economics project (4th sem)- srijan chakravorty

8/2/2019 Economics Project (4th Sem)- Srijan Chakravorty

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FREE TRADE AND DEVELOPMENT

CHANAKYA NATIONAL LAW UNIVERSITY Page 1


SUBMITTED TO: MRS. SHIVANI MOHAN,

FACULTY FOR ECONOMICS

SUBMITTED BY: SRIJAN CHAKRAVORTY

ROLL- 474

B.A. LL.B (HONS.), 4TH

SEMESTER


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TABLE OF CONTENTS

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

NATIONS10

6. TRADE LIBERALIZATION AND THE MILLENIUM DEVELOPMENTGOALS..17

7. CONCLUSIONS..24

8. BIBLIOGRAPHY25


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ACKNOWLEDGEMENT

I would like to take this opportunity to express my humble gratitude to

the faculty of Economics, Mrs. Shivani Mohan for assigning such an

interesting topic to me. I would also like to thank my parents for their

support in encouraging me to work harder on this assignment. I would

further extend my heartiest regards to the authors of the books and

articles on the Internet which I have referred to in my project work as

their information provided vital insights in the course of making the

project.


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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. The aim has been to

identify the relationship between free trade and development and their

relevance in the economic growth of a country.

SCOPE:

Though the study of Economics is an immense project and pages can be

written over the topic but due to certain restrictions and limitations I was

not able to deal with the topic in detail.

SOURCES OF DATA:

The following secondary sources of data have been used in the project-

1. Websites

2. Books

METHOD OF WRITING:

The method of writing followed in the course of this research paper is

primarily analytical.

MODE OF CITATION:

The researcher has followed a uniform mode of citation throughout the

course of this research paper.


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INTRODUCTION

One of the foremost challenges facing the world this century is dealing

with the persistent problem of world poverty. A world in which a majority

of the globes population lives in impoverished conditions is unacceptable.

What Adam Smith, 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.1

In past decades, various schemes have been proposed as the key to

promoting economic growth and development: development aid,population control, capital accumulation and investment in heavy

industry, and the like.2 Each of these schemes has failed to unlock the

door to greater prosperity in the developing world. As a result, the search

for a single universal measure that will stimulate economic growth has

given way to the less ambitious, but more realistic, search for the

combination of policies that tend to encourage, though not guarantee,

economic development.

One clear lesson from the past several decades, however, is that

countries taking advantage of the tremendous expansion in world trade

have also made substantial progress in promoting economic development

and reducing poverty. Experience has shown that there are many

different ways in which countries can take advantage of the opportunities

provided by trade, but nearly all involve some liberalization of domestic

trade policies. While trade liberalization often poses difficult political

challenges to governments, the tangible economic payoff to countries that

undertake such reforms makes it imperative that countries seriously

consider moving forward with new policies.

1The Wealth of The Nations (1776)

2 See William Easterly, The Elusive Quest for Growth , Cambridge: MIT Press, 2001.


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This paper reviews this link between trade and development. It

provides an overview of the recent evidence on the relationship between

trade and growth, trade and poverty reduction, and trade and income

distribution. The aim is to provide the background context for tackling

more specific issues, such as the agenda for trade negotiations in key

sectors such as agriculture and services, and the role of the World Trade

Organization in fostering the interests of developing countries.

TRADE POLICY AND DEVELOPMENT: A HISTORICAL

OVERVIEW

One of the oldest and most important questions in all of economics is the

relationship between a countrys trade policy and its economic

development. Simple economic analysis informs us that international

trade is not an end unto itself, but a means to an end, a vehicle for

achieving a higher standard of living through the more effective use of

national resources. If openness to trade helps improve economic

conditions in developing countries, then the policy implications are

relatively straightforward governments should pursue trade

liberalization as part of a general framework of policies aimed at

improving economic performance. Alternatively, if openness poses an

obstacle to economic development or if there are important exceptions to

free-trade rule, then certain restrictions on trade may prove beneficial

and government regulations may be warranted.

Economic theory can provide a framework for analyzing the

relationship between trade and development, such as sorting out the

various mechanisms by which one can affect the other, but theory does not

offer guidance that is decisive when it comes to policy. In part, this is

because of a tension between two alternative views of the impact of trade

on development. The classical view, often associated with Adam Smith, is

that free trade will lead to the most efficient use of a countrys resources


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and therefore yield the highest national income. Openness to trade

improve economic performance by increasing competition and by giving

domestic firms access to the best foreign technology, which can be

adopted to raise domestic productivity. An alternative view, associated

with the nineteenth century political economist Friedrich List, suggests

that developing countries should protect their infant manufacturing

industries from foreign competition to foster their growth and allow them

to catch up to industrial leaders. This view suggests that government

assistance to shift resources out of primary products and into

manufacturing would promote economic development and prevent

prolonged specialization in low value-added a ctivities.

While economic theory provides a framework for thinking about

these issues, 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, the answer given has not always been favorable to open

trade policies. For example, economic historian Paul 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,

Canada, and Argentina) imposed high tariffs and grew rapidly.3 For the

period 1870 to 1913, high tariffs and economic growth rates are positively

correlated.

Yet more recent analysis suggests that this simple correlation does

not support the conclusion that high tariffs were responsible for the rapid

growth in those countries. Rather, countries that chose largely for fiscal

reasons to impose high tariffs were also those with a high growth

3 Ha-Joon Chang, Kicking Away the Ladder: Development Strategy in Historical

Perspective , London: Anthem Press, 2002


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potential (i.e., they had high land to labor ratios and were therefore

magnets for foreign capital inflows and immigration). 4 The historical

record suggests that tariffs were not critical and may have been

counterproductive to these countries development. The United States

overtook Britain in per capita income in the 1890s largely because of

strong productivity performance in the (non-traded) service sector, not in

manufacturing. Argentina and Canada were among the most rapidly

growing countries around the turn of the century due in large part to a

commodity-based export boom. Per capita income grew more rapidly in

Malaya than in Japan in the early twentieth century, although Malaya did

not industrialize while Japan did. Thus, the historical experience of the

late nineteenth century suggests that there was a diversity of country

experiences with respect to economic development, and that tariffs on

imported manufactures were not the key to success.5

The tension between the benign and the malign view of free trades

impact of economic development persisted into the twentieth century. Yet

the most influential thinking on trade and development from the 1930s

through the 1960s was characterized by certain observations and

assumptions that gave support to protectionist import substitution trade

policies. The first assumption was that, because most developing

countries were producers of primary products, these countries were poor

because they produced primary products. Furthermo re, it was assumed

that open trade policies would perpetuate the specialization of these

countries in primary commodities, trapping them in the production of low

value-added goods for which export demand was believed to be stagnant

4 Precisely because labor was not densely populated, these countries relied on tariffs

as a f iscal device to raise revenue, as other tax instruments ( land taxes, income taxes)

were not feasible. Douglas A. Irwin, Interpreting the Tarif f-Growth Correlation of

the Late Nineteenth Century, American Economic Review 91 (May 2002): 165-169.

5 Douglas A. Irwin, Tariffs and Growth in Late Nineteenth Century America, The

World Economy 24 (January 2001): 15 -30


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(export pessimism). Observing that developed countries often had much

larger manufacturing sectors, developing countries sought to mimic this

mix by subsidizing industry and taxing agricultural and primary activities.

Thus, industrialization with a stress on capital accumulation andmanufacturing was believed to be the key to economic growth and

development. Many policymakers therefore concluded that import

substitution protecting domestic manufacturers from import

competition would be the best trade and development strategy. As the

one-time chief economist for the World Bank, Hollis Chenery, once stated,

industrialization consists primarily in the substitution of domestic

production of manufact ured goods for imp orts.6

The ideas behind the inward oriented development approach

justified government interference with trade, but did not lay out specific

blueprints for policy. And the actual policies pursued in the name of

import substitution proved to be less coherent than the theory. In many

cases, the degree of protection given to domestic industry was high and

idiosyncratic across sectors. Trade barriers served to shelter relatively

inefficient industries from competition, not promote the growth of infant

industries. The trade restrictions implicitly involved substantial

discrimination against exports. As a result, import substitution

constrained the ability of domestic firms to take advantage of the

opportunities presented by the world market and, consequently, the payoff

of import substitution policies in terms of economic growth and

development was disappointing. 7

6 see Anne O. Krueger, Trade Policy and Economic Development: How We Learn .

American Economic Review 87 (March 1997), pp. 1 -22.

7 6 Ian Little, Tibor Scitovsky, Maurice Scott , Industry and Trade in Some

Developing Countries: A Comparative Study , New York, Published for the

Development Centre of the OECD by Oxford University Press, 1970.


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A major change in the assumptions underlying the imp ort

substitution view of the world resulted from the economic success of

several East Asian countries, South Korea, Taiwan, and Hong Kong among

them, in the 1970s. These countries were very poor in the 1950s, but

chose an outward or export-oriented development path. They

demonstrated that developing countries open to trade did not necessarily

have to remain primary products producers, but could gain a niche in

producing labor-intensive manufactured goods and see their exports grow

rapidly. The rapid growth in trade came along with rapid rate of economic

growth, with associated reductions in poverty, malnutrition, infant

mortality, and other indices of well-being.

The achievements of these countries, in contrast to the

disappointments associated with import substitution, put new and

favorable light on the economic benefits accompanying economic reforms

and trade liberalization. While there continues to be a debate about the

degree to which East Asian countries did or did not implement industrial

policies, there is no doubt that openness to trade was an important factor

behind their economic success. The trade to GDP ratios of these co untries

rose significantly over this period. These countries may not have all

adopted laissez-faire policies with regard to industry, but they did allow

the free world market to dictate to a large degree the success or failure of

domestic industries.8

The East Asian experience undermined the export pessimism of

earlier decades and gave rise to a new appreciation for the gains from

trade, both importing foreign goods and technology, 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, more

8 See Marcus Noland and Howard Pack, Industrial Policy in an Era of Globali zation:

Lessons From Asia , Washington, D.C.: Institute for International Economics, March

2003


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countries began experimenting with trade liberalization and economic

openness in the 1970s and 1980s. How have these experiments fared?

RECENT TRENDS IN TRADE AND DEVELOPMENT IN

DEVELOPING NATIONS

As the previous section indicated, there are good reasons for believing

that openness to trade can help the development process of poor

countries. But before countries are advised to undertake significant

changes in their trade regime, clear empirical evidence that greater

integration with the world economy will produce economic benefits must

be presented. The past several decades has been a period of rapid global

economic integration in which countries have chosen a v ariety of different

policies. 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, poverty

reduction, income inequality, technological progress, and the like?

Over the past decade, dozens of studies have sifted through the link

between trade openness and economic performance evidence. The

evidence strongly suggests that more open countries, and countries

choosing to liberalize their trade policies, reap tangible economic

benefits.

The study by Jeffrey Sachs and Andrew Warner (1995) has been the

starting point for many recent studies on trade openness and economic

growth. They divided countries into two simple categories, open and

closed, based on various indicators of import tariffs, export policy, blackmarket exchange rate premia, etc. They found that per capita income in

open economies grew, on average, over 2 percentage points more rapidly

than in closed economies between 1970 and 1989. This is an astoundingly

large figure, and suggests that the gains from more open policies are

enormous.


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However, the Sachs and Warner study has been subjected to several

important criticisms. First, Rodriguez and Rodrik (2000) noted that the

statistical results came mainly from the black market premium, an

indicator of macroeconomic dysfunction, and not the trade policy

variables. Furthermore, they found that the results on openness were not

robust to the inclusion of other geographic variables, such regional

dummy variables and distance from the equator. Second, 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. In

other words, while the Sachs-Warner dummy variable effectively

partitioned fast growing countries from slow growing ones in the 1980s, it

failed to do so in the 1990s.

As Wacziarg and Welch (2002) noted, however, a better way of estimating

the effect of openness on growth is to examine the within-country impact

of discrete changes in trade policy openness. They formulated openness

indicators based on the date at which individual countries liberalized

their import policies. Studying a panel of countries over the period 1950

to 1998, they found that the within-country difference in growth between

a liberalized and a non-liberalized regime is +1.5 percentage points, on

average, controlling for country and year effects. Because trade reforms

sometimes occur during periods of macroeconomic instability, the authors

exclude the three years surrounding the reform and fou nd similar results.

Broad cross-country empirical studies such as these are useful for

highlighting general tendencies and relationships between trade and

development over the past several decades. Although questions of

measurement, statistical specification, and interpretation can be posed of

each individual study, the general conclusion is uniform: openness to

trade is associated with higher incomes and better economic


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performance.9 There may be some doubts about the magnitude and the

strength of that finding, but the direction of effect is not in doubt. No

study of recent experience has concluded that closed or isolated

economies perform better than those integrated into the world economy.

The cross-country empirical studies, however, fail to dramatize the

importance of policy changes on economic outcomes in specific instances.

A complementary approach is to focus on individual cases to see if the

results are consistent with the broader dat a analysis.

In fact, the recent experiences of the two largest developing

countries, China and India, support the findings of the cross-country

studies. Each with a population of over 1 billion, these countries sharply

changed their trade policies at different points in time: China abolished

the governments monopoly on foreign trade in 1978, 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. While neither country immediately adopted

free trade policies, they did open up their economies to world trade in a

sharp and distinct way.

For both China and India, the results have been astounding. In both

countries, the expansion of trade both exports and imports has been

very rapid over the past decade. This rapid growth in trade has been

accompanied by much faster rates of economic growth. In the twenty

years after 1980, real GDP grew at an average annual rate of 10 percent in

China and 6 percent in India. No other country grew as rapidly as China,

whereas fewer than ten other countries grew mo re rapidly than India.9

9 One study therefore used dozens of statistical specifications to examine the l ink

between trade pol icy indicators and the level of per capita income. More open trade

policies are invariably associated with higher per capita income, although the

magnitude and significance of the relationship varied considerably. Jones (2001).


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This rapid growth has translated into material improvements in the

standard of living of these countries. For example, higher incomes have

meant a sharp reduction in poverty. According to government statistics,

the incidence of poverty fell from 28 percent in 1978 to 9 percent in 1998

in China, and from 51 percent in 1977 to 27 percent 1999 in India.10

The demonstration effect of the Chinese and Indian experience is

perhaps even more profound than that of the earlier East Asian

experience. Here we have two of the most populous and poorest countries

in the world, with completely different political systems (a single party

communist state and a multiparty representative democracy), which for

decades pursued inward-oriented economic policies, suddenly changing

the direction of trade policy. The change in course was followed by

dramatic increases in foreign trade and economic activity. As a result,

both countries have succeeded in moving mi llions of people above the

poverty line. These are astounding and monumental achievements.

China and India did not follow the same economic policy blueprint,

but took advantage of their different attributes to opening to the world

market. China has welcomed foreign investment in labor -intensive

sectors, while India shares a comparative advantage in labor-intensive

manufactures and skill-intensive services, such as the software industry

around Bangalore. Unlike the earlier East Asian experience, neither

country is known for wise industrial policies that manipulated resource

allocation in a way often alleged to be the case elsewhere in Asia.

Of course, the tremendous economic payoff to China and India

resulted from their starting far behind the technological frontier with

highly distorted trade policies. Countries closer to the frontier with lower

trade barriers will not reap as enormous benefits as these countries, but

10 On India, see T. N. Srinivasan and Suresh D. Tendulkar, Reintegrati ng India with

the World Economy , Washington, D.C.: Institute for International Economics, March

2003.


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many millions of people live in countries just as poor and China and India

once were.

How it is possible that trade liberalization can provide such

substantial benefits? Recent studies have isolated two particular channelsby which openness is related to higher incomes: one is through greater

investment, and the other is through higher productivity.11

Empirical research has uncovered an indirect link between trade and

growth: the share of investment in GDP is positively correlated with

growth in per capita income, and trade is positively correlated with

investment. This means that while trade may not be directly correlated

with growth, it might stimulate growth indirectly through investment.12

Over the 1950 to 1998 time period, Wacziarg and Welch (2002) found that

within-country capital investment as a percent of GDP is 1.9 percentage

points higher in a liberalized regime than in a non-liberalized regime.

Trade policies that increase the domestic relative price of imported

capital goods are harmful to investment and therefore to growth as well.

Tariffs and other trade barriers that raise the domestic price of capital

goods means that each investment dollar buys less capital, reducing the

efficiency of investment spending. 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.13

In addition, trade contributes to productivity growth in at least two

ways: it serves as a conduit for the transfer of foreign technologies that

11

Of course, the two can be related: higher investment ( in capital goods, for example)can lead to higher productivity.

12 Levine and Renalt (1992).

13 See, for example, Wacziarg (2001). Lee (1995) finds that the ratio of imported to

domestically produced capital goods is significantly related to growth in per capita

income, particularly in developing countries, and Mazumdar (2001) reaches a similar

conclusion.


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enhance productivity, and it increases competition in a way that

stimulates industries to become more efficient and improve their

productivity. The first channel, that trade serves as a conduit for the

transfer of foreign technologies, operates in several ways. One is through

the importation of capital goods. Imported capital goods that embody

technological advances can greatly enhance an economys productivity.

To the extent that trade barriers raise the price of imported capital goods,

countries are hindering their ability to benefit from technologies that

could raise productivity. 14

The second channel by which trade contributes to productivity is by

forcing domestic industries to become more efficient. Trade increases

competition in the domestic market, diminishing the market power of any

firm and forcing them to behave more competitively. Competition also

stimulates firms to improve their efficiency, otherwise they risk going out

of business. Over the past decade, study after study has documented this

phenomena. After the Cte dIvoire reformed its trade policies in 1985,

overall productivity growth tripled, growing four times more rapidly in

industries that became less sheltered from foreign competition. Another

study examined industry productivity in Mexico before and after its trade

liberalization in 1985 and found that productivity increased significantly,

especially in traded goods sectors. Detailed studies of Indias trade

14 Productivity advances are usually the result of investment in research and

development (R&D), and the importation of foreign ideas can be an important source

of productivity improvement. Sometimes foreign research can be imported directly.

For example, China has long been struggling against a devastating disease known as

rice blast. The disease had destroyed mill ions of tons of rice a year, costing farmersbil l ions of dollars. Recent ly, under the direct ion of an internat ional team of

scientists, farmers in Chinas Yunnan province started planting a mixture of two

different types of rice in the same paddy. By this simple technique of bio-diversity,

farmers nearly eliminated rice blast and doubled their yield. Foreign R&D enabled the

Chinese farmers to abandon the use of chemical fungicides that had been used to fight

the disease and increase yields of a critical staple commodity. Yoon (2000).


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liberalization in 1991 and Koreas trade liberalization in the 1980s reached

essentially the same conclusion: trade not only disciplines domestic firms

and forces them to behave more like a competitive industry, but helps

increase the productivity of domestic firms.15 And the higher is an

economys productivity level, the higher is that countrys standard of

living.

Many developing countries fear that trade liberalization will force

painful adjustments on their manufacturing sector or even de-

industrialize the country. Yet both China and India have not de-

industrialized as a result of openness to trade. While some

manufacturing firms will be forced to close or consolidate as a result of

import competition, increased trade allows developing countries the

opportunity to exploit their strong comparative advantage in producing

labor intensive manufactures. Often exports from other ma nufacturing

industry depend on access to inexpensive and quality industrial inputs,

obtainable on the world market, so that import liberalization can promote

exports in other sectors. For example, although New Zealand has a strong

comparative advantage in agricultural goods, 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, in a way that served to raise

average industry productivity rather than a reallocation of resources

between sectors.

TRADE LIBERALIZATION AND THE MILLENIUM

DEVELOPMENT GOALS

The higher income levels or growth rates that accompany trade

liberalization are critical to achieving important development objectives.

15 See the studies by Harrison (1994). Tybout and Westbrook (1995). Kim (2000) and

Krishna and Mitra (1998).


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The United Nationss Millennium Development Goals, 1990-2015 include,

among other 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.

Poverty and Income Distribution:

Economic growth is essential for poverty reduction. As Figure 1 shows,

rapidly growing countries such as China and India have seen sharp

reductions in poverty rates.


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Although this link is clear, many observers worry about the impact of

trade liberalization and economic growth on income distribution. In some

sense, worries about income distribution miss the point of focusing on the

absolute well-being of the poor. If a policy raises income the income of

the rich 20 percent but that of the poor only 10 percent, it does not makesense 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.


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Evidence suggests, however, that growth is roughly neutral in its effect on

the distribution of income within a country. The percentage changes in

incomes of the poor are equal on average to percentage changes in average

income; in other words, the share of income that accrues to the poor is not

systematically associated with the growth rate (Dollar and Kray 2001).

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, i.e., trade may help reduce, rather than increase,

the urban-rural income inequality (Wei and Wu 2001). This pattern in the

data suggests that inferences based solely on China's national aggregate

figures (overall openness and overall inequality) can be misleading.

Indeed, data on the distribution of income are extremely hazardous to

work with because of different concepts of that distribution. Some studies

examine inequality between households, others between regions and

countries.

A frequently mentioned concern is that trade l iberaliz ation or an open

system of world trade may exacerbate world income inequality. Many

observers are disturbed by trends in the world distribution of income. But

whether there has been a divergence or co nvergence of world inco mes

depends largely upon the approach taken by various studies. Three

conceptual approaches have been taken. The first compares the

unweighted average of incomes across countries. The second compares

the population-weighted average of incomes across countries. The third

ignores national boundaries and examines income inequality between all

the worlds citizens.

Most studies examining average incomes across countries finds that those

incomes have diverged. However, in these studies, each country

constitutes a unique observation, giving Trinidad and Tobago (population

1.3 million) the same weight as China (population 1.3 billion). Most

studies examining population-weighted average incomes across countries


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finds that income inequality has been reduced in recent decades. This is

primarily because a few, 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

in these countries alone.

The final set of studies examines inequality among the world population,

ignoring country borders (i.e., individuals rather than countries are the

unit of observation). These studies tend to be relatively recent but also

tend to suggest no trend toward greater inequality.

Surjit Bhalla (2002, p. 205) summarizes the issue as follows:

While the average poor country may be losing ground (the divergence

literature), 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 the result of several big,

poor countries doing very well the giants, China and India, 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.

Child Labor and Schooling

Economic growth also helps reduce child labor. Figure 2 plots the

relationship between per capita income and the incidence of child labor

and shows an unmistakable relationship.


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As an example, per capita inco me in Vietnam grew at an annual rate of

nearly 7 percent between 1993 and 1997, after the country adopted

economic reforms. During this same period, the incidence of child labordeclined 28 percent. Recent studies have shown that 80 percent of the

decline in child labor in households that move from below to above the

poverty line is due to increases in the standard of living. In addition,

such increases in the standard of living can be linked specifically to trade

liberalization. After 1993, the relaxation of Vietnams export quota on

rice contributed to an increase in the real domestic price of rice of nearly

30 percent. 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.16 Reducing the disincentives on

16 Eric Edmonds, Will Child Labor Decline with Improvements in Living Standards?

Working paper, Dartmouth College , November 2002. Eric Edmonds and Nina Pavcnik,


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agricultural exports helps raise rural incomes and helps alleviate poverty,

and thereby the employment of child l abor.

Health

It has long been recognized that wealthier is healthier, that the benefits

of higher income are strong in terms of reducing infant mortality and

raising life expectancy. 17 Higher income households can afford medicines

and better health care, better nutrition and diets as well as better housing,

all of which benefit health status.

Some remarkable recent results point to a negative association between

tariff levels and life expectancy and a negative association between tariffs

and infant mortality. According to the results, 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 l ife

expectancy of 1.3 years and an increase in infant mortality of 6 per 1,000

births.18 This statistical correlation survives even after controlling for per

capita income and other factors (such as schooling and number of doctors

per capita), suggesting that openness to trade may be beneficial for these

outcomes for reasons that go beyond any indirect effect through raising

income.

In sum, the payoff of higher income is directly measurable in terms of le ss

poverty, less infant mortality, less malnutrition, less child labor, and

longer and better lives. Trade may not directly affect these outcomes, but

indirectly contributes to these vital development goals by leading to

higher income.

Does Globalization Increase Child Labor? Evidence from Vietnam, NBER Working

Paper No. Xxxx, January 14, 2002.

17 Lant Pritchett and Lawrence H. Summers, Wealthier Is Healthier, Journal of

Human Resources 31 (Fall 1996), pp. 841-68.

18 Shang-j in Wei and Yi Wu, The Life-and-Death Implications of Globalization,

unpublished paper, International Monetary Fund, December 2002.


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CONCLUSIONS

Economists know more about what can destroy economic growth and

activity than what creates it. However, 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.

Yet many developing countries remain suspicious of freer trade.19 In

addition, 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. But as the former Director General of the

WTO, Mike Moore (p. 173), has noted:

More and more, developing countries have come to see protectionism as

a self-inflicted wound. It not only punishes consumers, grossly inflating

the price they pay for necessities like food or clothing, but it also

handicaps exporters and entrepreneurs, who cant hope to compete on

world markets without access to world-priced inputs, efficient services

and modern technology.

The evidence from countries as diverse as South Korea and Chile, Chinaand India, Vietnam and Uganda, confirms that protectionism is indeed a

self-inflicted wound. The opportunity to take part in the tremendous

expansion of world trade is one that leads to tangible economic benefits.

Once dire economic conditions in those countries are now improving.

Trade reform has played an important role in helping mill ions of people to

see a better world.

19 It is sometimes difficult for sophisticated e conomists and politicians to understand

the deep historic and cultural problems some countries have with the idea of free

trade. Some sti l l equate it with their oppression from colonial days. Mike Moore, A

World Without Walls: Freedom, Development, Free Trade, and Global Governance ,

Oxford University Press, 2003, p. 133.


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CHANAKYA NATIONAL LAW UNIVERSITY P 25

BIBLIOGRAPHY

BOOKS REFERRED: Aksoy, A. and G. Salinas (2006); Growth Before and After

Trade Liberalisation.

Santos-Paulino, A.O. (2005), Trade Liberalisation andEconomi c Performance : Theory and Evidence for Developing

Countries.

Das., B.L. (2005), The Current Negotiations in the WTO:Options, Opportunities and Risks for Developing Countries ,

Zed Books/ TWN Press

NEWSPAPERS AND MAGAZINES REFERRED: India Today The Outlook The World Economy The Economic Times The Economist

ONLINE JOURNALS: Manupatra Hein Online Westlaw International

economics project (4th sem)- srijan chakravorty

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