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1. ACKNOWLEDGEMENT…………………………………………………………………………………….3 2. RESEARCH METHODOLOGY…………………………………………………………………………..4 3. INTRODUCTION …………………………………………..………………………………………...……...5 4. TRADE POLICY AND DEVELOPMENT: A HISTORICAL

OVERVIEW…………………………………………………………………………………………………………..6 5. RECENT TRENDS IN TRADE AND DEVELOPMENT IN DEVELOPING

NATIONS……………………………………………………………………………………………………………10 6. TRADE LIBERALIZATION AND THE MILLENIUM DEVELOPMENT

GOALS………….…………………………………………………………………………………………………….17 7. CONCLUSIONS……………………………………………………………………………………………..…24 8. BIBLIOGRAPHY………………………………………………………………………………………………25


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M rs. CHANAKYA NATIONAL LAW UNIVERSITY Page 3 . I would further extend my heartiest regards to the authors of the books and articles on the Interne t which I have referred to in my project work as their information provided vital insights in the course of making the project. I would also like to thank my parents for their support in encouraging me to work harder on this assignment.FREE TRADE AND DEVELOPMENT ACKNOWLEDGEMENT I would like to take this opportunity to express my humble gratitude to the faculty of Economics. Shivani Mohan for assigning such an interesting topic to me.

Websites Books METHOD OF WRI TING: The method of writing followed in the course of this research paper is primarily analytical.FREE TRADE AND DEVELOPMENT RESEARCH METHODOLOGY AIMS AND OBJECTIVES: The aim of the project is to present an overview of Free Trade and Development through various writings and articles. SCOPE: Though the study of Economics is an immense project and pag es can be written over the topic but due to certain restrictions and limitations I was not able to deal with the topic in detail. 2. SOURCES OF DATA: The following secondary sources of data have been used in the project 1. MODE OF CITATION: The researcher has followed a uniform mode of citation throughout the course of this research paper. CHANAKYA NATIONAL LAW UNIVERSITY Page 4 . The aim has been to identify the relationship between free trade and development and their relevance in the economic growth of a country .

but nearly all involve some liberalization of domestic trade policies. What Adam Smith . growth capital and development: and development investment in aid. economic development. One clear lesson from the past several decades.” 1 In past decades. CHANAKYA NATIONAL LAW UNIVERSITY Page 5 . search for the combination of policies that ten d to encourage. various schemes have been proposed as the key to promoting population economic control. heavy accumulation industry. and the like. Experience has shown that there are many different ways in which countries can take advantage of the opportunities provided by trade. the tangible economic payoff to countries that undertake such reforms makes it imperative that countries seriously consider moving forward with new policies. As a result. Ca m b ri dg e: MI T Pr es s. Th e El u si v e Qu es t fo r G ro wth . though not guarantee. 20 01 . 1 2 T he W ea lt h o f Th e Na ti o ns (177 6) S e e W ill ia m Ea st e rly . the search for a single universal measure that will stimulate economic growth has given way to the less ambitious. 2 Each of these schemes has failed to unl ock the door to greater prosperity in the developing world. While trade libe ralization often poses difficult political challenges to governments. is that countries taking advantage of the tremendous expansion in world trade have also made substantial progress in promoting economic d evelopment and reducing poverty.FREE TRADE AND DEVELOPMENT INTRODUCTION One of the foremost cha llenges facing the world this century is dealing with the persistent problem of world poverty. however. A world in which a majority of the globe’s population lives in impoverished conditions is unacceptable. but more realistic. wrote in relation to a country applies to the world at large: “No society can be flourishing and happy. of which the far greater part of the members are poor and miserable.

then the policy implications are straightforward liberalization as part of a general framework of policies aimed at improving economic performance. a vehicle for achieving a higher standard of living through the more effective use of national resources. TRADE POLICY AND DEVELOPMENT: A HISTORICAL OVERVIEW One of the oldest and most important questions in all of economics is the relationship development. such as the agenda for trade negotiations in key sectors such as agriculture and services. Alternatively. such as sorting out the various mechanisms by which one can affect the other. trade and poverty reduction. The aim is to provide the background context for tackling more specific issues. and the role of the World Trade Organization in fostering the interests of developing countries. It provides an overview of the recent evidence on the relationship between trade and growth. is that free trade will lead to the most efficient use of a country’s resources CHANAKYA NATIONAL LAW UNIVERSITY Page 6 . but theory does not offer guidance that is decisive when it comes to policy. relatively If openness to trade helps improve economic – governments should pursue trade conditions in developing countries. between a country’s trade policy and its economic Simple economic analysis informs us that international trade is not an end unto itself. The classical view. then certain restrictions on trade may prove beneficial and government regulations may be warranted. often associated with Adam Smith. but a means t o an end. this is because of a tension between two alternative views of the impact of trade on development. and trade and income distribution. In part.FREE TRADE AND DEVELOPMENT This paper reviews this l ink between trade and development. Economic theory can provide a framework for analyzing the relationship between trade and development. if openness poses an obstacle to economic development or if there are important exceptions to free-trade rule.

K i c ki ng A wa y th e La d d er : D ev elo p m ent S t r a teg y in Hi sto rica l Pe rsp ect ive . Lo nd on: Ant he m P r es s.FREE TRADE AND DEVELOPMENT and therefore yield the highest national income. An alternative view. For example. Openness to trade improve economic performance by increasing competition and by giving domestic firms access to the best foreign technology. Rather. the answer to the question of which trade regime best promotes economic development ultimately depends on empirical evidence: what have been the actual country experiences in terms of the impact of liberalization on economic performance? In the past. 3 For the period 1870 to 1913. high tariffs and economic growth rates are positively correlated. Canada. assistance to shift would resources promote manufacturing This view suggests that government of primary products and into economic developm ent and prevent out prolonged specialization in low value -added activities. associated with the nineteenth century political economist Friedrich List. economic historian Pau l Bairoch and others have argued that Friedrich List was correct in the nineteenth century: countries with relatively low tariffs (such as the Britain) grew relatively slowly while other developing countries (such as the United States. While economic theory provides a framework for thinking about these issues. countries that chose – largely for fiscal reasons – to impose high tariffs were also those with a high growth 3 H a-J oon C ha ng . which can be adopted to raise domestic productivity. 20 02 CHANAKYA NATIONAL LAW UNIVERSITY Page 7 . Yet more recent analysis suggests that this simple correlation does not support the conclusion that high tariffs wer e responsible for the rapid growth in those countries. and Argentina) imposed high tariffs and grew rapidly. suggests that developing countries should protect their infant manufacturi ng industries from foreign competition to foster their growth and allow them to catch up to industrial leaders. the answer given has not always been favorable to open trade policies.

30 CHANAKYA NATIONAL LAW UNIVERSITY Page 8 . 4 The historical record suggests that tariffs were not critical and may have been The United States counterproductive to these countries’ development. Yet the most influential thinking on trade and development from the 1930s through policies. Malaya than in Japan in the early twentieth century. trapping them in the production of low value-added goods for which export demand was believed to be stagnant Prec is el y b eca us e la b or w as n ot de ns ely po pul ate d. 5 the La te Ni n et e ent h C ent ur y . “ I nte r pr eti ng t he Ta ri f f . not in manufacturing.” Wor ld Eco no my 2 4 ( Ja nua ry 2 001 ): 1 5 . because most developing Furthermore.FREE TRADE AND DEVELOPMENT potential (i. the historical experience of the late nineteenth century suggests that there was a diversity of country experiences with respect to economic development. these countries were poor because they produced primary products. 5 The tension between the benign and the malign view of free trade’s impact of economic development persisted into the twentieth century. I r wi n . in co me ta xe s) we re n ot f ea si b le . as ot h er t ax i nst ru me nts ( lan d taxe s . the 1960s was characterized by certain observations and assumptions that gave support to protectionist “import substitution” trade The first assumption was that. t h es e cou ntr i es r el ie d on t ar if fs Do ugl as A . overtook Britain in per capita income in the 1890s largely bec ause of strong productivity performance in the (non -traded) service sector..G r o wth C o r r ela tio n o f The 4 as a fi scal d ev ic e t o ra is e re v en ue . Dou glas A . they had high land to labor ratios and were therefore magnets for foreign capital inflows and immigration). Thus. that open trade policies would perpetuate the specialization of these countries in primary commodities. it was assumed countries were producers of primary products. and that tariffs on imported manufactures were not the key to success. although Malaya did not industrialize while Japan did. “ T a ri ff s a nd G ro wt h in La t e Nin et ee nth Ce nt ur y Am e rica . ” A m er ica n Ec o no mi c Re v ie w 91 ( Ma y 2 00 2 ): 16 5 -1 69 . Argentina and Canada were among the most rapidly Per ca pita income grew more rapidly in growing countries around the turn of the century due in large part to a commodity-based export boom.e. I rw i n .

Mau r ic e S c ott . substitution – Many policymakers therefore concluded that from import import protecting domestic manufacturers competition – would be the best trade and development strategy. once stated. industries. “ T ra d e P o lic y a nd E co no m ic D ev elo pm en t : Ho w W e L ea rn . “industrialization consists primarily in the substitution of domestic production of manufactured goods for imports. not promote the growth of infant restrictions exports. discrimination The trade Trade barri ers served to shelter relatively implicitly a result. 1 . New Yor k .2 2 .FREE TRADE AND DEVELOPMENT (“export pessimism”). Thus.” 6 The ideas behind the “inward oriented” development approach justified government interference with trade. 19 70 .” 6 Ia n L it t l e . T i b or S c it ov s ky . Observing that developed countries often had much larger manufacturing sectors. And the actual policies pursued in the name of import substitution proved to be less coherent than the theory. In dust r y a n d Tra de in S o me Co u nt ri e s: A C o m pa ra tiv e S tud y . As against constrained the ability of domestic firms to take advantage of the opportunities presented by the world market and. Hollis Chenery. developing countries sought to mimic this mix by subsidizing industry and taxing agricultural and primary activities. 7 6 see An ne O. 7 De velo pi ng De v elo p me nt C e nt r e o f t he O E C D by O xfo rd Un iv e rs ity Pr ess . the payoff of import substitution policies in terms of economic growth and development was disappointing. the degree of protection given to domestic industry was high and idiosyncratic across sectors. industrialization – with a stress on capital accumulation and manufacturing – was believed to be the key to economic growth and development. Pub li s hed fo r the Am er ica n Ec ono m ic R ev i ew 87 ( Ma rc h 1 997 ) . In many cases. K ru e ge r . involved import substantial substitution inefficient industries from competition. consequently. but did not lay out specific blueprints for policy. CHANAKYA NATIONAL LAW UNIVERSITY Page 9 . As the one-time chief economist for the World Bank. p p .

and other indices of well -being. C . but or “ export -oriented” development path. Taiwan. but they did allow the free world market to dictate to a large degree the success or fa ilure of domestic industries.: I ns titut e fo r Int e rna ti on al Eco no mi cs . with associated reductions in poverty. chose an “outward” These countries were very poor in the 1950s. The rapid growth in trade came along with rapid rate of economic growth. D . malnutrition. The achievements of these with countries. there is no doubt that openness to trade was an important factor behind their economic success. South Korea. but could gain a niche in producing labor-intensive manufactured goods and see their exports grow rapidly. infant mortality. both importing foreign goods and technology. in contrast put to new the and disappointments associated import substitution. more S ee Ma rcus Nola nd a nd H o wa rd Pa c k.FREE TRADE AND DEVELOPMENT A major change in the assumptions underlying the import substitution view of the world resulted from the economic success of several East Asian countries. and Hong Kong among them. Ma rc h 20 03 CHANAKYA NATIONAL LAW UNIVERSITY Page 10 . These countries may not have all adopted laissez-faire policies with regard to indus try. I ndu stri a l Po lic y i n a n E r a o f G lo ba li za tio n: 8 Le sso n s F ro m Asi a . Was h in gt on . favorable light on the economic benefits accompanying economic reforms and trade liberalization. and the possibilities of exporting a new range of goods. As a result of a changing intellectual climate and the demonstration effect of the East Asian countries. in the 1970s. They demonstrated that developing countries open to trade did not necessarily have to remain primary products producers. The trade to GDP ratios of these countries rose significantly over this period. 8 The East Asian experience undermined the export pessimism of earlier decades and gave rise to a new appreciation for the gains from trade. While there continues to be a debate about the degree to which East Asian countries did or did not impl ement industrial policies.

choosing to benefits. But before countries are advised to undertake significant changes in their trade regime. technological progress.FREE TRADE AND DEVELOPMENT countries began experimenting with trade liberalization and economic openness in the 1970s and 1980s. and countries liberalize their trade policies. dozens of studies have s ifted through the link between trade openness and economic performance evidence. How have these experiments fared? RECENT TRENDS IN TRADE AND DEVELOPMENT IN DEVELOPING NATIONS As the previous section indicated. export policy. clear empirical evidence that greater integration with the world economy will pr oduce economic benefits must be presented. They divided countries into two simple categories. They found that per capita income in open economies grew. reap tangible economic . and suggests that the gains from more open policies are enormous. This period provides a testing ground for answering the question posed earlier: under which set of trade policies have countries performed best? How has openness to trade affected economic growth. and the like? Over the past decade. This is an astoundingly large figure. income inequality.” based on various indicators of import tariffs. “open” and “closed. etc. over 2 percentage points more rapidly than in closed economies between 1970 and 1989. on average. poverty reduction. CHANAKYA NATIONAL LAW UNIVERSITY Page 11 The evidence strongly suggests that more open countries. The past several decades has been a period of rapid global economic integration in which countries have chosen a variety of different policies. The study by Jeffrey Sa chs and Andrew Warner (1995) has been the starting point for many recent studies on trade openness and economic growth. there are good reasons for believing that openness to trade can help the development process of poor countries. b lack market exchange rate premia.

however. the general conclusion is uniform: openness to trade is associated with higher incomes and better economic CHANAKYA NATIONAL LAW UNIVERSITY Page 12 . Because trade reforms sometimes occur during periods of macroeconomic instabil ity. an indicator of macroeconomic dysfunction.FREE TRADE AND DEVELOPMENT However. Broad cross-country empirical studies such as these are useful for highlighting general tendencies and relationships between trade and development over the past se veral decades. a better way of estimating the effect of openness on growth is to examine the with in-country impact of discrete changes in trade policy openness. and not the trade policy variables. on average. they found that the results on openness were not robust to the inclusion of other geographic variables. while the Sachs -Warner dummy variable In effectively partitioned fast growing countries from slow growing ones in the 1980s. the authors exclude the three years surrounding the reform and found similar results. Although questions of measurement. other words. Wacziarg and Welch (2002) reexamined the Sachs -Warner analysis using data for the more recent period 1990 -1999 and found a much weaker relationship between the openness dummy variable and growth over that period. the Sachs and Warner study has been subjected to several important criticisms. First. Studying a panel of countries over the period 1950 to 1998. it failed to do so in the 1990s. Rodriguez and Rodrik (2000) noted that the statistical results came mainly from the black market premium. They formulated openness indicators based on the date at which individual countries liberalized their import policies. As Wacziarg and Welch (2002) noted. such regional dummy variables and distance from the equator.5 percentage points. Second. statistical specification. and interpretation can be posed of each individual study. controlling for country and year effects. Furthermore. they found that the within -country difference in growth between a liberalized and a non -liberalized regime is +1.

9 There may be some doubts about the magnitude and the strength of that finding. China and India. In both countries. however. CHANAKYA NATIONAL LAW UNIVERSITY Page 13 . fail to dramatize the importance of policy changes on economic outcomes in specific instances. they did open up their economies to world trade in a years after 1980. In fact. sharp and distinct way. the results have been astounding.FREE TRADE AND DEVELOPMENT performance. A complementary approach is to focus on individual cases to see if the results are consistent with the broader dat a analysis. study of recent experience has concluded that closed or No isolated economies perform better than those integrated into the world economy. The cross-country empirical studies. For both China and India. This rapid growth in trade has been In the twenty accompanied by much faster rates of economic growth. al th ou g h th e b et we en tra d e p ol icy i nd icat o rs and t he le ve l of p er ca p ita i nco me .9 9 One stud y t h er ef or e used d oz ens of st at i stic al s p ec if icat io ns t o exa m i ne t h e li n k inc om e. No other country grew as rapidly as China. Mor e op e n tr ad e pol ic i es ar e i n var ia b ly asso ci at e d w it h h i gh er p er ca p ita ma gn it ude a nd si g n if i canc e of t h e r elat io ns h i p va ri ed co ns id era b ly . While neither country immediately adopted free trade policies. while India undertook tentative moves to liberalize imports of capital goods in the mid-1980s and then drastically revised its vast and arcane import licensing process in 1991. support the findings of the cross -country studies. whereas fewer than ten other countries grew more rapidly than India. these countries sharply changed their trade policies at d ifferent points in time: China abolished the government’s monopoly on foreign trade in 1978. but the direction of effect is not in doubt. Jo ne s (2 00 1) . Each with a population of over 1 billion. real GDP grew at an average annual rate of 10 percent in China and 6 percent in India. the expansion of trade – both exports and imports – has been very rapid over the past decade. the recent experiences of the two largest developing countries.

and from 51 percent in 1977 to 27 percent 1999 in India. Mar ch 20 03 . the tremendous economi c payoff to China and India resulted from their starting far behind the technological frontier with highly distorted trade policies. Of course. but 10 On I nd ia . which for decades pursued inward -oriented economic policies. China and India did not follow the same economic policy blueprint. CHANAKYA NATIONAL LAW UNIVERSITY Page 14 . China has welcomed foreign investment in labor -intensive sectors. According to government statistics. the incidence of poverty fell from 28 percent in 1978 to 9 percent in 1998 in China.C . F or example. Here we have two of the most populous and poorest countries in the world. such as the softwar e industry around Bangalore. dramatic increases in foreign trade and economic activity. Unlike the earlier East Asian experience. s ee T .FREE TRADE AND DEVELOPMENT This rapid growth has translated into material improvements in the standard of living of these countries. D . : I ns titut e f or In te rn ati on a l Eco no m ics . suddenly changing the direction of trade policy. while India shares a comparative advantage in labor -intensive manufactures and skill -intensive services. R ein teg ra ti ng I ndia with the Wo rld Eco no m y . 10 The demonstration effect of the Chinese and Indian experience is perhaps even more profound than that of the earlier East Asian experience. These are astounding and monumental achievements. S ri n iv asa n an d S ur es h D . T en dul ka r . N. neither country is known for wise industrial policies that manipulated resource allocation in a way often alleged to be the case elsewhere in Asia. with completely different political systems (a s ingle party communist state and a multiparty representative democracy). both countries have succeeded in moving millions of people above the poverty line. but took advantage of their different attributes to opening to the world market. The change in course was followed by As a result. Was h in gt on . Countries closer to the frontier with lower trade barriers will not reap as enormous benefits as these countries. higher incomes have meant a sharp reduction in poverty.

Tariffs and other trade barriers that raise the domes tic price of capital goods means that each investment dollar buys less capital. 12 13 dom est ic ally p rod u ce d ca pi t al goo ds is si g ni f ica ntly re lat ed to g ro wth i n p er c a pit a in co me . How it is possible that trade liberalization can provide such substantial benefits? Recent studies have isolated two particular channels by which openness is related to higher incomes: one is through greater investment. fo r e xa m pl e. 11 Empirical research has uncovered an indirect link between trade and growth: the share of investment in GDP is positively correlated with This means that while trade may not be directly correlated growth in per capita income. Trade policies that increase the domestic relative price of imported capital goods are harmful to investment and therefore to growth as well. and the other i s through higher productivity . it might stimulate growth indirectly through investment. pa rt icul arl y i n d ev elo p i ng cou nt ri e s. L ee (1 995 ) fi nds t hat t h e r a tio of i m port ed to can le ad t o h ig h er pro d uct i v it y . Empirical evidence tends to support the idea that the free importation of intermediate and capital goods is an effective way of promoting inve stments that increase growth. and M azu md ar ( 20 01) r eac h es a s i mi lar concl us io n. with growth. for exa m pl e) L ev i ne a nd R en alt (1 9 92 ) . Wacziarg and Welch (2002) found that within-country capital investment as a percent of GDP is 1. CHANAKYA NATIONAL LAW UNIVERSITY Page 15 . 13 In addition. W a czi ar g (2 00 1) . and trade is positively correlated with investment. 12 Over the 1950 to 1998 time period. t h e t wo ca n b e re lat ed: hi g h er i nv est m ent (i n ca p ital good s . S e e.9 percentage points higher in a liberalized regime than in a non -liberalized regime.FREE TRADE AND DEVELOPMENT many millions of people live in countries just as poor and China and India once were. trade contributes to productivity growth in at least two ways: it serves as a conduit for the transfer of foreign technologies that 11 Of cour se . reducing the efficiency of investment spending.

especially in traded goods sectors. that trade serves as a conduit for the Impo rted capital goods that embody transfer of foreign technologies. C h in a h as lo ng b e en st ru g gl in g a ga in st a d e vast ati n g d is eas e kn ow n as ric e b last . The first channel. overall productivity growth tripled. study after study has documented this phenomena. One is through the importation of capital goods. Trade increases Competition also competition in the domestic market. CHANAKYA NATIONAL LAW UNIVERSITY Page 16 . F or ei gn R & D e na bl ed t h e C hi n es e fa r me rs t o a b and o n t h e us e of ch e m ical fu n gic id es t h at ha d b ee n u sed to f i g ht th e d is ea se a nd in cr ea se y ield s of a c r iti cal s tap le co m mod ity . a nd t h e i m po rtat io n of for e ig n id ea s ca n b e a n i m por tan t sou rce of p rod uct iv it y i m pro ve m ent . For exa m pl e . 14 Detailed studies of India’s trade Prod uct iv it y a d v anc es ar e u sual ly t h e res ult of i nv est m en t i n r es ea rc h an d S o met i me s f ore i gn re se arc h ca n b e i m por ted d ir ect ly . diminishing the market power of any stimulates firms to improve their efficiency. co st in g far m er s b ill io ns of d oll ar s.FREE TRADE AND DEVELOPMENT enhance productivity. Another study examined industry productivity in Mexico before and after its trade liberalization in 198 5 and found that productivity increased significantly. fa r me rs in Ch i na’ s Yu nn an p ro vi nc e sta rt ed p la nti n g a m i xtur e of t wo dif fe r ent t yp es of r ic e in t h e sa m e p addy . far m ers n ea rly el im i na t ed r ic e bl ast a nd dou bl ed t h ei r y i eld . To the extent that trade barriers raise the price of imported capital goods. technological advances can greatly enhance an economy’s productivity. sci en ti sts . Over the past decade. Yo o n (2 00 0 ). Th e d i se as e had d e st r oy ed m ill io ns o f t on s o f r ic e a y e ar . industries and to it increases more competition efficient and in a way th at their stimulates become improve productivity. After the Côte d’Ivoire reformed its trade po licies in 1985. operates in several ways. u nd er t he di re ct ion of a n i nt er nat io nal te am o f By t h is s i m pl e tec h ni qu e of b io -d iv e rs ity . firm and forcing them to behave more competitively. R ec ent ly . countries are hindering their ability to benefit from technologies th at could raise productivity. 14 The second channel by which trade contributes to productivity is by forcing domestic industries to become more efficient. otherwise they risk going out of business. growing four times more rapidly in industries that became less sheltered from foreign competition. de vel o pm en t ( R& D ).

TRADE LIBERALIZATION AND THE MILLENIUM DEVELOPMENT GOALS The higher income levels or growth rates that accompany trade liberalization are critical to achieving impo rtant development objectives. For example.FREE TRADE AND DEVELOPMENT liberalization in 1991 and Korea’s trade liberalization in the 1980s reached essentially the same conclusion: trade not only disc iplines domestic firms and forces them to behave more like a competitive industry. the reduction in trade barriers in the mid-1980s resulted more in a reallocation of resources between manufacturing plants – the shutdown of inefficient plants and the expansion of relatively efficient ones. Many developing countries fear that trade liberalization will force painful adjustments as a on their of manufacturing openness to sector trade. CHANAKYA NATIONAL LAW UNIVERSITY Page 17 . so that import liberalization can promote exports in other sectors. 15 S ee th e st ud i es by H a rr iso n (1 99 4) . 15 And the higher is an economy’s productivity level. obtainable on the world market. Ty bo ut and We st br oo k (1 995 ). increased trade allows developing countries the opportunity to exploit their strong comparative advantage in producing labor intensive manufactures. or even de some industrialize the country. K i m ( 20 00 ) and Kri s hn a a nd M it r a (19 9 8) . although New Zealand has a strong comparative advantage in agricultural goods. the higher is that country’s standard of living. Often exports from other ma nufacturing industry depend on access to inexpensive and quality industrial inputs. but helps increase the productivity of domestic firms. in a way that served to rai se average industry productivity – rather than a reallocation of resources between sectors. industrialized” Yet both China and India have not “de While result manufacturing f irms will be forced to close or consolidate as a result of import competition.

Poverty and Income Distribution: Economic growth is essential for poverty reduction. 1990 -2015 include. rapidly growing countries such as China and India have seen sharp CHANAKYA NATIONAL LAW UNIVERSITY Page 18 . reductions in poverty rates.FREE TRADE AND DEVELOPMENT The United Nations’s Millennium Development Goals. to: • • • • eradicate extreme hunger and poverty provide universal primary education reduce child mortality improve material health All of these goals are promoted by the greater income that results from economic policy reforms. As Figure 1 shows. among other goals.

worries about income distribution miss the point of focusing on the absolute well -being of the poor. it does not make sense to forego the policy and do nothing merely because the gains accrue disproportionately to the rich even as it helps lift the poor from dire poverty. In some sense.FREE TRADE AND DEVELOPMENT Although this link is clear. If a policy raises income the income of the rich 20 percent but that of the poo r only 10 percent. many observers worry about the impact of trade liberalization and economic growth on income distribution. CHANAKYA NATIONAL LAW UNIVERSITY Page 19 .

in other words. the world’s citizens.3 billion). the share of income that accrues to the poor is not systematically associat ed with the growth rate (Dollar and Kray 2001). data on the dis tribution of income are extremely hazardous to work with because of different concepts of that distribution. The first unweighted average of incomes across countries. The percentage changes in incomes of the poor are equal on average to percentage changes in average income. Other evidence from China points to that cities that experience a greater degree of openness in trade also tend to see a greater decline in urban rural income inequality. This pattern in the data suggests that inferences based solely on China's national aggregate figures (overall openness and overall inequality) can be misleading. But whether there has been a divergence or convergence of world incomes depends largely upon the ap proach taken by various studies. conceptual approaches have been taken.. however. i. trade may help reduce. ignores national boundaries and examines income inequality between all Most studies examining average incomes across countries finds that those incomes have diverged. giv ing Trinidad and Tobago (population 1. Indeed. Some studies examine inequality between households. However. the urban-rural income inequality (Wei and Wu 2001). that growth is roughly neutral in its effect on the distribution of income within a country. others between regions and countries.3 million) the same weight as China (population 1. Many observers are disturbed by trends in the world distribution of income. rather than increase. each country Most constitutes a unique observation. A frequently mentioned concern is that trade liberaliz ation or an open system of world trade may exacerbate world income inequality.FREE TRADE AND DEVELOPMENT Evidence suggests. in these studies. studies examining population -weighted average incomes across countries CHANAKYA NATIONAL LAW UNIVERSITY Page 20 . Three the compares The second compares The third the population -weighted average of incomes across countries.e.

. and also Indonesia and Vietnam. the conclusion that the world is becoming more equal must be accepted if one believes that there are more than 1 billion people in China and that their incomes are rising at a faster rate than the average. the average person in a poor country is gaining ground because her income is increasing at a faster rate than the income of the average rich person in a rich country. This is primarily because a few. and shows an unmistakable relationship. Figure 2 plots the relationship between per capita income and the incidence of child labor CHANAKYA NATIONAL LAW UNIVERSITY Page 21 . The final set of studies examines inequality among the world population. individuals rather than countries are the unit of observation). ignoring country borders (i. . Surjit Bhalla (2002. large countries (notably China and India) have been growing more rapidly than other countries.” One cannot ignore the improvement in absolute and relative well -being of nearly 2 billion people Child Labor and Schooling Economic growth also helps reduce child labor. in these countries alone.FREE TRADE AND DEVELOPMENT finds that income inequality has been reduced in recent decades. China and India. This is the result of several big. These studies tend to be relatively recent but also tend to suggest no trend toward greater inequalit y.e.. . poor countries doing very well – the giants. 205) summarizes the issue as follows: “While the average poor country may be losing ground (the divergence literature). p.

The greater integration of Vietnamese rice farmers with the world market contributed to a rise in domes tic income that allowed those farmers to reduce the use of child labor. Recent studies have shown that 80 percent of the In addition. the relaxation of Vietnam’s export quota on rice contributed to an increase in the real domestic price of rice of nearly 30 percent. During this same period. CHANAKYA NATIONAL LAW UNIVERSITY Page 22 . after the country adopted economic reforms. per capita income in Vietnam grew at an annual rate of nearly 7 percent between 1993 and 1997. No ve m b er 20 0 2 . such increases in the standard of living can be linked specifically to trade After 1993. Da rt m out h Co lle g e .FREE TRADE AND DEVELOPMENT As an example. liberalization. the incidence of child labor declined 28 percent. E ric Ed mo nd s and N i na Pa vc n i k. “ Wi l l Chi l d La bo r D ecli ne w ith I mp ro ve me nts in L iving S ta nda r d s?” Wor k i ng p a pe r. 16 Reducing the disincentives on 16 Er ic Ed mo nd s . decline in child labor in households that move from below to above the poverty line is due to increases in the standard of living.

18 un pu bl is h ed p a pe r . and longer and better lives. 18 This statistical correlation survives even after controlling for per capita income and other factors (such as schooling and number of doctors per capita). and thereby the employment of child labor. less infant mortality. the payoff of higher income is directly measurable in terms of less poverty.3 years and an increase in infant mo rtality of 6 per 1.FREE TRADE AND DEVELOPMENT agricultural exports helps raise rural incomes and helps alleviate poverty. less malnutrition. According to the results. “ T he Li fe -a n d . ” N B ER Wor k i ng Pap e r No . Trade may not directly affect t hese outcomes. “ Wea l thi er I s H ea lthie r . 84 1 . CHANAKYA NATIONAL LAW UNIVERSITY Page 23 . 17 La nt P r it c het t a nd La wr en ce H .” that the benefits of higher income are strong in terms of reducing infant mortality and raising life expectancy. “Do es Glo ba l i za ti o n I ncr ea s e Chi ld La bo r? Evid enc e f ro m V ie tn a m. J anu a ry 1 4 . suggesting that openness to trade may be beneficial for these outcomes for reasons that go bey ond any indirect effect through raising income. p p .6 8. but indirectly contributes to these vital development goals by leading to higher income. In t er nat io nal M on eta ry Fund . less child labor.” Jo ur nal of S ha n g. In sum. S u m me r s. better nutrition and diets as well as better housing. all of which benefit health status.” Hum an R es our ce s 31 ( Fall 19 96 ). 17 Higher income households can afford medicines and better health care. Health It has long been recognize d that “wealthier is healthier.Dea th I m plica ti o ns o f G lo ba li za tio n . D ec em b e r 20 0 2 .000 births. 20 0 2 . X xxx . Some remarkable recent results point to a negative association between tariff levels and life expectancy and a negative association between tariffs and infant mortality. an el even percentage point increase in tariffs (approximately equal to a one standard deviation of the change in tariffs over a five year period) is associated with a decline in life expectancy of 1.ji n We i a nd Yi Wu .

However. many politically powerful groups in developing countries have vested interests in the status quo and therefore oppose efforts to liberalize and open up the economy. Dev elo pm e nt . 19 “It is so m et im es d i ff i cult fo r so p h ist icat ed e co no mi sts a nd pol it ic ia ns to u nd ers tan d th e d ee p hi st o ric a nd cult u ral pro b le ms so me cou nt ri es ha ve w i th t h e id ea of f re e trad e . who can’t hope to compete on world markets without access to world -priced inputs. A Wo rld With o ut Wa l l s: Fr e edo m. efficient services and modern technology. has noted: “More and more. 133 . Yet many developing countries rem ain suspicious of freer trade. Once dire economic conditions in th ose countries are now improving.” The evidence from countries as diverse as South Korea and Chile. But as the forme r Director General of the WTO. a nd Glo b a l Go v er na n ce . 19 In addition. confirms that protectionism is indeed a self-inflicted wound. grossly inflating the price they pay for necessities like food or clothing.FREE TRADE AND DEVELOPMENT CONCLUSIONS Economists know more about what can destroy economic growth and activity than what creates it. countries that have found a way to take advantage of the rapid growth in world trade have generally found it to be an escalator out of poverty. F r ee T ra de . p . developing countries have come to see protectionism as a self-inflicted wound. Vietnam and Uganda. Mike Moore (p. ” M i k e Moo r e. Trade reform has played an important role in helping millions of people to see a better world. Oxfo rd Un i v ers it y P re ss. 173). S om e st ill eq u at e it w it h t he ir op p r e ssi on f ro m col on ial d a ys. 20 03 . CHANAKYA NATIONAL LAW UNIVERSITY Page 24 . C hina and India. but it also handicaps exporters and entrepreneurs. It not only punishes consumers. The opportunity to take part in the tremendous expansion of world trade is one that leads to tangible economic benefits.

. B. Opportunities and Risks for Developing Countries . (2005). The Current Negotiations in the WTO: Options.FREE TRADE AND DEVELOPMENT BIBLIOGRAPHY  BOOKS REFERRED:  Aksoy. Trade Liberalisation and Economic Performance: Theory and Evidence for Developing  ONLINE JOURNALS:    Manupatra Hein Online Westlaw International CHANAKYA NATIONAL LAW UNIVERSITY Page 25 . Zed Books/ TWN Press  NEWSPAPERS AND MAGAZINES REFERRED:      India Today The Outlook The World Economy The Economic Times The Economist A. (2005).L.O. and G. Countries.  Das.  Santos-Paulino. A. Growth Before and After Trade Liberalisation. Salinas (2006).

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