The Case for Trade Liberalization in Developing Countries

Abstract

I n a broad swing of the pendulum, developing countries have been shifting from severe and destructive protection to free trade fever. Many of the notable examples are in Latin America. Mexico, after a major unilateral trade liberalization, is now negotiating a free trade agreement with Canada and the United States; Chile, traditionally a highly protected country, is a leading example of reducing trade barriers; Argentina and Brazil have entered free trade agreements. A free trade area for the Americas is becoming a serious possibility. The enthusiasm for more openness of the economy is not limited to Latin America; for example, Korea and Turkey are cases of highly successful liberalization. There are also cases in Africa-for example, Ghana and Botswana-to demonstrate the possibility and the benefits of opening up. This new enthusiasm for freer trade stems from four overlapping sources: Anti-statism. The world has seen a broad intellectual swing away from emphasizing the beneficial role of the state in the 1980s, and protection is seen as one of the manifestations of an overly intrusive state. Of course, a shift to a liberal trade regime has not always been the by-product of a more democratic society: Chile under Pinochet or Korea in its liberalizing phase were under authoritarian rule. "Two cheers for the market, but not three," the saying goes; today the market gets at least three cheers, which may be at least one too many. Poor economic performance. Many developing countries have suffered dismal economic performance and declining productive potential. Much of the reason can be traced to populist macroeconomic policies that engendered debt crises and hyperinflation. Of course, part of the reason was also a very adverse external environment. But since the days of plentiful external credit are gone,

One Hundred Years of Exchange Rate Economics at the University of Chicago: 1892-1992

“…Monetary deviations, on the other hand, have to do with price sluggishness, wage stickiness, capital controls, and expectations. (Dornbusch and Helmers 1988).…”

“…Newer empirical models identify the way in which long-term "fundamentals," such as terms of trade, commercial policy, differential productivity trends, and other, affected the equilibrium long-term relative price of tradables to nontradables. Large and persistent deviations from this long-term equilibrium were considered to represent situations of under or overvaluation, and the policies aimed at correcting them were discussed (Dornbusch and Helmers, 1988).…”