Commentary

Saving the Poor from Development?

By Aaron Lukas
June 23, 2000
These are dark days for the protectionist union members and eclectic globaphobes who paraded famously through the streets of Seattle and stormed police barricades in Washington, D.C. After losing a string of major congressional votes — from permanent normal trade relations with China to freer trade with Africa to quotas on imported steel — and after failing to disrupt the World Bank-IMF meetings last month, it’s obvious that the anti-trade “movement” isn’t as formidable as its cheerleaders claim.

Perhaps most telling is that the anti-globalization message is falling on deaf ears in developing countries, which are resisting attempts by their self-proclaimed defenders to link labor and environmental agendas to trade. As one Gabonese diplomat who was blocked from attending the Seattle World Trade Organization meetings noted with disgust, “[The protesters] understand nothing, and are as remote from our problems as you’d expect from middle-class whites in Washington state.” Mexico’s president, Ernesto Zedillo, was even more damning: “Forces from the extreme left, the extreme right, environmentalist groups, trade unions of developed countries and some self-appointed representatives of civil society, are gathering around a common endeavor: to save the people of developing countries — from development.”

The anti-trade forces claim to speak for the residents of poor countries, but oddly enough, workers there aren’t so sure that they need saving. Many realize that the removal of trade barriers immediately expands the range of choices for consumers and places downward pressure on prices, thus raising the real value of workers’ earnings. Some note that foreign investment provides more jobs, new production technologies, infrastructure improvements and a source of capital for local entrepreneurs. Businesspeople want access to both cheaper inputs and vastly larger markets for their products. For most people, however, the many and varied benefits of a liberal trade and investment regime can be boiled down to one very attractive proposition: globalization spurs economic growth, and growth raises living standards.

That common-sense notion is supported by numerous studies that have found a link between the freedom to conduct international transactions and economic growth. A well-known paper by Jeffrey Sachs and Andrew Warner of Harvard University, for example, found that developing countries with open economies grew by an average of 4.5 percent per year in the 1970s and 1980s, while those countries with closed economies grew by only 0.7 percent. The same pattern held for developed countries: those with open economies grew by 2.3 percent per year while those with closed economies grew by 0.7 percent. Other studies, such as a 1998 analysis by the Organization for Economic Cooperation and Development, have found a growth gap of roughly two to one in favor of open economies.

Developing countries that have grown at the open-economy average have been converging with the industrial economies while their closed-economy counterparts have tended to fall further behind. No wonder “globalization” isn’t such a dirty word in places that are suffering from a lack of it.

Perhaps more clearly than anywhere in the world, East Asia illustrates the rapid gains in human welfare that are possible when developing nations adopt an outward-oriented development strategy. Real per capita incomes in the region have grown at an average rate of 4 to 6 percent per year since the 1960s. That compares extremely favorably with the development experience elsewhere: from 1960 to 1990, the top eight Asian economies grew about three times faster than the economies of Latin America and South Asia and five times faster than those of sub-Saharan Africa. Moreover, the recent Asian financial crisis appears to have presented only a temporary obstacle to these burgeoning economies. Even if the crisis had stopped all economic progress for five years, those economies would have performed well above the world average for the past three decades.

Critics of cross-country comparisons correctly point out that isolating the effects of trade liberalization from other variables is methodologically daunting, since reductions in trade barriers are frequently made in conjunction with a host of other reforms. Two points, however, are crystal clear. First, there is an undeniable relationship between growth rates and economic freedom generally, including the freedom to conduct international transactions. Second, contrary to the claims of the anti-trade forces, there is no evidence whatsoever that countries that have shut themselves off from global markets have prospered over the long term.

The globaphobes are on the wrong side of history. In the past half century since the founding of the GATT, the world economy has grown 6-fold, in part because trade has expanded 16-fold. As East Asia has shown, that growth need not lead to the wholesale exploitation of workers in poor countries. Instead, globalization makes it possible for more people to lift themselves out of grinding poverty more quickly than was ever possible in the past. It has and will continue to measurably improve the lives of millions around the world.

Aaron Lukas is an analyst at the Cato Institute’s Center for Trade Policy Studies and author of the paper “WTO Report Card III: Globalization and Developing Countries.”