Saturday, May 12, 2007

In Defense of Globalization/Jagdish Bhagwati

At the same time, the evidence against an inward-looking or import substitution trade strategy is really quite overwhelming. In the 1960s and 1970s, several full-length studies of the trade industrialization strategies of over a dozen major developing countries, including India, Ghana, Egypt, South Korea, the Philippines, Chile, Brazil, and Mexico, were undertaken at the Organization for Economic Cooperation and Development (OECD) and the National Bureau of Economic Research, the leading research institution in the United States. These studies were very substantial and examined several complexities that would be ignored in a simplistic regression analysis across a multitude of nations. Thus, for instance, in examining whether the 1966 trade liberalization in India worked, T.N. Srinivasan and I wrote a whole chapter assessing whether, after making allowance for a severe drought that blighted exports, the liberalization could be considered to ahve been beneficial compared to a decision to avoid it. Only after systematic examination of the actual details of these countries' experience could we judge whether trade liberalization had truly occurred and when; only then we could shift meaningfully to a limited regression analysis that stood on the shoulders of this sophisticated analysis. The result was to over-turn decisively the prevailing wisdom in favor of autarkic policies. Indeed, many of us had started with the presumption that inward-looking policies would be seen to be welfare-enhancing but the results were strikingly in the opposite direction, supportive of outward orientation in trade and direct foreign investment instead. Why? (Page 61)

* The outward-oriented economies were better able to gain from trade. The layman finds it hard to appreciate this because, as the Nobel laureate Paul Samuelson has remarked, perhaps the most counterintuitive but true proposition in economics has to be that one can specialize and do better.

Third, consider the contrasting experience of India and the Far East. From the 1960s to the 1980s, India remained locked in relatively autarkic trade policies; the Far Eastern countries--Singapore, Hong Kong, South Korea, and Taiwan, the four Little Tigers--shifted to outward orientation dramatically. The results speak for themselves: exports and income grew at abysmal rates in India, at dramatic rates in the Far East. India missed the bus. No, it missed the Concorde!

Of course, the trade strategy has to be put into the full context of other policies that enabled it to translate into gigantic growth-enhancing outcomes for the Far East and into tragic shortfall for India. To see this, consider the East Asian "miracle," as economists christened it: it is not surprising that the practitioners of the dismal science call a splendid economic performance a miracle! This spectacular performance was, it is widely recognized now, due to very high rates of productive investment almost unparalleled elsewhere. Sure enough, the Soviet-bloc countries had experienced similar rates of investment, but it had all turned out to unproductive investment. The "blood, seat, and tears" strategy of getting Soviet citizens to forgo consumption in the interest of investment and growth of income had proven to be a failure. (Page 63)

Writing in regard to historian E.H. Carr on the Soviet dilemma of "socialism in one country":
If a single nation, even if the government is popularly elected, shifts to radical policies, financial capital may leave; even the bourgeoisie ("human capital") may emigrate, voting with its feet. At the same time, fresh foreign funds may dry up, exacerbating the crisis. Government, contemplating such an outcome, may shun leftward policy shifts, or if they try them, they may be forced to retrace their steps amid chaos. Evidently, if socialism obtains everywhere, rather than just in just one country, the prospects are better for it to manage a sharp lurch to the left since there is no capitalist safe haven to worry about. Page 97

From the Economist:
If any cause commands the unswerving support of The Economist, it is that of liberal trade. For as long as it has existed, this newspaper has championed freedom of commerce across borders. Liberal trade, we have always argued, advances prosperity, encourages peace among nations and is an indispensable part of individual liberty. It seems natural to suppose that what goes for trade in goods must go for trade in capital, in which case capital controls would offend us as violently as, say, an import quota on bananas. The issues have much in common, but they are not the same. Untidy as it may be, economic liberals should acknowledge that capital controls-of a certain restricted sort, and in certain cases-have a role. (Page 207)