Trading
illusions
Dani
Rodrik , Harvard University
Advocates
of global economic integration hold out utopian visions of the
prosperity that developing countries will reap if they open their
borders to commerce and capital. This hollow promise diverts poor
nations’ attention and resources from the key domestic innovations
needed to spur economic growth.
senior U.S. Treasury official recently urged Mexico’s government
to work harder to reduce violent crime because "such high levels
of crime and violence may drive away foreign investors." This
admonition nicely illustrates how foreign trade and investment
have become the ultimate yardstick for evaluating the social and
economic policies of governments in developing countries.
Underlying this perversion of priorities is
a remarkable consensus on the imperative of global economic integration.
Openness to trade and investment flows is no longer viewed simply
as a component of a country’s development strategy; it has mutated
into the most potent catalyst for economic growth known to humanity.
Predictably, senior officials of the World Trade Organization
(WTO), International Monetary Fund (IMF), and other international
financial agencies incessantly repeat the openness mantra. In
recent years, however, faith in integration has spread quickly
to political leaders and policymakers around the world.
Joining the world economy is no longer a matter
simply of dismantling barriers to trade and investment. Countries
now must also comply with a long list of admission requirements,
from new patent rules to more rigorous banking standards. The
apostles of economic integration prescribe comprehensive institutional
reforms that took today’s advanced countries generations to accomplish,
so that developing countries can, as the cliché goes, maximize
the gains and minimize the risks of participation in the world
economy. Global integration has become, for all practical purposes,
a substitute for a development strategy.
This trend is bad news for the world’s poor.
The new agenda of global integration rests on shaky empirical
ground and seriously distorts policymakers’ priorities. By focusing
on international integration, governments in poor nations divert
human resources, administrative capabilities, and political capital
away from more urgent development priorities such as education,
public health, industrial capacity, and social cohesion. This
emphasis also undermines nascent democratic institutions by removing
the choice of development strategy from public debate.
World markets are a source of technology and
capital; it would be silly for the developing world not to exploit
these opportunities. But globalization is not a shortcut to development.
Successful economic growth strategies have always required a judicious
blend of imported practices with domestic institutional innovations.
Policymakers need to forge a domestic growth strategy by relying
on domestic investors and domestic institutions. The costliest
downside of the integrationist faith is that it crowds out serious
thinking and efforts along such lines.
Excuses, excuses
Countries that have bought wholeheartedly into the integration
orthodoxy are discovering that openness does not deliver on its
promise. Despite sharply lowering their barriers to trade and
investment since the 1980s, scores of countries in Latin America
and Africa are stagnating or growing less rapidly than in the
heyday of import substitution during the 1960s and 1970s. By contrast,
the fastest growing countries are China, India, and others in
East and Southeast Asia. Policymakers in these countries have
also espoused trade and investment liberalization, but they have
done so in an unorthodox manner - gradually, sequentially, and
only after an initial period of high growth - and as part of a
broader policy package with many unconventional features.
The disappointing outcomes with deep liberalization
have been absorbed into the faith with remarkable aplomb. Those
who view global integration as the prerequisite for economic development
now simply add the caveat that opening borders is insufficient.
Reaping the gains from openness, they argue, also requires a full
complement of institutional reforms.
Consider trade liberalization. Asking any
World Bank economist what a successful trade-liberalization program
requires will likely elicit a laundry list of measures beyond
the simple reduction of tariff and nontariff barriers: tax reform
to make up for lost tariff revenues; social safety nets to compensate
displaced workers; administrative reform to bring trade practices
into compliance with WTO rules; labor market reform to enhance
worker mobility across industries; technological assistance to
upgrade firms hurt by import competition; and training programs
to ensure that export-oriented firms and investors have access
to skilled workers. As the promise of trade liberalization fails
to materialize, the prerequisites keep expanding. For example,
Clare Short, Great Britain’s secretary of state for international
development, recently added universal provision of health and
education to the list.
Free trade-offs
Most (but certainly not all) of the institutional reforms on the
integrationist agenda are perfectly sensible, and in a world without
financial, administrative, or political constraints, there would
be little argument about the need to adopt them. But in the real
world, governments face difficult choices over how to deploy their
fiscal resources, administrative capabilities, and political capital.
Setting institutional priorities to maximize integration into
the global economy has real opportunity costs.
Consider some illustrative trade-offs. World
Bank trade economist Michael Finger has estimated that a typical
developing country must spend $150 million to implement requirements
under just three WTO agreements (those on customs valuation, sanitary
and phytosanitary measures, and trade-related intellectual property
rights). As Finger notes, this sum equals a year’s development
budget for many least-developed countries. And while the budgetary
burden of implementing financial codes and standards has never
been fully estimated, it undoubtedly entails a substantial diversion
of fiscal and human resources as well. Should governments in developing
countries train more bank auditors and accountants, even if those
investments mean fewer secondary-school teachers or reduced spending
on primary education for girls?
How much should politicians spend on social
protection policies in view of the fiscal constraints imposed
by market ‘discipline’? Peru’s central bank holds foreign reserves
equal to 15 months of imports as an insurance policy against the
sudden capital outflows that financially open economies often
experience. The opportunity cost of this policy amounts to almost
1 percent of gross domestic product annually - more than enough
to fund a generous antipoverty program.
Asian myths
Even if the institutional reforms needed to join the international
economic community are expensive and preclude investments in other
crucial areas, pro-globalization advocates argue that the vast
increases in economic growth that invariably result from insertion
into the global marketplace will more than compensate for those
costs. Take the East Asian tigers or China, the advocates say.
Where would they be without international trade and foreign capital
flows?
That these countries reaped enormous benefits
from their progressive integration into the world economy is undeniable.
But look closely at what policies produced those results, and
you will find little that resembles today’s rule book.
Countries like South Korea and Taiwan had
to abide by few international constraints and pay few of the modern
costs of integration during their formative growth experience
in the 1960s and 1970s. At that time, global trade rules were
sparse and economies faced almost none of today’s common pressures
to open their borders to capital flows. So these countries combined
their outward orientation with unorthodox policies: high levels
of tariff and nontariff barriers, public ownership of large segments
of banking and industry, export subsidies, domestic-content requirements,
patent and copyright infringements, and restrictions on capital
flows (including on foreign direct investment). Such policies
are either precluded by today’s trade rules or are highly frowned
upon by organizations like the IMF and the World Bank.
China also followed a highly unorthodox two-track
strategy, violating practically every rule in the guidebook (including,
most notably, the requirement of private property rights). India,
which significantly raised its economic growth rate in the early
1980s, remains one of the world’s most highly protected economies.
All of these countries liberalized trade gradually,
over a period of decades, not years. Significant import liberalization
did not occur until after a transition to high economic growth
had taken place. And far from wiping the institutional slate clean,
all of these nations managed to eke growth out of their existing
institutions, imperfect as they may have been. Indeed, when some
of the more successful Asian economies gave in to Western pressure
to liberalize capital flows rapidly, they were rewarded with the
Asian financial crisis.
That is why these countries can hardly be
considered poster children for today’s global rules. South Korea,
China, India, and the other Asian success cases had the freedom
to do their own thing, and they used that freedom abundantly.
Today’s globalizers would be unable to replicate these experiences
without running afoul of the IMF or the WTO. The Asian experience
highlights a deeper point: A sound overall development strategy
that produces high economic growth is far more effective in achieving
integration with the world economy than a purely integrationist
strategy that relies on openness to work its magic. In other words,
the globalizers have it exactly backwards. Integration is the
result, not the cause, of economic and social development. A relatively
protected economy like Vietnam is integrating with the world economy
much more rapidly than an open economy like Haiti because Vietnam,
unlike Haiti, has a reasonably functional economy and polity.
Economic openness and all its accouterments
do not deserve the priority they typically receive in the development
strategies pushed by leading multilateral organizations. Countries
that have achieved long-term economic growth have usually combined
the opportunities offered by world markets with a growth strategy
that mobilizes the capabilities of domestic institutions and investors.
Designing such a growth strategy is both harder and easier than
implementing typical integration policies. It is harder because
the binding constraints on growth are usually country specific
and do not respond well to standardized recipes. But it is easier
because once those constraints are targeted, relatively simple
policy changes can yield enormous economic payoffs and start a
virtuous cycle of growth and additional reform.
Unorthodox innovations that depart from the
integration rule book are typically part and parcel of such strategies.
Public enterprises during the Meiji restoration in Japan; township
and village enterprises in China; an export processing zone in
Mauritius; generous tax incentives for priority investments in
Taiwan; extensive credit subsidies in South Korea; infant-industry
protection in Brazil during the 1960s and 1970s - these are some
of the innovations that have been instrumental in kick-starting
investment and growth in the past. None came out of a Washington
economist’s tool kit.
Few of these experiments have worked as well
when transplanted to other settings, only underscoring the decisive
importance of local conditions. To be effective, development strategies
need to be tailored to prevailing domestic institutional strengths.
There is simply no alternative to a homegrown business plan. Policymakers
who look to Washington and financial markets for the answers are
condemning themselves to mimicking the conventional wisdom du
jour, and to eventual disillusionment.
| Dani
Rodrik is teaching political economy at the John
F. Kennedy School of Government, Harvard University. |
© 2001 by the Carnegie Endowment for International Peace
|
