The welfare cost of protection is not negligible: even if the 2 percent figure is the correct one, the welfare gain is too large a chunk of output to be thrown away. What is absurd is the cost imposed on consumers in relation to the import saving and sales gains for domestic producers. The last unit of imports foregone because of a 100 percent tariff has a resource cost that is twice that of buying the good abroad. The cost of protection which AGE models calculate appears moderate only because high protection does not conserve much foreign exchange, and does not open up significant markets to domestic producers; it is because import substitution does not work that welfare gains from tariff reductions are not very large.

What is true is that the stakes of development are on a different scale. India's GNP, for example, grew by 5.4 percent on average from 1980 to 1995, Korea's by 4 percent more; a 2 percent nonrecurrent: gain does pale in comparison with a 4 percent annual addition to output during 15 years. Remember Stiglitz's demonstration that production function theory cannot explain why the per capita output gap between developed and developing countries is so large; trade theory too cannot account for the gap. Regretfully development economics, to which such great minds have contributed over more than two centuries as W. Arthur Lewis's chapter reminds us, idoes not explain why some countries are much more successful than others in economic terms.

Following an introduction to the principles of trade policy in Bliss's chapter, Pack's chapter deals with industrialization and trade. He sets out an interesting "wide steps" hypothesis" according to which "outward-oriented" countries, which balance import protection by export incentives, are able to switch readily into net exports when they complete the import substitution phase for a good, smoothing the process of structural change that accompanies 47 development of the path of investment.

Balassa's paper is the most exhaustive. He shoots down such dead ducks as dependency theory, the once popular "delinking" proposals according to which Southern countries should cut themselves off from Northern ones, and the concept of the New International Economic Order (NIEO) enforc,ed through a global primary commodities cartel. He reviews the post-war history of development, trying to understand why outward orientation is so beneficial to growth. An outward-oriented strategy is defined as one where in the spirit of the Lerner's symmetry theorem, import protection is compensated by export subsidies.

Balassa is concerned that economic theory does not explain why outward orientation is so beneficial, and searches for "dynamic gains from trade" that might clarify the mystery. Entirely properly, he complernents cross-country regressions by in-depth country studies based on a personal data base that he kept up to date for ten years after the first oil shock. The reported results show that outward-oriented countries have adjusted better to external shocks, and in particular have pursued better macro strategies than those resorted to by users of import substitution strategies. They have also achieved more growth per unit of investment and higher rates of saving than import substituting countries. Estimates of this sort have been replicated by too many excellent authors to be dismissed by a curt remark on the fragility of cross-country estimates. A broad spectrum of policies appears to be associated with the selection of trade strategies. Why this is so is unclear.

> **47** Balassa makes a similar point in chapter 31.

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