In a comment on my recent post on the contribution of trade liberalisation to Asia's success, Jim takes issue with my contention that
China and India are very powerful examples of the benefits of
liberalisation: before they started their reforms, growth was slow, but
as they have opened up their economies, growth has accelerated.
He argues that growth speeded up before they opened up, and that their growth since they opened up is not due to freer trade.
Jim makes three specific counter-claims:
1. 'Both India and China grew strongly through the 1980s, well before any significant trade liberalisation.'
2. 'While they did eventually liberalise significantly and kept
growing, the evidence that the trade opening caused the growth is
pretty thin.'
3. 'China is at best middling in terms of trade openness in comparison to
other developing countries.'
I'll address each in turn.
1. It is not true that China and, to a lesser extent, India did not undertake any significant trade liberalisation in the 1980s.
In the mid-1970s, all trade was centrally controlled in both countries. But starting from December 1978, China began to open up. In the 1980s:
- The central government's monopoly on foreign trade was broken.
- A large number of foreign trade corporations were established (there were over 5,000 by 1988), with trading rights also granted to big companies.
- Special economic zones and open cities were established.
- Joint ventures with 25% foreign investment were permitted, and these were granted the right to trade directly.
- Companies were allowed to keep some of the foreign currency earned through trade.
- The remninbi's artificially high official rate was devalued from 1.5 to the dollar in 1979 to 8.7 in 1991.
In short, in place of the central government's absolute control over foreign trade, a large number of companies were permitted to trade, with trade regulated through import licences and tariffs instead. Free trade it wasn't, but it was certainly a much more liberal regime than before.
India's trade liberalisation in the 1980s was more modest - by 1990 some 30% of imports, mainly capital and intermediate
goods, could be imported without specific licences and import quotas
were replaced with less harmful, albeit very high, tariffs - but then so too was its economic growth.
Whereas China's economy grew by an average of over 9% a year in both the 1980s and the 1990s (subject to the caveat that applies to all official Chinese statistics), India's managed only 4.8% in 1981-88.
That was an improvement on the wretched 3.2% recorded in 1965-81, but still pretty poor, especially given the rapid rise in India's population, which meant that living standards rose much more slowly than GDP.
True, India's economy boomed between 1988 and 1991 - but this growth spurt proved unsustainable and ended in financial crisis. Since the economic reforms in 1991, which ended import licensing and slashed tariffs, India's growth has averaged 5.8%.
As Arvind Panagariya quite rightly points out:
Bradford DeLong and Dani Rodrik have argued that
reforms in India cannot be credited with higher growth because the
growth rate crossed the 5 percent mark in the 1980s, well before the
launch of the July 1991 reforms. This is a wrong reading of the Indian
experience for two reasons. First, liberalization was already under way
during the 1980s and played a crucial role in stimulating growth during
that decade. Second, growth in the 1980s was fragile and unsustainable.
The more systematic and systemic reforms of the 1990s... gave rise to more sustainable growth.
In short, Jim's claim is incorrect. A more accurate summary of what happened in the 1980s is: "China made big steps to liberalise its trade and was rewarded with much faster economic growth, while India opened up less and enjoyed only a modest uptick in growth."
2. Trade liberalisation is clearly not the only reform that
China and (to a lesser extent) India have undertaken, and it is not
responsible for all their growth. But it has certainly boosted both
China's and India's rate of growth.
The Ravallion/Chen article that Jim mentions says nothing about the impact
of trade liberalisation on growth: it is concerned with poverty and
inequality. And its findings do not contradict my contention: although
some people may lose from trade liberalisation in the short term, the
long-term productivity gains from freeing trade, which boosts
competition and innovation, raise long-term growth, thus reducing poverty.
There is a mountain of evidence to support the belief that freeing trade promotes economic growth in developing countries. For instance:
- Studies of nine countries – Chile, Colombia, Egypt, Ghana, Israel, Korea, the Philippines, Turkey, and, yes, India – directed by Anne Krueger and Jagdish Bhagwati for the National Bureau of Economic Research in the late 1970s showed that liberalising trade led to faster economic growth.
- These findings were confirmed by studies of nineteen countries – Argentina, Brazil, Chile, Columbia, Greece, Indonesia, Israel, Korea, New Zealand, Pakistan, Peru, the Philippines, Portugal, Singapore, Spain, Sri Lanka, Turkey, Uruguay, and Yugoslavia – over four decades conducted in the early 1990s by Demetris Papageorgiou, Michael Michaely, and Armeane Choksi of the World Bank.
Just look at China:
- Since 1978, China has gone from a system where trade was wholly controlled by the central government to one where a huge number of private companies engage in foreign trade, import licenses have largely been abolished, industrial tariffs have fallen to single figures and service sectors are being opened up too.
- The volume of China's trade has risen 70-fold, trade’s share in gross domestic product has risen five-fold and the country’s share in world trade has jumped from 0.8% to 7.7%.
- Over the same period, Chinese living standards, as measured by GDP per person at purchasing power parity, have risen five-fold - and the country has witnessed the fastest fall in poverty ever recorded.
Not connected? Hardly. Indeed, Harm Zebregs finds that foreign direct investment alone boosted GDP growth by 3 percentage points a year in the 1990s, even though it accounted for only 5 percent of GDP.
3. Whatever measure of openness you use, China is more open than most developing countries.
Its weighted average industrial tariff is less than 6%, compared with a developing-country average of 8% (bound) and 12.5% (applied).
Imports account for over a quarter of GDP, a huge figure for a such a large and populous economy.
So is China a fully open economy? Clearly not. Is it much more open than before? Yes. Is it now more open than most developing countries? Most certainly.
So I repeat:
China and India are very powerful examples of the benefits of
liberalisation: before they started their reforms, growth was slow, but
as they have opened up their economies, growth has accelerated.
