Trade Liberalisation and Economic Performance in Developing Countries – Introduction

Abstract

One of the most prominent features of the world economy over the last fifty years, and particularly in the last twenty years, has been the liberalisation of international trade and payments under the auspices of the GATT (and now the WTO), the IMF and the World Bank (as part of conditionality and Structural Adjustment Programmes). This is one of the reasons why world trade has grown nearly five times faster than world output and probably why the GDP of most countries has generally been impressive by historical standards, at least compared to the miserable experience of the years between the two great wars. The purpose of this Feature is to explore in depth some aspects and consequences of the liberalisation process that affect the overall economic performance of countries, and the welfare of peoples within countries. There has been a good deal of work on the relation between trade liberalisation and economic growth, which has recently come under critical scrutiny from Rodriguez and Rodrick (2000), but much less work on other aspects of liberalisation such as the monetary (balance of payments) consequences of trade liberalisation and the impact of liberalisation on income inequality and the wage structure in developing countries. Moreover, what are the necessary economic and institutional conditions for liberalisation to be ‘successful’ in enhancing economic performance and the welfare of people? This last issue is addressed in the first paper by Alan Winters who argues that trade liberalisation by itself is unlikely to boost economic growth very much, unless openness reduces corruption and is accompanied by improved macroeconomic policy-making. He details the difficulties in interpreting econometric studies which purport to find a strong causal link between trade liberalisation and growth or total factor productivity. On the other hand, there is no coherent body of evidence that openness is bad for growth. He concurs with Rodriguez and Rodrick’s (2000) concern that the priority given to trade reform may generate expectations that are unlikely to be met without complementary measures, and may delay other institutional reforms which would have a greater impact. In other words, trade policy reform cannot be regarded as a panacea and a substitute for a comprehensive development strategy. Winters then goes on to consider the other growth-enhancing policies that must be involved if trade liberalisation is to confer benefits. The fight against corruption is one vital ingredient, with liberalisation reducing the scope for rent-seeking opportunities. Greater openness can also be a safeguard against inflation and a stimulus to investment. But investment requires incentives, adequate financing mechanisms, a framework of property rights and, above all, The Economic Journal, 114 (February), F1–F3. Royal Economic Society 2004. Published by Blackwell Publishing, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA.