The Policy of Trade Openness and Trade Liberalization - Essay Example

Introduction Free trade also can be defined as business transactions between countries without any restrictions that are imposed by the government. A more popular term given to this phenomenon is that of "liberalization or open trade". Stiglitz (pp 56-67) defines it as, close integration between countries and people that has resulted in vast reduction on trade barriers to allow free flow of goods and services across the countries. There are various restrictions that exist in trade. They include non tariff trade barriers, tariff, legislation and taxes. Free trade in terms of economics means that there is trade in both goods and services without having any trade barrier. This also means that policies that can distort trade or make one country have an advantage over others do not exist. These policies include laws regulations, subsidies and taxes. In free trade there is free access to markets by any country or a nation that wishes to do so. Another aspect of free trade involves easy accessibility to any market information. (Stiglitz, pp 56-67) This paper will review in detail the effects of free trade or open trade and argue, that successful developing economies are not characterised by greater trade openness. Trade openness and trade liberalization (policy) According to market definitions free trade is a model where goods and service between countries flow without any hindrance from the government compulsory restrictions. Trade restrictions include taxes, tariffs and other trade barriers legal placed by the government. The removal of this trading barrier is what is termed as trade liberalization. (Dornbusch, pp.69-85) Openness market policies Dornbusch (pp.69-85) explains that, liberalizations aims at transferring power of the economy from the public sector to the private sector. Policies that are advocated by the liberalists and which are approved by the international trade bodies like the IMF and the WTO includes; Fiscal rectitude; that means governments cutting expenditures or raising taxes to sustain budget surplus Competitive exchange levels; this policy encourages the governments to accept exchange rates determined by the market forces. Free trade; this implies the elimination of trade barriers, like subsidies and tariffs, and other trade barriers Privatisation; this means transfer of past public owned organisation services and goods to private sector Limited intervention; governments should not interfere with markets expect in building infrastructure. Unembroidered market prices; this implies that governments will desist from controlling market prices. Export - led development; this are development strategies that emphasize export and foreign trade instead of protecting domestic industry. (Dornbusch, pp.69-85) Do open market economies grow faster than closed ones Many studies on market economics have argued that open trade system enhances a faster growth of economy. The point for this strong favour in terms of open trade is based on studies and on a conclusion that outward- based economies realize faster growth rates than those economies that are inward oriented. However, this seems to be overstated, as Dornbusch, (pp.69-85) observers, currently the advantages of open markets are being oversold continuously in the related literatures and in the IMF and World Bank publications. Yet, it is hard to understand the advantages of liberalization of markets among market economies. Economists reports that the effects of openness are very complicated and general mixed as to what extend the trade polices impact the growth of economy. More so the fact that studies explain trade openness in different ways makes it hard to classify countries depending on their level of trade openness. Thus, it does not come as a surprise when different results are obtained when different measures are used. (Dornbusch, pp.69-85) The correlation between free market and the economic growth of a country is a hotly debated issue in the trade and development literature. Until now, this issue remains unresolved. It is important to note that, many literatures on this topic have put a lot of attention on the correlation between trade policies and economic growth instead of emphasizing trade levels and growth. Though, the two concepts are so much related to each other, their correlation with growth may vary so much. Thus, it is important that if one has to measure the economic growth, one should specifically be clear on which measure he/she is using to measure openness. (Edwards, pp.1358-1393) However, today the most significant problem that many researchers face today is the absence of clear and obvious definition the term "trade liberalization" or openness. Even currently, it is not clear what trade openness is. Rodriguez and Dani (pp.98-104) explain how trade can be liberalized through applying policies which reduce the restrictions against export sector. Yet, he further examines that a country can have a fully liberalized market yet use high tariffs so as to promote import substitution. (Rodriguez and Dani, pp.98-104) 3.1 Free market create low economic growth Consider some statistics- 70% of the worlds wealth lies with the western states, these states have been able to dominate the world through their capitalistic structure, the rest of the world has been quite slow in catching up and hence the centre for capitalism is the west where as the rest of the world specially the Asian states can be described as the peripheries of the capitalist structure, this description has been given by George Soros in his book 'The Crisis of Global Capitalism'. Shaikh (pp 45-54) clearly argues that, the main danger facing the world at this point in time is that most of the wealth flows from the centre to the peripheries and back to the centre, there is no known way by which the peripheries can actually plug this leakage from their economies. Add to this the new world order brought about by the 'Free Trade' concept brought about by the WTO, the free trade agreement to which most countries must comply. (Shaikh, pp 45-54) Bhaduri (pp 154-159) states that, free trade ordinance removes any synthetic barriers that any state would raise in order to protect their industry. The logic behind this concept is that, by removing barriers the industries will automatically become very efficient because there would not be any barriers to hinder them. But, in reality this does not happen because industries are not inefficient by choice there are some problems that they face that makes them inefficient and there is no way that this inefficiency could be over come by implementing this policy because the problems that hinder the efficiency of some of these industries would still persist, this has definitely resulted in the shutting down of some of the industries, specially in the third world countries where industries are already weak and poverty level is on the rise. This has only increased the suffering of those who are already below the poverty line. Bhaduri (pp 154-159) adds that, the problem with free market is that it is the survival of the fittest and those who are not fit enough are not sidelined but are pushed towards hunger and death which is a very serious issue and a growing cause of the increasing poverty and deaths due to the same reason. (Bhaduri, pp 154-159) 3.2 Asian Crisis: a result of excessive borrowing: Prior to 1997, eight East Asian countries-Japan, South Korea, Taiwan, Hong Kong, Singapore, Thailand, Malaysia, and Indonesia - experienced a rapid economic growth often called the "East Asian miracle". Between 1965 and 1990, the GDP in these countries doubled. Their success was attributed to many factors such as free trade, macroeconomic policies and discipline, high saving and investment rates that attracted many foreign investors looking for a high rate of return. (Stiglitz, pp 56-67) With increasing pressure felt in the foreign exchange market there was a sudden flow of Thai baht in market against the US dollar (the currency speculators rushed to buy US dollar against the Thai baht). This resulted in Thai currency devaluation followed by withdrawal of foreign capital from other East Asian countries as well. What followed was the Asian crisis in mid - 1997 affecting currencies, stock markets and other asset prices of several Southeast Asian economies. Stiglitz, pp 56-67) observe that, foreign investors lost confidence and withdrew their invested money from these countries. Extensive borrowing in foreign currencies by corporations and other financial institutions while turning blind eye to currency fluctuation was the main culprit for this crisis. The ineffective financial supervision that encouraged short - term borrowing underestimating while the risk involved in exchange rate proved fatal. (Stiglitz, pp 56-67) 3.3 Role of the international monetary bodies In several working papers much has been said about the international bodies and their role in the Asian Crisis. What is even a greater matter of concern is the role of IMF during the crisis. Nobody ever talks about their intervention. It is true while dealing with global market; one normally expects the global bodies to be accountable for its success or failure. In East Asian case the IMF supervisory authorities spent little time in monitoring the international capital inflows. (Stiglitz, pp 56-67) 3.4 Free markets causes social mobility and inequality The standard policy of liberalization includes reducing taxes and government expenses on social services, removing levies and other trade barriers to ensure free trade, limiting regulations on labour markets and on financial markets and putting focus on macroeconomic policies. All this factors have been observed not to stimulate economic growth of a country; this observation is made by (Nafziger, pp, 45-53) Economists tell us again that free markets exists in theory not fair, free markets have been known to create social mobility and inequality. For example in America critics of liberalization argue that liberalization has created to low wages of workers and high inequality. They point out that in the U.S 30% of employees earn what is termed as "low wages" while 35 of the workers on the labour markets are underemployed, only around 40% of workers in the U.S are viewed as adequately employed. (Deraniyagala, pp 90-96 ) Other policies which are directly related to free market have been put into operation over the last years. For instance the IMF and the World Bank have progressively during the last two decade required countries to adopt several measures in order to borrow money from the international bodies. (Deraniyagala and Fine, pp. 99-105, 2006)These measures included monetary polices that emphasized high interest rates and tight credit, reduced public spending, privatization of public organizations, increasing more foreign reserves, and other requirements of micro- interventions that included paying fees for primary education and health services to eliminating several government subsidies. As a result many poor and medium income countries especially the in Asia and Africa experienced unprecedented high level of foreign debt. Deraniyagala and Fine (pp. 99-105, 2006) notes that, in Asia this lead to the infamous Asian crises, in Africa it saw many African countries especially in the sub-Saharan region experience high levels of poverty and collapse in infrastructure and social services. (Deraniyagala and Fine, pp. 99-105, 2006) Weisbrot (pp 120-127) notes that, before the advance of liberalization and free market, many countries deliberately approved and implemented policies that were meant to protect their economies and industries from global markets so that their industries can grow to the point of competing in the global market. For example performance prerequisites on foreign industries were common. The measures required foreign industries to employ the local workers in professional positions, buy inputs from the local producers to ensure transfer of technology, and limited capital flow. This was undertaken by the developing countries in order to stabilize their currencies and to encourage corporations and individual with hefty amounts of local currency to invest in the country. Deraniyagala (pp 90-96) explains that, unfortunately, with new measures from the international monetary bodies i.e. the IMF and the WB coupled by new agreements and measures by the WTO to bring about free market economies in the world and encourage free trade, these countries have suffered badly in economic development because they can not favourable compete with high technologies and vast resources of multi-nationals companies or with development nations. This has led to low prices of products from these countries particularly in agricultural products and resulted to negative trade balance and low GDP. This shows that liberalization policies have highly contributed to reduced or backsliding economic growth in poor and medium economy countries. (Weisbrot, pp 120-127) 4 Measuring the effects of free markets and liberalization In the recent past different scholars have come up with different ways of measuring overall trade policy position (Amsden, pp 51-99) and made a conclusion that those countries with outward-orientation do better. These findings have significant implications on the empirical studies that try to analysis the impacts of liberalization on the economic performance based upon comparing countries. It also shows that complexity of deducing such empirical studies. (Amsden, pp 51-99) It is general accepted that the market liberalization have increase international trade and cash flow among many countries. (Weisbrot, et al pp 4-17) However, in measuring the most important social indicators in many countries it has been observed that growth has been low, when the effects of liberalizations and free market are observed in the period between 1980 and 2000. In examining the economic growth in this period, it is clear that in those twenty years, there is an apparent decline in economic progress compared to the previous twenty years. For the purpose of this paper we shall examine the GDP of some countries between the years 1960 to 1980 (before free market policies) and between 1980 and 2000 after the implementation of free market policies advanced by the international, monetary bodies, the IMF ns the World Bank. (Weisbrot, et al pp 4-17) 4.1 The finding indicates that; Economic growth; the decline in growth of economy levels was most high across many countries. The poorest countries for example in sub-Sahara African went from a per capita GDP growth level of 1.9% in between 1960- 1980 to low level of 0.5% levels between 1980 and 2000. As for the middle economy countries, there was a big decline of GDP from growth rate of 3.6 % to low level less than 1% over the period of 1980 - 2000. There was also a decline in other groups of countries in economic growth rates. (Weisbrot, et al pp 4-17) Weisbrot, et al (pp 4-17) notes that, for the past twenty years there as been significant changes undertaken in the economic policies being adopted all over the world, and particularly in the poor and middle level income countries. Most of these measures were aimed at liberalizing market economies and creating free markets. Such policies included removing of tariffs and trade barriers to create a liberal market. Other policies that are directly related to liberalization have been put in place by the IMF and the World Bank. For example the IMF and the world bank during this period (between 1980- 2000) required countries borrowing money to fulfil some structural conditions. Thus, this period can be used to ascertain the impacts brought across by trade liberalization or free market economy effects. (Weisbrot, et al pp 4-17) The primary and the most fundamental comparison are simply looking at the growth per capita in of countries GDP before and after liberalization. Some country in different economic growth rates were selected which included Countries South Korea, Philippines, Egypt, Kenya and Zimbabwe. (Weisbrot, et al pp 4-17) Figure 1 shows the results. The figure illustrates an average growth rate of GDP countries in different groups at the beginning of the two eras. As it can be observed in each of the five groups, the growth rate of the GDP is declining in the second period between 1980 and 2000. The decline is quite worse for the poorest countries, for the second group it can be observed that had a per capita GDP starting from $1, 121 -$1, 826 in 2000, at the beginning observed their growth rate fall from a rate of 2.1 per year to 0.8 %. (Weisbrot, et al pp 4-17) Sources: (Weisbrot, et al pp 4-17) Summing up the results obtained on the growth per capita GDP income growth rate, countries in all groups performed averagely poorly during the period of market liberalization than before that period. Weisbrot, et al (pp 4-17) observes that the largest performance was observed for countries that considered as middle level economies. The most disturbing issue is the fact that poorest countries saw their per capita GDP growth decline from modest rate to very low levels. While it may not be possible for this paper to explain and draw a strong conclusion as to why there was a decline, it can be deduced that liberalization of market economies played an important role. Free market economies seem to be unfavourable for those countries with which are underdeveloped. (Weisbrot, et al pp 4-17) As noted before, the results in this paper do not fully prove that free market and liberalization are responsible for poor performance of some countries. However, it presents a strong argument that free market or open market policies implemented during the period of 1980 to 2000 are at to a large extend responsible for decline of economic growth in these countries. Conclusion Free trade or open trade is characterized by removal of trading barriers between countries. This is meant to stimulate more trading between countries which is faster and without any hindrance. The policy makers of these policies argue that free trade leads to higher economic growth in countries. However, free trade policies advanced by the IMF and the WB has lead to poor and middle economic countries to experience more economic hardships brought about by stiffer monetary policies. Some of the economies collapsed or stalled. A good example is the Asian crisis. Keeping in mind all the arguments presented open trade definitely is a cause of concern and cause of slow economic progress amongst the populace of the world but it is extremely important to remember that it is not the only cause of concern, some of the policies undertaken by states are implemented incorrectly which result in growing poverty and economic hardship being witnessed in many countries especially African states. However, it cannot be stated that liberalization or open market is the ONE and ONLY cause of increase in economic hardships amongst the world's populace. Reference: Amsden A. (2007): Escape from Empire; The Developing World's Journey Through Heaven and Hell, Cambridge, MA; MIT Press, chapters 3 and 10; pp 51-99 Bhaduri A. (2006): 'Toward the Optimum Degree of Openness' in Gallagher K.P. (ed.) (2006) Putting Development First: The Importance of Policy Space in the WTO and International Financial Institutions, chapter 4, London: Zed Books. Pp 154-159 (Bhaduri, pp 154-159) Deraniyagala S. (2005): "Neo-liberalism in International Trade: Sound Economics or a Question of Faith" chapter 10 in Saad-Filho and D. Johnston (eds.) Neo-liberalism: A Critical Reader, pp 90-96 Deraniyagala S., and Fine, B. (2006): Kicking Away the Logic: Free Trade is Neither the Question nor the Answer for Development" in Jomo K.S. and B. Fine (eds.) The New Development Economics after the Washington Consensus. London: Zed Books. pp. 99-105. Dornbusch R. (1992): 'The Case for Trade Liberalization in Developing Countries Journal of Economic Perspectives, 6 (1) winter, pp.69-85. Edwards S. (1993): 'Openness, Trade Liberalization, and Growth in Developing Countries; Journal of Economic Literature, 31, pp.1358-1393. Nafziger E.W. (2006): Economic Development. Cambridge UK: Cambridge University Press. Pp, 45-53 Rodriguez, F. and Dani R. (2000): "Trade Policy and Economic Growth: A Skeptic's Guide to the Cross-National Evidence," in B. Bernanke and K. Rogoff, NBER Macroeconomics Annual 2000, Cambridge, MA, MIT Press. Pp, 98-104 Pritchett L. (1996): Measuring Outward Orientation in LDCs: Can it be done; Journal of Development Economics; Vol.49, pp.307-335. Shaikh A. (2005): "The Economic Mythology of Neo-liberalism; chapter 4 in Saad-Filho and D. Johnston (eds.) Neoliberalism: A Critical Reader, pp 45-54 Stiglitz J. (2002): Globalization and its Discontents. New York: Norton, pp 56-67 Weisbrot, M. et al (2001): The Score card on Globalization 1980-2000;Twenty years of diminishing progress; A briefing paper; Centre for Economic and Policy Research, (CEPR May 2001) pp 4-17 Read More