by Chakravarthi Raghavan

Geneva, 19 May 2000 -- “Openness to trade helps developing countries catch up with rich ones, and the poor generally from the faster economic growth that trade liberalization brings,” WTO Director-General Mike Moore asserted Monday in a column he contributed to the Financial Times previewing a WTO study purporting to show these.

The study, with an overview by a WTO staff economist (Hakan Nordstrom) and two chapters, one by Dan Ben-David of the Tel Aviv University and another by Prof. Alan Winters of the University of Sussex, is much less conclusive than Moore would make out, or for that matter the conclusion (p.6) drawn by the WTO staff economist in the overview chapter.

The two chapters in fact raise more questions than providing answers for policy-makers in developing countries or transition economies (who are the large majority of the WTO’s membership). A careful reading of the Winters study in fact casts more doubts on the liberalization theories and the nexus of development, growth and poverty alleviation.

At a seminar at the WTO, the two authors were in fact more skeptical, in effect agreeing with some participants from other international organizations that trade was just one element, that the evidence of links between trade liberalization and growth could be more correlative than causative, and that not enough is known about causative factors and effects in developing countries.

Excepting for a footnote reference to one study of critical review of the literature on trade and growth (by F. Rodriguez and D. Rodrick, “Trade Policy and Economic Growth: A Skeptik’s guide to cross-national evidence”), much of the literature cited in the overview by the WTO staff economist is the mainstream one where faith in theory predominates over empirical evidence.

Incidentally, in presenting the overview of the study in Monday morning’s Financial Times, Mr. Moore disregarded the publication embargo (1300 hrs GMT of 19 June) on the study set by his own secretariat (presumably under his authority and knowledge).

The chapter by Ben-David on trade-related convergence is, as a footnote explains, part of a project merging together his earlier studies and conclusions. The study is based on the data and experience of 25 high and middle-income countries (those according to him have at least 25% per capita of the US and for whom the IMF data on directions of trade are reliable).

It thus excludes all but four or five developing countries.

In underscoring the limitations of the study and conclusions, the author says (p 39 of the study): “More importantly perhaps, is the fact that data limitations precluded the analysis of poor countries here — AND IT IS FAR FROM OBVIOUS (AT LEAST TO THIS AUTHOR) THAT THE IMPACT OF TRADE LIBERALIZATION FOUND ON INCOMES IN THE MIDDLE AND HIGH INCOME COUNTRIES COULD ALSO BE FOUND IN THE POOREST COUNTRIES IN THE WORLD (emphasis added). In the case of the poorest countries, a range of constraints to economic growth and development must be addressed if openness to trade is to have an impact on the income levels and growth.”

The contribution of several critical institutions in providing the overall environment so that openness to trade can contribute to growth is extremely important, says Ben-David.

“Although trade can serve as a conduit for knowledge spillovers, the capacity of each country to absorb these trade-induced spillovers is different. If a country wishes to develop and compete, then exposure to technology must be accompanied by a serious investment in domestic education - as well as infrastructure, telecommunication, preservation of property rights, and all other essential ingredients so important in enabling a country to grow in general, and to enjoy the fruits of openness to the rest of the world in particular.”

The author himself says in his conclusion: “There is very little evidence that countries, in general, are converging towards one another in terms of their income gaps. In fact, income gaps between the majority of countries appear to be growing over time.”

He also says: “... the results of this paper in no way imply that trade policy is the most important policy from a long-run growth perspective.  Other aspects of openness such as foreign investments were not examined here and there are several studies that report the contribution of these.”

Ben-David goes on to make the claim that there is convergence among the 25 ‘rich countries’ and that “an important thread that appears to tie together” many of them is international trade.

The recent Economic Survey of Europe (2000 No.1) by the UN Economic Commission for Europe has devoted a whole chapter to look at Economic Convergence in Europe and, after surveying a great deal of literature, said “The available empirical evidence does not support the universal convergence hypothesis: there is no systematic tendency for poor countries to grow faster than the richer ones. In fact, the dominant feature has been for diverging productivity levels and real per capita incomes between the group of advanced industrialized economies on the one hand and the developing countries on the other. There are some significant exceptions, such as the east Asian growth rates. The general conclusion, however, is that countries do not tend to converge to the same balanced growth path, but rather settle on different ones, a fact which is mirrored in more or less persistently large differences in per capita income.”

Ben-David’s studies (as of several others on globalization and economic convergence) were also reviewed by Richard Kozul-Wright and Robert Rowthorn (UNCTAD Discussion paper No 131, 1998).

On Ben-David’s claim that trade integration was a major causal factor promoting income convergence, Kozul-Wright and Rowthorn, pointed out that in the case of the EEC the claim was contradicted by his own data.  These data, Kozul-Wright and Rowthorn point out, show that dispersion of per capita incomes among the original EEC members fell dramatically over 1951-1963, and more gradually thereafter.

But the process of reducing tariffs and eliminating quotas began in the EEC only in 1958 and took some years to complete, and tariffs were still quite high in 1963. A more convincing argument, Kozul-Wright and Rowthorn add in the UNCTAD paper, is that “rapid growth and income convergence throughout the EEC region led to a mood of optimism and created the political conditions required to dismantle trade barriers, which in turn led to a rapid expansion of trade.”

Prof. Winters' chapter, with references to ‘widespread belief’ that openness, fairly broadly defined, stimulates growth, has noted that these studies (D.Dollar 1992, Sachs and Warner 1995, and Edwards 1998) “have received pretty rough treatment recently from Rodriguez and Rodrik (1999). Winters concedes the lack of empirical evidence and link between liberal trade and growth, but argues that this is due to the difficulty of measuring trade stances.

At UNCTAD-X in Bangkok (February 2000), Winters at a roundtable of academics referred to the importance of ‘effective measures’ of trade regimes and that this lack of measurement lay at the heart of the difficulty of proving conclusively that openness is good for economic growth, and that UNCTAD should devote itself to this task (presumably of collecting and correlating data to prove the theories of Winters et al).

He called then for honest delineation of areas over which policy recommendations apply, with clear ways to identify where these policy recommendations have moved outside the limits, and said such delineation on all sides “leave us with many grey areas where we just do not know what policy is appropriate, but a rush to colonize these areas with rhetoric is neither edifying for an international organization nor, ultimately, useful... International organizations and donors frequently talk about ‘best practice’. For long-term objectives like development, this raises serious questions of how we know what is best. Some clarity on this would be welcome. Most of what we say will at best be provisional.”

In his essay in the WTO study, Winters concludes that trade liberalization is generally a strongly positive contributor to poverty alleviation. But most reforms, he says, will create some losers (some even in the long run) and that some reforms could exacerbate poverty temporarily. In these circumstances, policy should seek to alleviate the hardship caused rather than abandon reform altogether.

Referring to the weakness of an empirical link between liberal trade and growth, Winters in his WTO essay says that “overall the fairest assessment of the evidence is that, despite the clear plausibility of such a link, open trade alone has not yet been unambiguously and universally linked to subsequent economic growth.”

While there is evidence that access to imports enhances performance, postulating a link from exporting to technology is weaker.

“Similarly it is quite difficult to prove that FDI (foreign direct investment) boosts efficiency because investors choose efficient firms and sectors.”

While there is undoubtedly a connection between openness and dynamism of an economy, “it is more complex than economists sometimes choose to believe. Openness probably needs several concomitant policies or conditions before it will generate growth.”

While Winters notes that technological flows need not depend on trade or commercial transfers of knowhow, but could arise autonomously or through direct interventions in research and development in favour of developing countries, he has not addressed directly the issue that the global monopolies over IPRs created by TRIPs, in fact inhibit and even prevent R & D and development of technology through copying and adapting, the path followed in the post-war period of the last century by today’s industrial world including late-comers like Japan and even several of today’s EC members.

However, he does say that intellectual property and TRIPS is a very sensitive issue in the area of openness and technology. The Uruguay Round TRIPS agreement, he adds, has resulted in developing countries having to pay more for using certain technologies, and in those cases will both reduce income and curtail use of technologies.

On the other hand, the increased rewards may stimulate the flow of technology to developing countries “although, to date, firm evidence to that effect is lacking (emphasis added). The commercialisation of intellectual property may also bias it away from meeting the needs of the poor, since collectively they represent such a small market.” - SUNS 4690

The above article first appeared in the South-North Development Monitor (SUNS) of which Chakravarthi Raghavan is the Chief Editor.

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