TRADE LIBERALIZATION AND ECONOMIC GROWTH

Trade liberalization and economic growth

Trade liberalization and economic growth

Introduction

Krueger (1998) focused on the benefits of trade liberalisation and pointed out that trade liberalisation is good but it does not automatically lead to reap the benefits of liberalisation. Some countries may not benefit from liberalisation until these countries also follow outward oriented trade strategy. For example, Turkey liberalised trade in late 1960's and 1970's. Turkey then moved to outer -oriented strategy in the early 1980's which helped to reap the fruits of trade liberalisation. Furthermore, trade strategies and development strategies need to be integrated for fruitful results. Outer-oriented strategy means that trade strategies are not biased in incentives in favor of import-competing industries.

There is a need to provided similar incentives for all exporting industries. In this respect, role of the government is important for creating an environment for expansion of trade and for sustaining economic growth. Krueger developed six arguments pertaining to trade strategies and growth. The main arguments are: The developing countries need imports for industrialisation. The growing needs for foreign exchange earnings is not easily met and as a result not only industrialisation but also economic growth is hampered.

Protection of some industries will pull resources from other sectors and therefore economic growth may slow down. Besides, the production structure of LDC's is generally skewed towards labour intensive techniques and similar goods. These countries import capital intensive goods which are expensive, therefore, need for more foreign exchange need to be met for the growth of exporting industries. Besides, these industries need to be altered to compete at international level; since these industries are developed under protection and incentives, therefore it could be challenge for developing countries.

With the expansion, the development of other industries, later on, require higher capital-labour ratio which further increases for foreign exchange and if such demand is not met then these industries may become inefficient due to high cost and import of capital goods. Moreover, peoples in LDC's have low income and market is limited to basic consumption goods which may not fetch much from international trade; these products also face heavy competition.

As a result shortage of foreign exchange may become a problem. Foreign exchange rate also need to be kept competitive. Failing to do so will lead to generate excess demand for foreign exchange. The overvaluation of foreign exchange rate could also lead to loose competitiveness in the international market.

The other problem is that the size of these industries may also remain below minimum effective and efficient size, which restricts the growth of these industries. Besides, if import substitution continues in LDC's, which is in the hands of bureaucracy and it is their power and they may not want to loose it, then in spite of all other efforts a country may not gain from liberalisation. Generally, quota and licensing empowers bureaucracy over producers which sometimes also lead to create monopolies and therefore restricts the benefits of free trade. Such inefficiencies are often not transparent to ...