Title: Trade liberalization and economic reform in developing countries
Description: "The paper analyses economic performance of a sample of developing countries that have  undertaken trade liberalization and structural reforms since the early 1980s with the  objective of expansion of exports and diversification in favour of manufacturing sector. The  results obtained are varied. Forty per cent of the sample countries experienced rapid  expansion of exports of manufactured goods. In a minority of these countries, mostly East  Asian, rapid export growth was also accompanied with fast expansion of industrial supply  capacity and upgrading. By contrast, the experience of the majority of the sample countries,  mostly in Africa and Latin America, has not been satisfactory. In fact, half of the sample, most  of them low income countries, have faced de-industrialization. Even in some cases where  manufactured exports grew extremely fast, e.g. Mexico, MVA did not accelerate and  upgrading of the industrial base did not take place. Slow growth of exports and deindustrialization  has also been accompanied by increased vulnerability of the economy,  particularly the manufacturing sector, to external factors particularly as far as reliance on  imports are concerned. Generally speaking, in the case of the majority group, trade  liberalization has led to the development and re-orientation of the industrial sector in  accordance with static comparative advantage, with the exception of industries that were  near maturity. For example, in Latin America the expansion of exports has taken place mainly  in resource based industries, the labour intensive stage of production, i.e. assembly  operations, and in a few cases in the automobile industry. A number of industries which had  been dynamic during the import substitution era continued, however, to be dynamic in terms  of production, exports and investment. The industries which were near maturity when the  reform started, such as aerospace in Brazil, benefited from liberalization as the competitive  pressure that emerged made them more efficient.  The reform programmes designed by IFIs also failed to encourage private investment,  particularly in the manufacturing sector; the I/GDP ratio fell even where the inflow of FDI  was considerable--e.g. in the case of Latin America. Trade liberalization changed the  structure of incentives in favour of exports, but the balance between risks and return changed  against the manufacturing sector.  A major difference between the 'minority' and the 'majority' groups is that in the case of  the former, i.e. East Asian NIEs, at least until recently economic reform, particularly trade  liberalization, has taken place gradually and selectively as part of a long-term industrial  policy, after they had reached a certain level of industrialization and development. By  contrast, the 'majority group' embarked, in the main, on a process of rapid structural reform  including uniform and across-the-board liberalization.  The author argues that no doubt trade liberalization is essential when an industry reaches a  certain level of maturity, provided it is undertaken selectively and gradually. Nevertheless,  the way it is recommended under the Washington Consensus, it is more likely to lead to the  destruction of the existing industries, particularly of those that are at their early stages of  infancy without necessarily leading to the emergence of new ones. Further, any new industry  that emerges would be in line with static, rather than dynamic, comparative advantage. The  low income countries, in particular, will be locked in production and exports of primary  commodities, simple processing and at best assembly operation or other labour intensive ones  with little prospect for upgrading"--United Nations Conference on Trade and Development web site.
Subjects: Free trade, Structural adjustment (Economic policy), Deindustrialization, Economic conditions
Places: Developing countries