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Does trade openness helps or hinders industrialization?

  • Shafaeddin, Mehdi

Does Trade Openness Favour or Hinder Industrialization and Development? Mehdi Shafaeddin* A paper prepared for the Intergovernmental Group of Twenty-Four on International Monetary Affairs, to be presented at the Technical Group meeting, Geneva, 16-17 March 2006 Abstract The purpose of this study is to examine whether free trade helps or hinders industrialization and development. The author argues that there is neither a theoretical justification nor historical and empirical evidence to support what he refers to as “trade liberalization hypothesis”(TLH). The theory behind TLH is the doctrine of comparative cost advantage which can not be used as a guide to caching up and achieving dynamic comparative advantage which is a policy-based effort. Almost all successful industrializers went through a long period of selective infant industry protection before subjecting their industries to trade liberalization gradually. The forced trade liberalization imposed on the third world during the colonial era led to their de-industrialization, specialization in primary commodities and underdevelopment. On the basis of empirical study of a sample of developing countries which have undertaken trade liberalization during the last quarter of a century and the case study of Mexico, which has been the champion of liberalization, the author also concludes: that trade liberalization is essential when an industry reaches a certain level of maturity, provided it is undertaken selectively and gradually; that the way it is recommended by neo-liberals under the label of “Washington Consensus”, however, it is a recipe for destruction of the industries at their early stages of infancy, or development; that if through NAMA negotiations of the Doha Round, developing countries submit to developed countries to accept their proposed Swiss formula, with a low coefficient (10), and binding of their tariff lines at low levels, it would be at the cost of halting their industrialization process; that the low income countries and others at early stages of industrialization, in particular, will be trapped in production and exports of primary commodities, simple processing and at best assembly operation and/or other simple labour intensive industries. Finally, as international trading rules are not conducive to industrialization and development, he argues for the need for a different framework of industrial and trade policies outlined elsewhere**. Such a framework, however, requires a radical change in international trade rules. Developing countries should not be worried, he emphasizes, to be “blamed” for defending their policy autonomy in order to enhance their development. *The author is a development economist, affiliated to the Institute of Economic Research, University of Neuchate. He is the former head of Macroeconomics and Development Policies Branch, Globalization and Development Strategies Division of UNCTAD and the author of Trade Policy at the Crossroads; the Recent Experience of Developing Countries, Macmillan, 2005 as well as a number of articles on trade, industrial and development policies. The author is grateful to Mr A. Buira, the Director of G24 Secretariat, for his comments on an earlier draft. His thanks also go to J. Pizzaro for his helpful assistance in processing data. **Shafaeddin, M. (2005.c) “Towards an Alternative Perspective on Trade and Industrial Policies”, Development and Change, 36.6:1143-1162. Shafaeddin 1

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 4371.

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Date of creation: Mar 2006
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Handle: RePEc:pra:mprapa:4371
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  1. Moreira, Mauricio Mesquita & Correa, Paulo Guilherme, 1998. "A first look at the impacts of trade liberalization on Brazilian manufacturing industry," World Development, Elsevier, vol. 26(10), pages 1859-1874, October.
  2. Manuel R. AGOSIN & Ricardo MAYER, 2000. "Foreign Investment In Developing Countries, Does It Crowd In Domestic Investment?," UNCTAD Discussion Papers 146, United Nations Conference on Trade and Development.
  3. Helleiner, G. K., 1990. "Trade strategy in medium-term adjustment," World Development, Elsevier, vol. 18(6), pages 879-897, June.
  4. Romain Wacziarg & Karen Horn Welch, 2003. "Trade Liberalization and Growth: New Evidence," NBER Working Papers 10152, National Bureau of Economic Research, Inc.
  5. Bengt-Åke Lundvall, 2004. "Why the New Economy is a Learning Economy," DRUID Working Papers 04-01, DRUID, Copenhagen Business School, Department of Industrial Economics and Strategy/Aalborg University, Department of Business Studies.
  6. Ethier, Wilfred, 1979. "Internationally decreasing costs and world trade," Journal of International Economics, Elsevier, vol. 9(1), pages 1-24, February.
  7. Singh, Ajit, 2003. "Special and Differential Treatment, The Multilateral Trading System and Economic Development in the 21st Century," MPRA Paper 24301, University Library of Munich, Germany.
  8. Shafaeddin, Mehdi, 2006. "Is The Industrial Policy Relevant In The 21st Century?," MPRA Paper 6643, University Library of Munich, Germany.
  9. Francisco Rodriguez & Dani Rodrik, 1999. "Trade Policy and Economic Growth: A Skeptic's Guide to Cross-National Evidence," NBER Working Papers 7081, National Bureau of Economic Research, Inc.
  10. Shafaeddin, S. M., 2004. "Is China's accession to WTO threatening exports of developing countries?," China Economic Review, Elsevier, vol. 15(2), pages 109-144, January.
  11. S.M. Shafaeddin, 2005. "Trade Liberalization And Economic Reform In Developing Countries: Structural Change Or De-Industrialization?," UNCTAD Discussion Papers 179, United Nations Conference on Trade and Development.
  12. Jean-Marie Grether, 1997. "Estimating the pro-competitive gains from trade liberalization: an application to Mexican manufacturing," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 6(3), pages 393-417.
  13. Stiglitz, Joseph E, 1996. "Some Lessons from the East Asian Miracle," World Bank Research Observer, World Bank Group, vol. 11(2), pages 151-77, August.
  14. Maurizio Zanardi & Alberto Paloni, 2007. "The IMF, World Bank and policy reform," ULB Institutional Repository 2013/9823, ULB -- Universite Libre de Bruxelles.
  15. Razin, Assaf & Sadka, Efraim & Coury, Tarek, 2003. "Trade openness, investment instability and terms-of-trade volatility," Journal of International Economics, Elsevier, vol. 61(2), pages 285-306, December.
  16. Stein, Howard, 1992. "Deindustrialization, adjustment, the World Bank and the IMF in Africa," World Development, Elsevier, vol. 20(1), pages 83-95, January.
  17. Mehdi SHAFAEDDIN, 1998. "How Did Developed Countries Industrialize? The History Of Trade And Industrial Policy: The Cases Of Great Britain And The Usa," UNCTAD Discussion Papers 139, United Nations Conference on Trade and Development.
  18. Edwards, Sebastian, 1993. "Openness, Trade Liberalization, and Growth in Developing Countries," Journal of Economic Literature, American Economic Association, vol. 31(3), pages 1358-93, September.
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