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FREE TRADE AND ECONOMIC DEVELOPMENT

Syed Ahmad & Asad Zaman


This is a draft of an unpublished article, by the late Dr. Syed Ahmad. Although it is in need of a final
polish, it contains many insightful ideas which shed a lot of light on the issue of free trade.

The doctrine of free trade is currently recommended, mostly through various world organizations, such as
the IMF, the World Bank, and the WTO.., to all economically underdeveloped (not to use euphemisms)
countries as one of the primary requirements for development. The only international organizations which
has had a more cautious view , on this issue, the UNCTAD on this issue appears to be dead; at least its
voice has not been heard for a long time. The purpose of this paper is to examine once again, in a brief but
systematic way, the basis of this recommendation, in the light of some recent and some not so recent
experience of economic development and its reverse, as well as of the theory behind this.

Before proceeding further, let us define the sense in which the two key expressions in the title will be
used in the following discussion. First ‘free trade’. Free trade will be used in its simplest sense. It is the
absence of any restriction either through import duties or otherwise of the commercial movement of goods
and services as well as of finances between a particular country and the rest of the world.. Thus the
promotion of ‘foreign trade’ is not by itself the promotion of free trade; only the complete absence of
restrictions qualifies. Next 'economic development' . The adjective makes it clear that here we are not
addressing the issue whether or under what circumstances economic development leads or does not lead to
development in the broader sense of the term. The meaning is further narrowed by using it in the strict
sense of .growth in per capita income . Thus no account will be taken of the distribution of income or
other aspects of economic welfare. Thus, by removing the equity or other moral constraints the argument
for free trade is examined in the most favourable circumstances.

The plan of the paper is as follows. Part I narrates well-known, but seldom put together, experiences
of three major countries of the world, which , not to put too fine a point, were subjected to free trade
under duress, by foreign countries. Part II gives a brief account of the early phases of development of the
countries which have already developed or have gone some distance on that path, and to examine which of
them have followed the free trade route in their successful endeavours. Part III examines some of the
major theoretical arguments on this issue. Part IV contains some ‘residua’ and conclusions.

The table below neatly summarizes the historical contents of this section. If these calculations or
estimates are accepted (at least for their being the most recent and at least, as far as one can see, from the
most unbiased source), what we see is the following. Starting with the bottom line of Table II, in
conjunction with that of Table I, we can see that India was a major manufacturing country in the world in
1750 and even sometime after this. Even in per capita terms, it was comparable to most European
countries, and was not far behind England which had been developing quite fast around that time, if Adam
Smith’s testimony (1776) is any guide. India having that high level of per capita production of
manufacturing was surprising and an indication of its solid foundation, since the country had been in an
administrative disarray at least since 1707: by 1750 the Mughal Empire had split into small fiefdoms, in
the North, South, East and West. However, Britain did not have much to sell to India, and India retained
the position of being a producer of higher quality goods: her main manufacturing consisted of fine
textiles, high quality steel exported to Europe in large quantities, and ship-building, among others. .
.But although Britain had gained political dominance in India soon after the beginning of her ‘industrial
revolution’ , around the fourth quarter of the 18 th century., it yet could not take advantage of free trade with
India, since upto then she could still not compete with her . It is only when she had technologically
advanced in many areas of manufacturing, that she benefited from this, and the manufacturing sector in
India started declining precipitously in relative as well as per capita terms. By 1900, she had lost 85 % of
her per capita production of manufacturing. While only 55% of the population was dependent on
agriculture in year 1595, by the early twentieth century the number rose to 85%.. India had become a
backward , poor country, dependent almost completely on agriculture.

Table1: Relative Shares of World Manufacturing Output, 1750-1900


1750 1800 1830 1860 1880 1900
Europe as a whole 23.2 28.1 34.2 53.2 61.3 62
United Kingdom 1.9 4.3 9.5 19.9 22.9 18.5
Habsburg Empire 2.9 3.2 3.2 4.2 4.4 4.7
France 4 4.2 5.2 7.9 7.8 6.8
Germany 2.9 3.5 3.5 4.9 8.5 13.2
Italy 2.4 2.5 2.3 2.5 2.5 2.5
Russia 5 5.6 5.6 7 7.6 8.8
United States 0.1 0.8 2.4 7.2 14.7 23.6
Japan 3.8 3.5 2.8 2.6 2.4 2.4
Third World 73 67.7 60.5 36.6 20.9 11
China 32.8 33.3 29.8 19.7 12.5 6.2
India/Pakistan 24.5 19.7 17.6 8.6 2.8 1.7

Table 2: Per Capital Levels of Industrialization, 1750-1900


1750 1800 1830 1860 1880 1900
Europe as a whole 8 8 11 16 24 35
United Kingdom 10 16 25 64 87 [100]
Habsburg Empire 7 7 8 11 15 23
France 9 9 12 20 28 39
Germany 8 8 9 15 25 52
Italy 8 8 8 10 12 17
Russia 6 6 7 8 10 15
United States 4 9 14 21 38 69
Japan 7 7 7 7 9 12
Third World 7 6 6 4 3 2
China 8 6 6 4 4 3
India/Pakistan 7 6 6 3 2 1

This is often attributed to the administrative neglect by a non-resident administration. But the
neglect of what? It is true that when the administration of Madras Presidency (province) requested the
Viceroy to permit it to encourage the development of the tanning of hides and skins industry in that area, it
received a terse reply to the effect that the objective of the British Government in India is to rule India
efficiently, not to develop her economically. But the decision was quite in conformity with the laissez faire,
and in particular the free trade philosophy. Government interference by encouraging the establishment of
any tannery would interfere with the free movement of untanned hides and skins from one country (India)
to another (Britain, which imported these items tanned them, made shoes , and sold them back to India,
among others). Again, when the British Government in India, for revenue reasons imposed a 5% duty on
the import of textiles from all countries, the Secretary of State for India in London ordered that an exactly
the same percentage of excise tax be imposed on the textiles produced and sold in India. …the notorious
‘countervailing tax’. Again, this can only be described as ‘free trade’ , taken to its purest form.

Perhaps one could find other non-free-trade actions taken by the British Government in India
to suppress Indian industry, in the interest of the British. But there is little doubt that at the time when the
British technical development was taking place at a fast pace while India had not joined the race, the
imposition of free trade on India was one of the main means and cause of her almost complete
deindustrialization. ...

I have told India’s story in some detail, because she was undoubtedly the worst sufferer from
the forced free trade policy. We may now move up to the second row in both Tables I and II—to China.
Her share of manufacturing as well its per capita production also declined sharply over the specified
period. Her being forced into free trade , epitomized by in the two ‘Opium Wars’, free trade violence
taken to its ridiculous extreme, is a notorious episode of the world history. However, since in spite of her
subjugation at various levels, she did not completely lose her sovereignty, as India did, she was still able
to take preventive action against the free trade ruining her industries completely..

The fourth line from the bottom on both Tables tells us the story of a country which was
similarly attacked, if anything more explicitly by free trade, was militarily defeated, and had to accept the
free trade conditions of the victors, but was resourceful enough to avoid its worst consequences, as is
indicated by the indicated rows on the two tables . Perry’s naval attack on Japan for the specific purpose of
imposing free trade is well-known. So is the later invasion by at least four powers, led by Perry of the U.S.
and including Britain, France and Germany with some representation of Holland as well, The treaty
imposed upon Japan forbade her from imposing any tariff , either on imports or exports.. How Japan
managed to escape the fate of India and China resulted from her ability to retain a good part of her political
sovereignty, and the ability how to use it, combined with the amazing combined inaptitude of her would be
tormentors.

The inaptitude was in the drafting of the treaty which prohibited the imposition of import
and export duties and direct subsidies to either, but did not mention anything about the subsidization of
industrial production. It was this loophole in the imposed free trade that the Japanese exploited to the full,
and made the basis of their policy of industrialization. The imposed additional taxes on agriculture and used
the revenue for subsidizing selected industries. They did this promptly. As we see, their per capita output
of manufacturing never declined , even though their share of world output did.

These are the brief stories of three major countries attacked by free trade by the
industrialized countries. No such blatant attack is made on underdeveloped countries these days, but
perhaps it need not be. Today, the attempt to impose free trade is made ‘by other means’; it is a non-violent
but two-pronged attack. One is what may be called ‘intellectual imperialism’, to which most of us
’voluntarily’ surrender. The countries which want to impose free trade on the underdeveloped countries,
are not only industrially more advanced , they also control the journals and publications which are most
cited and for that reason respected even in countries which are being ‘invaded’, so to say. In these
publications only the arguments and theories that support free trade are repeated, while its shortcomings
are suppressed. We shall consider the theoretical arguments in Section III below. For the moment we only
need to note , that it is not only the merit of the argument that convinces many in underdeveloped countries,
but also the source country-origin of the argument, as well as the persistence with which it is presented.
The other direction of attack is through the control of capital by the developed countries. And in this
capacity they can directly and indirectly impose their free trade will on the needy, as the victors of the past
did. F. Sachs ., on a related issue begins his paper with the statement “History, Nehru famously observed,
is written by the victors. Financial history, it seems, is written by the creditors.” The creditors indeed play
the role of the victors in imposing free trade directly, or indirectly through the perpetual haranguing of the
borrowers by the international trade and financial organizations, such as the IMF, the World bank and
WTO which the rich control. Hence even where the means of control has changed, its existence and
objectives have not. In fact these days, even those who are free of these encumberances, are still liable to
subjugation by the intellectual dominance of the free trade idea, which to their good fortune the Japanese
were not, when they embarked upon modern industrial development. ,The free trade advocated and
imposed these days of course includes both the free movement of goods and finances. These countries do
have the advantage of political independence, but it seems there are many different ways of skinning a
cat!

II

Let us turn now from the stories of the ‘victims’ of the imposition of free trade, to stories of
the development of the developed countries, and those which have gone some substantial distance in that
direction, to see how far they have used free trade as the means of their development. Among them, the
first to develop was of course England, as every body knows and the above table shows. There have been
suggestions that at least England , being the first in the field, so to say did not need any ‘protection’ (from
whom would she have needed it?) for her development. Even this plausible expectation, however, is not
valid. Leaving aside such trivial policy of having death penalty for anybody in the American colonies who
made nails which could be used in ship-building, the first major protective measure , on the eve of its
‘industrial revolution’ she took. was against Indian textile-------the industry she destroyed through free
trade after the revolution gathered some pace. But at the earlier stage, she simply banned the import of any
Indian textile into Britain altogether.. Furthermore, she used this ban as a two-edged weapon. By
preventing the import of textile she protected her own upcoming textile industry, but at the same time let
the East India Company (or advised them?) to sell it to her European competitors , convincing them ,
according to List of the benefits of free trade. Whatever the reason, Portugal did allow the import of India
textile, while England had banned its own company from selling it in England., and finally the entire textile
industry of Portugal was destroyed. In the meantime, Britain herself gained greater efficiency behind the
walls of her protective policy. By the time of the Great Exhibition of 1851, England was supplying seventy
five percent of the world textile export (or production?). She was then committed to not only the theory,
but also the practice of free trade.

The economic development of Germany and the U..S.A under the umbrella of
protection is well-known. Germany had industrialized enough by the middle of the nineteenth century to
expect to benefit by forcing free trade on Japan. . But the Germans are so much aware of the initial role
of protection in their industrialization process that they still revere the memory of List, the well-known
German prophet of protection.

The U.S. led the five-power fleet to force Japan into free trade, although she herself
did not allow free access of import in her country. A section title in a chapter Bairoch’s chapter in his
…….tells us about the high rate of growth in the U.S> under protection, the basic arguments of which
were laid down by the first Secretary of Treasury of the independent United States, Alexander Hamilton in
his famous presentation to the U.S Senate in 1798. This remained the foundation of the U.S trade policy
until the period [specified by Bairoch. Check]. The argument for the ‘Infant Industry’ is much older, but
the term itself was first used in that presentation.

Among the ‘late developers’ , in Alice Amsden (1989) language, we have already noted how Japan
managed to squeeze out of the strait-jacket of free trade into which she was forced by the more
industrialized countries. Amsden book goes into the details of how the non-conformity with the free trade
philosophy and policy has been the central strategy of development of all successful ‘late developers’ of
East Asia. Her prime example, not surprisingly, is South Korea. She tells us that South Korea could not
initially compete even in textiles, perhaps the most labour-intensive organized industry, without
support(P68) Part of her policy of export promotion to provide support by making the export of certain
proportion of the product so supported a requirement for the support. (p.69). The Government
established multiple price of loans (P.145), which included even negative interest rate for certain promising
sectors . It is well-documented that the basic strategy of all the ‘miracle’ countries was a selective non-
adherence of the free trade policy. In fact their recent financial difficulties and worse can to a large extent
be attributed to their too close adherence of the free trade policy in the financial sector.
III
Since a good part of fashionable economic theory today is based on the assumption that no
profitable opportunity can be left unused , and since no known country has based its early industrialization
on free trade, one could argue that this was simply because it would not have been profitable for them to
do so.! This would be then all the theoretical argument one needed to prove the case against the adoption
of free trade by the countries in their early period of industrialization. However, since in my view the
above stated basis amounts to economic nihilism, I shall briefly examine the theoretical arguments, and
the personalities behind this in this section.
Taking the personalities first, one can predict with reasonable accuracy, the nationalities of
the supporters and opponents of free trade on the basis of the evidence of the previous sections . Britain,
the earliest industrially advanced country provided most early powerful supporters of free trade. Smith’s
rhetoric and Ricardo’s comparative advantage theory still form the foundation of the free trade argument
today.(Note: With such a lively lot writing economics , there were of course some opponents, such as
Malthus, but his argument was not regarding the efficacy of free trade for industrialization.) The major
opponents included List from Germany, Carey from the United States, and John Rae from Canada, with
argument against free trade in the early period of industrialization. , all from countries which industrialized
sometime after Britain.. Such prediction is not necessarily based on the assumption of partisanship
,amounting to intellectual dishonesty on the part of the participant although this is not unheard of. (Note: In
fact such motivation can be with some reason attributed the two most important pillars of ‘liberalism’ in
Britain, and indeed in the world, John Locke and John Stuart Mill. John Locke (Seciond Treaties on
Government 1699) justified slavery on the ground of the slaves being made captives in a ’just war’, in
which the captive loses his right to life, and therefore cannot complain if he loses only his right to freedom
! Leaving aside the merit of the principle itself particularly by a prophet of liberalism, in Mking this
argument he had also to imply that attacking African villages at night and capturing people without any
other justification than having a.gun was somehow a ‘just war’ . If this was a ‘just’ war, then which war
was not? In any case this was completely in contradiction .with all the definitions of ‘just war’ that was
accepted even in his time and country . The suspicion of intellectual dishonesty arises from the fact that
Locke’s patron and benefactor, Lord Shafetsury had a large number of slaves working on his plantations
in the American colonies. Again, John Stuart Mill (On Liberty 1859?), such a great defender of individual
right that he was prepared to defend it even against democracy,. recommended taking away the rights of
all the individuals of a country, if in his view the country itself was in a state of infancy and so were all its
individuals! One need hardly comment on of the argument which at one place insists on defending the
right of the individual against that of the society, here recommends taking away individual right even if
the two rights are not in conflict.. Then let us examine his choice of the country he selects to illustrate this
point. Of all the countries he could choose from, he chose India! An individual of this country , named
Panini had produced perhaps the most systematic grammar in any language ever in the eighth century
B.C.; another individual, called Kotalya had written a book entitled Erthshashtra, meaning economics,
which was a extensive treaties on public and economic administration , in the 4 th. century B.C. Then
there was some other individual in that country who invented the game of chess in the first century A.D.,
and another who had thought up of the modern number system, which by using zero revolutionized the
system. Another, who around the 5th century A.D. wrote Lilavati, and introduced the world to Algebra,
and others from the same country were responsible to take the subject further over many centuries.
Another who wrote a treatise on making love in the fifth century which is famous even today. There were
individuals writing drama and poetry a thousand years before Shakespeare had seen the light of the day.
and others who had developed and created arts of various forms over the centuries, including the
individual who conceived and built the Taj Mahal, long after the British traders had been granted
permission to establish their trading posts in India! It was presumptuous, to say the least, for somebody
from England where people did not even know how to write until the eighth century, to call India an
‘infant’ or a child-like country. Why did he have to go at a tangent and make his initial argument about
child-like countries, and whatever the merit of the argument, why of all countries he would chose one of
the most unsuitable one to illustrate his point, can in my view be best answered by the same suspicion of
intellectual dishonesty. At the time Mill was writing his book, the East India Company had become the
virtual ruler of a large part of India, and Mill was not only a paid employee of the East India Company,
but also a British patriot, and Britain was about to take over the administration of India. It served Mill’s
purpose on all counts to argue against the freedoms in India to justify the foreign rule there as well as the
fully despotic form of rule practiced by his employers, and he went out to fight to promote the interest of
his Company and for his nation in his own way. Not all cases of intellectual dishonesty are so blatant, but
this does not mean that they are not there.)
It is also because one is inclined , often even without realizing, to think about things from his own point
of view , and genuinely believe that what is good for him must be good for the others.
Leaving aside the motivation of the arguer in making an argument (not that this is not important. It
is particularly naïve for economists, when they invariably attribute utility maximizing or profit
maximization as the driving force of everybody else’s action, to believe that their reader will forget about
such motivation on their part! This is not to say that for this reason their argument should not be listened to,
but only that such posssible motivation lurking behind their argument should not be ignored. ), we move
on to consider what some of these authors actually said about free trade or simply about matters which can
be related to the question of free trade.
Although the argument in support of free trade is traced by its advocates (a recent example is
D.Irwin (1996) back to very early times, Adam Smith is often presented as the most forceful and still the
most persuasive advocate of free trade. In fact Irwin concludes “Smith’s policy of free trade, therefore,
applies to all countries regardless of the state of economic development” (p.96).
In spite of such assertions (Or perhaps because of it), we need to look at Smith’s circumstances,
as well as his arguments more closely. He published his Wealth of Nations (1776), at a time when Britain
had advanced in industrialization further than his actual or potential competitors, but her advantage in this
respect was yet not overpowering. In fact, the technique which enabled England to match the fineness of
Indian textile , which later allowed Britain not only to dominate the world textile production, but was the
main engine of her early growth, was patented the very year the book was published; obviously it would be
some years before Britain could dominate the world market even in this area. Hence, in spite of free trade
being an off-shoot of Smith’s laissez faire doctrine (which in turn he also heavily qualified, but this is
well-known at least since Viner (1927), and we need not go into its details here), he did qualify his
advocacy of free trade. In fact a couple of these are cited by Irwin himself, but he either inadvertently or on
purpose, selects only those which are at bottom not directly against free trade, but leaves out others which
are. For example, one he leaves out is Smith’s direct advocacy of imposing export duty on wool, and
implicitly on other raw materials used in manufacturing in British industry (1776, p. ) to keep the price of
raw material cheaper at home, to give advantage to home producers. No stretch of argument can make
this a part of a free trade policy or philosophy. It were only Smith’s successors, who wrote when Britain
had acquired clear ascendancy in manufacturing, who advocated unfettered free trade. Smith himself
modified his policy recommendation, in spite of what Irwin would have us believe, according to Britain’s
state of economic development.
This was, of course, a direct negation by Smith of a completely free trade policy. Besides,
he also developed certain ideas, which indirectly, and perhaps without his realizing this, provided
arguments against free trade. The most important of these, somewhat ironically, is his development of his
idea of division of labour. Ironically, because it was used more directly by his followers and even by Smith
himself , as a strong argument in favour of free trade: it provided the opportunity for the international
division of labour. Smith is famous . for the division of labour not because it brings about allocational
efficiency (as implied by the above consideration), nor because he contributed anything original to the
basic concept------we know at least since Marx that he did not. It was primarily because he (rightly or
wrongly) considers the division of labour as the main engine of economic growth (For references , see
Ahmad 1996). As such he opens his Wealth of Nations with the first three chapters on this topic. Although
the entire argument of these chapters points to the presence of the increasing return to scale, the title of
Chapter 3 and, of course, its contents brings this out into the open, so to say. The title is “The Division of
Labour is limited by the extent of the market”. . The direct implication of this statement is that production
takes place under conditions of increasing returns! Division of labour reduces the unit cost of production
and this cannot be continued only because of the limitation of the market. And increasing returns has
always been a thorn in the side of free traders,( as it has been to this day of the modern general
equilibrium theorists) About free trade, even Irwin says in 1996 “Increasing returns….still proves vexing
[!]: their effect [on the protection argument] seem particularly important and difficult to dismiss”, and
Haberler a great advocate of free trade, had to admit “Graham’s conclusions [against free trade, based on
increasing returns] follows, provided that one accepts his assumptions.” [?cited in Irwin?] We return to this
later, but, but what we may note before we leave Smith, is that in spite of his strong advocacy of free trade,
he not only made direct recommendation contrary to this policy, he also provided , through his
presentation of the division of labour, the basis of one of the strongest argument against free trade.
Finally, we may examine very generally, even if briefly , the contents and the nature of the
theoretical economic and related arguments on free trade. The supporters of free trade, since Smith base
their argument on the resource-allocational efficiency achieved through free trade. This is essentially the
aspect of classical economics taken over by the neoclassicals which they combined with their utility
approach, but almost completely ignored the other , and to many the more important for the classicals---
growth and development. The allocation issue is directly in conformity with the interests of the countries
which have already ‘arrived’, because , by and large, it supports the status quo. Any changes that may take
place within its boundaries are slow, and non-threatening to the superiority of the superiors. The emphasis
on ‘comparative advantage’ as the basis of policy, or its counterpart the ‘Heckscher-Ohlin’ emphasis on
the relative abundance of factors determining the choice of goods to be produced is the obvious
prescription for the perpetuation of the relative status quo. The “drawers of water and the hewers of
wood”, proceeding on this route would not ever likely be able to threaten the high-tech domain of the elite.
Against this we have the role of increasing returns (Graham), technical change and its
externalities (John Rae), cultural externalities of industrialization(List), which engender forces that take us
out of the placid and comfortable ( that is for those who have already ‘arrived’) world of ‘comparative
advantage’ and Heckscher-Ohlin, to a world in which the active participation of the state plays an
important role , because the increasing returns, technical and cultural and even financial externalilties,
give technical change and industrialization generally, the characteristic of a ‘public good’, as pointed out
by John Rae (1834, See Ahmad 1996) long ago.
What is the answer of the promoters of free trade? It comes in many forms. One is to abuse or
ridicule the opponents. For instance, in his review of Irwin’ Against the Tide, Krugman characterizes the
opponents in the following way: “………he is chortling with glee at his own intellectual daring. You see,
he intends to (gasp) attack free trade.” Again “Read the latest manifesto rejecting the dogma of free trade
from the Economic Whatever Institute…… ‘ The other is to belittle the importance of an argument against
free trade and its author, by using dismissive adjectives. Thus …… says about Graham’s argument
[based on increasing returns] that it is “ little more than a theoretical curiosity” [?cited in Irwin’s book?]
Irwin himself takes a less strident stand. As we have noted, he concedes “Increasing
returns…….still prove vexing [what a word to use!]; their effects [on the protection issue] seem potentially
important and difficult to dismiss…..” He grudgingly evaluates the state of the argument as follows
“Free trade is not passe, but it is an idea that has irretrievably lost its innocence….”..The matter should
have been reasonably left there, but the book could not be ended without chanting the appropriate mantra:
and thus the last words of the book are "....“free trade will remain one of the most durable and robust
proposition that economic analysis [including or excluding increasing returns and externalities?] has to
offer for the conduct of economic policy.” And it is perhaps this mantra that takes Krugman to mystical
heights in the following observation in the above noted review of the book “….because it [free trade
philosophy] is a far deeper idea than even most of its supporters will ever understand” (emphasis added to
highlight the mystical).
To the question that if the argument for free trade is not so overwhelming, why it is often repeated
by those who are likely to suffer from it, or already suffering from it. The rather sketchy answer, noted
earlier, is the intellectual and other kind of dominance of those who benefit from it. Some of this
motivation can attributed to some people in the underdeveloped countries themselves, but the origin mostly
lies in the motivation of the others. Such indoctrination is done through the control of the media including
the academic journals, the ‘prestigious’ ones are usually dominated by a small group of people in the
more economically advanced countries (see Economic Journal March 1999), in places where many of the
students from underdeveloped countries get their training from.