Managing Trade: Taiwan and South Korea as Challenges to Economics and Political Science

Abstract

There is nothing that economists more about than the virtues of free or almost free trade. So says Jagdish Bhagwati, a distinguished trade theorist, who claims that belief in the superiority of the promotion (or near free trade) strategy over the substitution strategy is all but universal among economists, insofar as any kind of consensus can ever be found in our tribe.' Bhagwati's claim is supported by a survey of economists' opinions.2 The survey elicited responses to twenty-seven propositions about the economy from nearly 1,000 economists in five industrialized countries, in terms of agree, agree with provisos, and disagree. Of the twenty-seven propositions, the one that elicited the most agreement was and import controls lower economic welfare. Seventy-nine percent of the American economists and 57 percent of the whole sample generally agreed with it.3 At the level of practical policy, the consensus is expressed in the World Bank's emphasis on trade liberalization. The World Bank's Structural Adjustment Loans over the 1980s have carried more trade liberalization conditions than those in any other policy domain.4 For the World Bank, trade liberalization is the queen of policies, not just one among many. An impressive amount of evidence supports the consensus. Since the late 1960s at least nine major studies have examined the impact of trade regimes on economic growth, income distribution, and other development indicators.5 These studies all resoundingly confirm that free or almost free trade produces the best economic results (with some small exceptions) or that countries with freer, less distorted trade regimes have better development performance than countries with less open, more distorted ones. The implications go well beyond trade policy. Import tariffs and import controls are only a subset of the ways that governments try to alter the composition of economic activity. The neoclassical mainstream believes that most such interventions are a mistake--not just one mistake among many, but a mistake so big as to constitute the main reason for the slow progress of most developing countries. Compared to the effects of government intervention, external factors such as shrinking export markets and volatility in the world economy are distinctly secondary reasons for slow progress, as also are domestic factors like inherent market failures (market failures which are not themselves caused by government intervention). Real world markets, in this view, may well be imperfect, but real world governments are even more imperfect.6 This hypothesis has not been subject to testing in any comprehensive way, but the nine studies of trade policy do constitute the most systematic testing of