exceptions to
free-trade rule, then certain restrictions on trade may prove beneficial
and government regulations may be warranted.
Economic theory can provide a framework for analyzing the
relationship between trade and development, such as sorting out the
various mechanisms by which one can affect the other, but theory does not
offer guidance that is decisive when it comes to policy. In part, this is
because of a tension between two alternative views of the impact of trade
on development. The classical view, often associated with Adam Smith, is
that free trade will lead to the most efficient use of a countrys resources
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and therefore yield the highest national income. Openness to trade
improve economic performance by increasing competition and by giving
domestic firms access to the best foreign technology, which can be
adopted to raise domestic productivity. An alternative view, associated
with the nineteenth century political economist Friedrich List, suggests
that developing countries should protect their infant manufacturing
industries from foreign competition to foster their growth and allow them
to catch up to industrial leaders. This view suggests that government
assistance to shift resources out of primary products and into
manufacturing would promote economic development and prevent
prolonged specialization in low value-added a ctivities.
While economic theory provides a framework for thinking about
these issues, the answer to the question of which trade regime best
promotes economic development ultimately depends on empirical
evidence: what have been the actual country experiences in terms of the
impact of liberalization on economic performance?
In the past, the answer given has not always been favorable to open
trade policies. For example, economic historian Paul Bairoch and others
have argued that Friedrich List was correct in the nineteenth century:
countries with relatively low tariffs (such as the Britain) grew relatively
slowly while other developing countries (such as the United States,
Canada, and Argentina) imposed high tariffs and grew rapidly.3 For the
period 1870 to 1913, high tariffs and economic growth rates are positively
correlated.
Yet more recent analysis suggests that this simple correlation does
not support the conclusion that high tariffs were responsible for the rapid
growth in those countries. Rather, countries that chose largely for fiscal
reasons to impose high tariffs were also those with a high growth
3 Ha-Joon Chang, Kicking Away the Ladder: Development Strategy in Historical
Perspective , London: Anthem Press, 2002
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potential (i.e., they had high land to labor ratios and were therefore
magnets for foreign capital inflows and immigration). 4 The historical
record suggests that tariffs were not critical and may have been
counterproductive to these countries development. The United States
overtook Britain in per capita income in the 1890s largely because of
strong productivity performance in the (non-traded) service sector, not in
manufacturing. Argentina and Canada were among the most rapidly
growing countries around the turn of the century due in large part to a
commodity-based export boom. Per capita income grew more rapidly in
Malaya than in Japan in the early twentieth century, although Malaya did
not industrialize while Japan did. Thus, the historical experience of the
late nineteenth century suggests that there was a diversity of country
experiences with respect to economic development, and that tariffs on
imported manufactures were not the key to success.5
The tension between the benign and the malign view of free trades
impact of economic development persisted into the twentieth century. Yet
the most influential thinking on trade and development from the 1930s
through the 1960s was characterized by certain observations and
assumptions that gave support to protectionist import substitution trade
policies. The first assumption was that, because most developing
countries were producers of primary products, these countries were poor
because they produced primary products. Furthermo re, it was assumed
that open trade policies would perpetuate the specialization of these
countries in primary commodities, trapping them in the production of low
value-added goods for which export demand was believed to be stagnant
4 Precisely because labor was not densely populated, these countries relied on tariffs
as a f iscal device to raise revenue, as other tax instruments ( land taxes, income taxes)
were not feasible. Douglas A. Irwin, Interpreting the Tarif f-Growth Correlation of
the Late Nineteenth Century, American Economic Review 91 (May 2002): 165-169.
5 Douglas A. Irwin, Tariffs and Growth in Late Nineteenth Century America, The
World Economy 24 (January 2001): 15 -30
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(export pessimism). Observing that developed countries often had much
larger manufacturing sectors, developing countries sought to mimic this
mix by subsidizing industry and taxing agricultural and primary activities.
Thus, industrialization with a stress on capital accumulation andmanufacturing was believed to be the key to economic growth and
development. Many policymakers therefore concluded that import
substitution protecting domestic manufacturers from import
competition would be the best trade and development strategy. As the
one-time chief economist for the World Bank, Hollis Chenery, once stated,
industrialization consists primarily in the substitution of domestic
production of manufact ured goods for imp orts.6
The ideas behind the inward oriented development approach
justified government interference with trade, but did not lay out specific
blueprints for policy. And the actual policies pursued in the name of
import substitution proved to be less coherent than the theory. In many
cases, the degree of protection given to domestic industry was high and
idiosyncratic across sectors. Trade barriers served to shelter relatively
inefficient industries from competition, not promote the growth of infant
industries. The trade restrictions implicitly involved substantial
discrimination against exports. As a result, import substitution
constrained the ability of domestic firms to take advantage of the
opportunities presented by the world market and, consequently, the payoff
of import substitution policies in terms of economic growth and
development was disappointing. 7
6 see Anne O. Krueger, Trade Policy and Economic Development: How We Learn .
American Economic Review 87 (March 1997), pp. 1 -22.
7 6 Ian Little, Tibor Scitovsky, Maurice Scott , Industry and Trade in Some
Developing Countries: A Comparative Study , New York, Published for the
Development Centre of the OECD by Oxford University Press, 1970.
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A major change in the assumptions underlying the imp ort
substitution view of the world resulted from the economic success of
several East Asian countries, South Korea, Taiwan, and Hong Kong among
them, in the 1970s. These countries were very poor in the 1950s, but
chose an outward or export-oriented development path. They
demonstrated that developing countries open to trade did not necessarily
have to remain primary products producers, but could gain a niche in
producing labor-intensive manufactured goods and see their exports grow
rapidly. The rapid growth in trade came along with rapid rate of economic
growth, with associated reductions in poverty, malnutrition, infant
mortality, and other indices of well-being.
The achievements of these countries, in contrast to the
disappointments associated with import substitution, put new and
favorable light on the economic benefits accompanying economic reforms
and trade liberalization. While there continues to be a debate about the
degree to which East Asian countries did or did not implement industrial
policies, there is no doubt that openness to trade was an important factor
behind their economic success. The trade to GDP ratios of these co untries
rose significantly over this period. These countries may not have all
adopted laissez-faire policies with regard to industry, but they did allow
the free world market to dictate to a large degree the success or failure of
domestic industries.8
The East Asian experience undermined the export pessimism of
earlier decades and gave rise to a new appreciation for the gains from
trade, both importing foreign goods and technology, and the possibilities
of exporting a new range of goods. As a result of a changing intellectual
climate and the demonstration effect of the East Asian countries, more
8 See Marcus Noland and Howard Pack, Industrial Policy in an Era of Globali zation:
Lessons From Asia , Washington, D.C.: Institute for International Economics, March
2003
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countries began experimenting with trade liberalization and economic
openness in the 1970s and 1980s. How have these experiments fared?
RECENT TRENDS IN TRADE AND DEVELOPMENT IN
DEVELOPING NATIONS
As the previous section indicated, there are good reasons for believing
that openness to trade can help the development process of poor
countries. But before countries are advised to undertake significant
changes in their trade regime, clear empirical evidence that greater
integration with the world economy will produce economic benefits must
be presented. The past several decades has been a period of rapid global
economic integration in which countries have chosen a v ariety of different
policies. This period provides a testing ground for answering the question
posed earlier: under which set of trade policies have countries performed
best? How has openness to trade affected economic growth, poverty
reduction, income inequality, technological progress, and the like?
Over the past decade, dozens of studies have sifted through the link
between trade openness and economic performance evidence. The
evidence strongly suggests that more open countries, and countries
choosing to liberalize their trade policies, reap tangible economic
benefits.
The study by Jeffrey Sachs and Andrew Warner (1995) has been the
starting point for many recent studies on trade openness and economic
growth. They divided countries into two simple categories, open and
closed, based on various indicators of import tariffs, export policy, blackmarket exchange rate premia, etc. They found that per capita income in
open economies grew, on average, over 2 percentage points more rapidly
than in closed economies between 1970 and 1989. This is an astoundingly
large figure, and suggests that the gains from more open policies are
enormous.
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However, the Sachs and Warner study has been subjected to several
important criticisms. First, Rodriguez and Rodrik (2000) noted that the
statistical results came mainly from the black market premium, an
indicator of macroeconomic dysfunction, and not the trade policy
variables. Furthermore, they found that the results on openness were not
robust to the inclusion of other geographic variables, such regional
dummy variables and distance from the equator. Second, Wacziarg and
Welch (2002) reexamined the Sachs-Warner analysis using data for the
more recent period 1990-1999 and found a much weaker relationship
between the openness dummy variable and growth over that period. In
other words, while the Sachs-Warner dummy variable effectively
partitioned fast growing countries from slow growing ones in the 1980s, it
failed to do so in the 1990s.
As Wacziarg and Welch (2002) noted, however, a better way of estimating
the effect of openness on growth is to examine the within-country impact
of discrete changes in trade policy openness. They formulated openness
indicators based on the date at which individual countries liberalized
their import policies. Studying a panel of countries over the period 1950
to 1998, they found that the within-country difference in growth between
a liberalized and a non-liberalized regime is +1.5 percentage points, on
average, controlling for country and year effects. Because trade reforms
sometimes occur during periods of macroeconomic instability, the authors
exclude the three years surrounding the reform and fou nd similar results.
Broad cross-country empirical studies such as these are useful for
highlighting general tendencies and relationships between trade and
development over the past several decades. Although questions of
measurement, statistical specification, and interpretation can be posed of
each individual study, the general conclusion is uniform: openness to
trade is associated with higher incomes and better economic
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performance.9 There may be some doubts about the magnitude and the
strength of that finding, but the direction of effect is not in doubt. No
study of recent experience has concluded that closed or isolated
economies perform better than those integrated into the world economy.
The cross-country empirical studies, however, fail to dramatize the
importance of policy changes on economic outcomes in specific instances.
A complementary approach is to focus on individual cases to see if the
results are consistent with the broader dat a analysis.
In fact, the recent experiences of the two largest developing
countries, China and India, support the findings of the cross-country
studies. Each with a population of over 1 billion, these countries sharply
changed their trade policies at different points in time: China abolished
the governments monopoly on foreign trade in 1978, while India
undertook tentative moves to liberalize imports of capital goods in the
mid-1980s and then drastically revised its vast and arcane import
licensing process in 1991. While neither country immediately adopted
free trade policies, they did open up their economies to world trade in a
sharp and distinct way.
For both China and India, the results have been astounding. In both
countries, the expansion of trade both exports and imports has been
very rapid over the past decade. This rapid growth in trade has been
accompanied by much faster rates of economic growth. In the twenty
years after 1980, real GDP grew at an average annual rate of 10 percent in
China and 6 percent in India. No other country grew as rapidly as China,
whereas fewer than ten other countries grew mo re rapidly than India.9
9 One study therefore used dozens of statistical specifications to examine the l ink
between trade pol icy indicators and the level of per capita income. More open trade
policies are invariably associated with higher per capita income, although the
magnitude and significance of the relationship varied considerably. Jones (2001).
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This rapid growth has translated into material improvements in the
standard of living of these countries. For example, higher incomes have
meant a sharp reduction in poverty. According to government statistics,
the incidence of poverty fell from 28 percent in 1978 to 9 percent in 1998
in China, and from 51 percent in 1977 to 27 percent 1999 in India.10
The demonstration effect of the Chinese and Indian experience is
perhaps even more profound than that of the earlier East Asian
experience. Here we have two of the most populous and poorest countries
in the world, with completely different political systems (a single party
communist state and a multiparty representative democracy), which for
decades pursued inward-oriented economic policies, suddenly changing
the direction of trade policy. The change in course was followed by
dramatic increases in foreign trade and economic activity. As a result,
both countries have succeeded in moving mi llions of people above the
poverty line. These are astounding and monumental achievements.
China and India did not follow the same economic policy blueprint,
but took advantage of their different attributes to opening to the world
market. China has welcomed foreign investment in labor -intensive
sectors, while India shares a comparative advantage in labor-intensive
manufactures and skill-intensive services, such as the software industry
around Bangalore. Unlike the earlier East Asian experience, neither
country is known for wise industrial policies that manipulated resource
allocation in a way often alleged to be the case elsewhere in Asia.
Of course, the tremendous economic payoff to China and India
resulted from their starting far behind the technological frontier with
highly distorted trade policies. Countries closer to the frontier with lower
trade barriers will not reap as enormous benefits as these countries, but
10 On India, see T. N. Srinivasan and Suresh D. Tendulkar, Reintegrati ng India with
the World Economy , Washington, D.C.: Institute for International Economics, March
2003.
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many millions of people live in countries just as poor and China and India
once were.
How it is possible that trade liberalization can provide such
substantial benefits? Recent studies have isolated two particular channelsby which openness is related to higher incomes: one is through greater
investment, and the other is through higher productivity.11
Empirical research has uncovered an indirect link between trade and
growth: the share of investment in GDP is positively correlated with
growth in per capita income, and trade is positively correlated with
investment. This means that while trade may not be directly correlated
with growth, it might stimulate growth indirectly through investment.12
Over the 1950 to 1998 time period, Wacziarg and Welch (2002) found that
within-country capital investment as a percent of GDP is 1.9 percentage
points higher in a liberalized regime than in a non-liberalized regime.
Trade policies that increase the domestic relative price of imported
capital goods are harmful to investment and therefore to growth as well.
Tariffs and other trade barriers that raise the domestic price of capital
goods means that each investment dollar buys less capital, reducing the
efficiency of investment spending. Empirical evidence tends to support
the idea that the free importation of intermediate and capital goods is an
effective way of promoting inve stments that increase growth.13
In addition, trade contributes to productivity growth in at least two
ways: it serves as a conduit for the transfer of foreign technologies that
11
Of course, the two can be related: higher investment ( in capital goods, for example)can lead to higher productivity.
12 Levine and Renalt (1992).
13 See, for example, Wacziarg (2001). Lee (1995) finds that the ratio of imported to
domestically produced capital goods is significantly related to growth in per capita
income, particularly in developing countries, and Mazumdar (2001) reaches a similar
conclusion.
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enhance productivity, and it increases competition in a way that
stimulates industries to become more efficient and improve their
productivity. The first channel, that trade serves as a conduit for the
transfer of foreign technologies, operates in several ways. One is through
the importation of capital goods. Imported capital goods that embody
technological advances can greatly enhance an economys productivity.
To the extent that trade barriers raise the price of imported capital goods,
countries are hindering their ability to benefit from technologies that
could raise productivity. 14
The second channel by which trade contributes to productivity is by
forcing domestic industries to become more efficient. Trade increases
competition in the domestic market, diminishing the market power of any
firm and forcing them to behave more competitively. Competition also
stimulates firms to improve their efficiency, otherwise they risk going out
of business. Over the past decade, study after study has documented this
phenomena. After the Cte dIvoire reformed its trade policies in 1985,
overall productivity growth tripled, growing four times more rapidly in
industries that became less sheltered from foreign competition. Another
study examined industry productivity in Mexico before and after its trade
liberalization in 1985 and found that productivity increased significantly,
especially in traded goods sectors. Detailed studies of Indias trade
14 Productivity advances are usually the result of investment in research and
development (R&D), and the importation of foreign ideas can be an important source
of productivity improvement. Sometimes foreign research can be imported directly.
For example, China has long been struggling against a devastating disease known as
rice blast. The disease had destroyed mill ions of tons of rice a year, costing farmersbil l ions of dollars. Recent ly, under the direct ion of an internat ional team of
scientists, farmers in Chinas Yunnan province started planting a mixture of two
different types of rice in the same paddy. By this simple technique of bio-diversity,
farmers nearly eliminated rice blast and doubled their yield. Foreign R&D enabled the
Chinese farmers to abandon the use of chemical fungicides that had been used to fight
the disease and increase yields of a critical staple commodity. Yoon (2000).
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liberalization in 1991 and Koreas trade liberalization in the 1980s reached
essentially the same conclusion: trade not only disciplines domestic firms
and forces them to behave more like a competitive industry, but helps
increase the productivity of domestic firms.15 And the higher is an
economys productivity level, the higher is that countrys standard of
living.
Many developing countries fear that trade liberalization will force
painful adjustments on their manufacturing sector or even de-
industrialize the country. Yet both China and India have not de-
industrialized as a result of openness to trade. While some
manufacturing firms will be forced to close or consolidate as a result of
import competition, increased trade allows developing countries the
opportunity to exploit their strong comparative advantage in producing
labor intensive manufactures. Often exports from other ma nufacturing
industry depend on access to inexpensive and quality industrial inputs,
obtainable on the world market, so that import liberalization can promote
exports in other sectors. For example, although New Zealand has a strong
comparative advantage in agricultural goods, the reduction in trade
barriers in the mid-1980s resulted more in a reallocation of resources
between manufacturing plants the shutdown of inefficient plants and
the expansion of relatively efficient ones, in a way that served to raise
average industry productivity rather than a reallocation of resources
between sectors.
TRADE LIBERALIZATION AND THE MILLENIUM
DEVELOPMENT GOALS
The higher income levels or growth rates that accompany trade
liberalization are critical to achieving important development objectives.
15 See the studies by Harrison (1994). Tybout and Westbrook (1995). Kim (2000) and
Krishna and Mitra (1998).
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The United Nationss Millennium Development Goals, 1990-2015 include,
among other goals, to:
eradicate extreme hunger and poverty provide universal primary education reduce child mortality improve material health
All of these goals are promoted by the greater income that results from
economic policy reforms.
Poverty and Income Distribution:
Economic growth is essential for poverty reduction. As Figure 1 shows,
rapidly growing countries such as China and India have seen sharp
reductions in poverty rates.
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Although this link is clear, many observers worry about the impact of
trade liberalization and economic growth on income distribution. In some
sense, worries about income distribution miss the point of focusing on the
absolute well-being of the poor. If a policy raises income the income of
the rich 20 percent but that of the poor only 10 percent, it does not makesense to forego the policy and do nothing merely because the gains accrue
disproportionately to the rich even as it helps lift the poor from dire
poverty.
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Evidence suggests, however, that growth is roughly neutral in its effect on
the distribution of income within a country. The percentage changes in
incomes of the poor are equal on average to percentage changes in average
income; in other words, the share of income that accrues to the poor is not
systematically associated with the growth rate (Dollar and Kray 2001).
Other evidence from China points to that cities that experience a greater
degree of openness in trade also tend to see a greater decline in urban-
rural income inequality, i.e., trade may help reduce, rather than increase,
the urban-rural income inequality (Wei and Wu 2001). This pattern in the
data suggests that inferences based solely on China's national aggregate
figures (overall openness and overall inequality) can be misleading.
Indeed, data on the distribution of income are extremely hazardous to
work with because of different concepts of that distribution. Some studies
examine inequality between households, others between regions and
countries.
A frequently mentioned concern is that trade l iberaliz ation or an open
system of world trade may exacerbate world income inequality. Many
observers are disturbed by trends in the world distribution of income. But
whether there has been a divergence or co nvergence of world inco mes
depends largely upon the approach taken by various studies. Three
conceptual approaches have been taken. The first compares the
unweighted average of incomes across countries. The second compares
the population-weighted average of incomes across countries. The third
ignores national boundaries and examines income inequality between all
the worlds citizens.
Most studies examining average incomes across countries finds that those
incomes have diverged. However, in these studies, each country
constitutes a unique observation, giving Trinidad and Tobago (population
1.3 million) the same weight as China (population 1.3 billion). Most
studies examining population-weighted average incomes across countries
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finds that income inequality has been reduced in recent decades. This is
primarily because a few, large countries (notably China and India) have
been growing more rapidly than other countries. One cannot ignore the
improvement in absolute and relative well-being of nearly 2 billion people
in these countries alone.
The final set of studies examines inequality among the world population,
ignoring country borders (i.e., individuals rather than countries are the
unit of observation). These studies tend to be relatively recent but also
tend to suggest no trend toward greater inequality.
Surjit Bhalla (2002, p. 205) summarizes the issue as follows:
While the average poor country may be losing ground (the divergence
literature), the average person in a poor country is gaining ground
because her income is increasing at a faster rate than the income of the
average rich person in a rich country. This is the result of several big,
poor countries doing very well the giants, China and India, and also
Indonesia and Vietnam. . . . the conclusion that the world is becoming
more equal must be accepted if one believes that there are more than 1
billion people in China and that their incomes are rising at a faster rate
than the average.
Child Labor and Schooling
Economic growth also helps reduce child labor. Figure 2 plots the
relationship between per capita income and the incidence of child labor
and shows an unmistakable relationship.
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As an example, per capita inco me in Vietnam grew at an annual rate of
nearly 7 percent between 1993 and 1997, after the country adopted
economic reforms. During this same period, the incidence of child labordeclined 28 percent. Recent studies have shown that 80 percent of the
decline in child labor in households that move from below to above the
poverty line is due to increases in the standard of living. In addition,
such increases in the standard of living can be linked specifically to trade
liberalization. After 1993, the relaxation of Vietnams export quota on
rice contributed to an increase in the real domestic price of rice of nearly
30 percent. The greater integration of Vietnamese rice farmers with the
world market contributed to a rise in domes tic income that allowed those
farmers to reduce the use of child labor.16 Reducing the disincentives on
16 Eric Edmonds, Will Child Labor Decline with Improvements in Living Standards?
Working paper, Dartmouth College , November 2002. Eric Edmonds and Nina Pavcnik,
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agricultural exports helps raise rural incomes and helps alleviate poverty,
and thereby the employment of child l abor.
Health
It has long been recognized that wealthier is healthier, that the benefits
of higher income are strong in terms of reducing infant mortality and
raising life expectancy. 17 Higher income households can afford medicines
and better health care, better nutrition and diets as well as better housing,
all of which benefit health status.
Some remarkable recent results point to a negative association between
tariff levels and life expectancy and a negative association between tariffs
and infant mortality. According to the results, an el even percentage point
increase in tariffs (approximately equal to a one standard deviation of the
change in tariffs over a five year period) is associated with a decline in l ife
expectancy of 1.3 years and an increase in infant mortality of 6 per 1,000
births.18 This statistical correlation survives even after controlling for per
capita income and other factors (such as schooling and number of doctors
per capita), suggesting that openness to trade may be beneficial for these
outcomes for reasons that go beyond any indirect effect through raising
income.
In sum, the payoff of higher income is directly measurable in terms of le ss
poverty, less infant mortality, less malnutrition, less child labor, and
longer and better lives. Trade may not directly affect these outcomes, but
indirectly contributes to these vital development goals by leading to
higher income.
Does Globalization Increase Child Labor? Evidence from Vietnam, NBER Working
Paper No. Xxxx, January 14, 2002.
17 Lant Pritchett and Lawrence H. Summers, Wealthier Is Healthier, Journal of
Human Resources 31 (Fall 1996), pp. 841-68.
18 Shang-j in Wei and Yi Wu, The Life-and-Death Implications of Globalization,
unpublished paper, International Monetary Fund, December 2002.
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CONCLUSIONS
Economists know more about what can destroy economic growth and
activity than what creates it. However, countries that have found a way to
take advantage of the rapid growth in world trade have generally found it
to be an escalator out of poverty.
Yet many developing countries remain suspicious of freer trade.19 In
addition, many politically powerful groups in developing countries have
vested interests in the status quo and therefore oppose efforts to liberalize
and open up the economy. But as the former Director General of the
WTO, Mike Moore (p. 173), has noted:
More and more, developing countries have come to see protectionism as
a self-inflicted wound. It not only punishes consumers, grossly inflating
the price they pay for necessities like food or clothing, but it also
handicaps exporters and entrepreneurs, who cant hope to compete on
world markets without access to world-priced inputs, efficient services
and modern technology.
The evidence from countries as diverse as South Korea and Chile, Chinaand India, Vietnam and Uganda, confirms that protectionism is indeed a
self-inflicted wound. The opportunity to take part in the tremendous
expansion of world trade is one that leads to tangible economic benefits.
Once dire economic conditions in those countries are now improving.
Trade reform has played an important role in helping mill ions of people to
see a better world.
19 It is sometimes difficult for sophisticated e conomists and politicians to understand
the deep historic and cultural problems some countries have with the idea of free
trade. Some sti l l equate it with their oppression from colonial days. Mike Moore, A
World Without Walls: Freedom, Development, Free Trade, and Global Governance ,
Oxford University Press, 2003, p. 133.
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BIBLIOGRAPHY
BOOKS REFERRED: Aksoy, A. and G. Salinas (2006); Growth Before and After
Trade Liberalisation.
Santos-Paulino, A.O. (2005), Trade Liberalisation andEconomi c Performance : Theory and Evidence for Developing
Countries.
Das., B.L. (2005), The Current Negotiations in the WTO:Options, Opportunities and Risks for Developing Countries ,
Zed Books/ TWN Press
NEWSPAPERS AND MAGAZINES REFERRED: India Today The Outlook The World Economy The Economic Times The Economist
ONLINE JOURNALS: Manupatra Hein Online Westlaw International