"Do countries with lower barriers to international trade experience faster economic progress? Few questions have been more vigorously debated in the history of economic thought, and none is more central to the vast literature on trade and development."
So begins "Trade Policy and Economic Growth: a Skeptic's Guide to the Cross-national Evidence," a paper published in 1999 by economists Dani Rodrik and Francisco Rodriguez. In a brassy challenge striking at the very heart of conventional trade wisdom, they argue that the answer to their initial question is no. Or at least: not on the basis of the evidence so far compiled. After choosing what, in their opinion, are the four most important papers of the '90s that argued that, yes, lower trade barriers do equal faster growth, Rodriguez and Rodrik proceed to shoot holes in the methodologies of each paper.
The paper has been described as "seminal" and "controversial." It is cited constantly in the literature on trade and development. It is a staple of serious critiques of free trade, and practically a foundational document for anti-globalization activists who like to bolster their arguments with rigorous footnotes. I ran across it today while reading the introduction to a new United Nations Development Program report, "Trade on Human Terms: Transforming Trade for Human Development In Asia and the Pacific."
Earlier this year, I read (and posted about) some provocative papers by Rodrik, so I was already primed to track down the footnote, in keeping with the mandate of this blog to dig ever deeper into the roots of globalization. Proof that trade does not automatically lead to growth would be a mighty weapon to wield in the gladiatorial theater of debate.
But proving an economic proposition is tricky business. Are Rodrik and Rodriguez correct? From my layman's perspective, I have no authority to say yea or nay. Methodological analyses can get highly abstruse, and they are guaranteed to engender ripostes that are equally dense and technical. All I can say for sure is that the paper caused a splash, reopening, with a vengeance, a question that mainstream development economists had considered settled.
But what I really like about the paper is not what it undermines, but what it supports. Rodrik and Rodriguez are not out to suggest that opening up to trade is necessarily bad for an economy. Quite the contrary; they take pains to note that "We do not want to leave the reader with the impression that we think trade protection is good for economic growth. We know of no credible evidence -- at least for the post-1945 period -- that suggests that trade restrictions [my italics] are systematically associated with higher growth rates."
The true mission of the authors is to offer up a paean to contingency. That is, the relationship between trade policy and growth depends on a host of other factors specific to the circumstances of each nation. Is the country large or small? Landlocked or blessed with easy access to the ocean? Does it have well-developed institutions, strong "human capital" resources, a stable currency? The prospects for trade liberalization leading to accelerated growth will be different according to the nitty-gritty constellation of these details. So what works for Singapore might not work for Zambia. Or even more to the point -- what worked for Taiwan in the 1970s might not work for Taiwan in the 1990s. In some cases, cutting tariffs across the board might be the right thing to goose an economy forward; but in other, judicious protection of certain industries combined with judicious state intervention could be the better choice.
This would seem, on the surface, to be a fairly simplistic assertion. Different strokes for different folks, y'know? But contingency seems to be a fairly hard thing for pundits and policymakers and advocates of all stripes to master. One-size-fits-all solutions are generally the rage.
A terrific paper comparing the East Asian development experience with Africa's woes that I stumbled upon while searching for clues to the critical response to Rodrik and Rodriguez's paper, "Trade Liberalization and Development: Lessons for Africa," a 2004 publication of the African Trade Policy Institute, puts all the pieces together.
In the post-World War II era, "import substitution" was the hot development option du jour -- the idea that the quickest path to growth was to protect domestic industries from international competition and gradually replace imported goods with locally produced products. But when the import-substituting countries of Latin America and Africa ran into the huge international debt repayment debacle of the late '70s and early '80s, the paradigm shifted. In came the Washington Consensus and "structural adjustments" -- and the imperative from the lords of the World Bank and IMF to abolish tariffs.
But the structural adjustment policies proved even worse at nurturing growth than import substitution. Leaving us where we are now, in a world where some countries are growing quickly, some are mouldering along, and some are actually regressing. Asia booms, Africa stumbles. Why?
There's no quick and tidy answer. Instead, there is, again, a contingent explanation. East Asian success demonstrates a dynamic approach to development. A little import subsititution here, a little export promotion there, a little state intervention there, a little more openness to world markets here. Underlying it all is a special kind of openness; an openness to mixing and matching, an openness to constant change in the face of constantly changing circumstances.
"The trade policies of the Asian countries are the result of complex combinations between openness and restriction, the object of which is to help their economies to build their competitive advantages. These observations enable us to postulate the existence of two types of trade liberalization strategy. One is dynamic and pragmatic, making little reference to theoretical debates and intellectual fashions in economics science; its main characteristic is its continuous adaptation to development strategies and to the changing needs of growth dynamics."
The endless debates that rage in the development literature over whether the success of countries like Taiwan or South Korea is because they opened up to the outside world or because their governments targeted industrial sectors and protected local industry miss the point. They did both.
Down with the one-size-fits-all solution! Fie on the ideologue who will admit no counter-example! Unshakable confidence is a platform for disaster. In the conclusion to their paper, Rodrik and Rodriguez write that "What we would like the reader to take away from this paper is some caution and humility in interpreting the existing cross-national evidence on the relationship between trade policy and economic growth."
"Caution" and "humility" -- these are not words that one would use to describe the typical World Bank or IMF bureaucrat, or the anti-globalization activist chanting "Smash the WTO." Everybody's sure they've got the answers, except that there are no answers, only contingent explanations that spin around like a Calder mobile, exquisitely sensitive to every wafting breeze, and generally in need of constant adjustment.
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