Free Trade: A Dead End for Underdeveloped Economies

Abstract

Critics of the free trade doctrine tend to argue that the theory of comparative advantage is not wrong in itself, but that its assumptions are not generally fulfilled in the real world, and hence that free trade is desirable under ‘ideal conditions.’ By contrast, this paper argues that the theory of comparative advantage does not hold even under ‘ideal conditions.’ The theory, a variation on the story of static efficiency, pays no attention to dynamic considerations, such as long-term technical change and productivity growth, which are essential in economic development. Starting from the ‘growth laws’ of Verdoorn and Kaldor, this paper argues that dynamic efficiency is intimately related to industrial growth. Moreover, because industrial goods have higher income elasticity of demand than agricultural goods, there is a positive feedback mechanism from international and domestic demand for industrial goods to the Verdoorn-Kaldor ‘laws’ of productivity growth. The empirical evidence indicates that poor countries do not have a comparative advantage in agricultural goods, and that they have an absolute disadvantage in the trade of agricultural as well as industrial goods. Further liberalisation of trade in agricultural goods will therefore harm rather than help the poorest countries. To achieve economic development, those countries need the freedom to implement a strategy designed for that purpose, just as the now-industrialised countries did.