Re: [Re: Globalisation kills Indian Industry??!!]

[Charu datt <charuX@lucent.com>]

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Vamsi Musunuru wrote:

 > ....... [re liberalization and globalization]
 > In fact, in Modern Economics the two can be unified effortlessly (I
assume).

Since you bring up  'Modern Economics', the attached article on
referencing studies of protected vs liberalised economies is relevant.

My own position is that I do not endorse the pervasive government
control of industry engenderd by licence-raj, but neither do I support
surrendering that control to the even less accountable local and global
corporate interests that would replace the power currently exercised by
government.

For those of you lacking the patience to wade through the examples
and references in the full article, here are some excerpts:

     ...even if there are efficiency gains from freer trade, when the
     terms of trade are set by free market forces there is every reason to
believe the lion’s share of any efficiency gain will be distributed to the
country that was better off in the first place -- thereby aggravating global
inequality. Not only is the empirical evidence that the terms of trade have
declined for LDCs so overwhelming that even the IMF publishes studies
confirming this fact, theoretical considerations provide every reason to
expect this to occur.

     “New trade theory” and “new growth
     theory” do not predict that free trade necessarily leads to the most
rapid economic growth for LDCs. Instead the newest theoretical models
predict a  positive role for protectionist measures to guide the development
of comparative advantages yielding higher long-run growth trajectories.

full article:
_________________________________________________________
More Free Trade is Good and More Protectionism is Bad. NOT!
By Robin Hahnel

Six months ago, before the Battle of Seattle against the WTO and the War in
Washington against the IMF and World Bank, most anti-globalization activists
were intimidated by one of the great myths of mainstream economic theory:
“More free trade is good and more protectionism is bad.” The truth was most
of us were cowed by what was commonly accepted as fact: “freer trade leads
to global efficiency gains through specialization, while protectionism is
inefficient because it  prevents gains from international specialization.”
After thousands of  articles, pamphlets, essays, talks and teach-ins, our
movement is now blessed with a swarm of “organic intellectuals” who can
explain why free trade is usually bad, and why protectionism is usually
necessary for economic development.

We can now explain that even in static economic models, even abstracting
from the true social costs of transportation, even abstracting from the
adjustment costs of moving resources and people from one industry and
location to another, it is only the case that more specialization and trade
yields efficiency gains if relative prices inside countries reflect the true
social opportunity costs of producing things, which is often not  the case.
Otherwise, commercial comparative advantage as calculated by commercial
prices will not be the same as true comparative advantage calculated in
terms of true social opportunity costs, and freer trade may well lead to
efficiency losses rather than gains.

For example, NAFTA led to less shirt production and more corn production in
the US and less corn production and more shirt production in Mexico. This
was because the price of shirts relative to the price of corn was higher in
the US than in Mexico, so reducing Mexican tariffs on corn and US tariffs on
shirts reduced profits for corn farming in Mexico and for shirt making in
the US while raising profits for shirt making in Mexico and corn farming in
the US. But the price of making corn in the US did not include the
environmental costs of pesticide run off or full price water for
agricultural use, much less the positive probability that there will be
future costs of GMO corn seeds. These are real costs of producing corn the
way we grow it here in the US that are not included in the commercial cost
of corn. On the other hand, the price of making more shirts in Mexico did
not include the social costs of moving Mexicans out of villages into urban
slums. In traditional villages Mexicans enjoy centuries old kinship safety
nets and lower exposure to crime and disease. It is not at all clear that if
we take these external costs of living in Mexican urban slums and shanty
towns into account that Mexico’s true comparative advantage is in shirt
production, and if we take the environmental external costs of modern corn
farming into account the US actually enjoys a comparative advantage in corn
production. Therefore, it is not necessarily the case that by promoting more
free trade between the US and Mexico NAFTA has yielded efficiency gains
rather than losses. (See David Barkin, Distorted Development: Mexico in the
World Economy, (Westview Press, Boulder CO,  1990, and David Barkin,Rosemary
Batt, and Billlie DeWalt, Food Crops vs. Feed Crops: Global Substitution of
Grains in Production, (L. Rienner, Boulder CO, 1990.)

And many in the movement against corporate sponsored globalization can now
point out that even if there are efficiency gains from freer trade, when the
terms of trade are set by free market forces there is every reason to
believe the lion’s share of any efficiency gain will be distributed to the
country that was better off in the first place -- thereby aggravating global
inequality. Not only is the empirical evidence that the terms of trade have
declined for LDCs so overwhelming that even the IMF publishes studies
confirming this fact, theoretical considerations provide every reason to
expect this to occur.

Predictable differences in the income elasticity of demand for LDC and MDC
exports would yield this result. (See Raul Prebisch, The Economic
Development of Latin America and its Principal Problems, United Nations, NY,
1950, and H. Singer, “The Distribution of Gains Between Investing and
Borrowing Countries,” American Economic Review 40, 1950: 473-485.) More
downwardly rigid wages in more highly unionized MDCs as compared to LDCs
would yield this result. (See Raul Prebisch, Towards a New Trade Policy for
Development, Report by the Secretary General of UNCTAD, United Nations, NY,
1964.) And even simple static models where international markets are assumed
to be competitive and elasticities of demand are all assumed to be infinite,
predict that a greater share of efficiency gains from specialization and
trade will go to countries where capital is relatively abundant and a lower
share will go to countries where labor is relatively abundant. (See Robin
Hahnel, Panic Rules! Everything You Need to Know About the Global Economy,
South End Press, Cambridge MA, 1999, appendix B, and John Roemer, “Unequal
Exchange, Labor Migration, and International Capital Flows: A Theoretical
Synthesis,” in Marxism, Central Planning, and the Soviet Economy, P. Desai,
ed. (MIT Press, Cambridge MA, 1983.) This important fact about the
international economy, which mainstream economists love to ignore, implies
that even if commercial prices did reflect true social opportunity costs
(which they do not) so that freer trade would invariably produce efficiency
gains (rather than sometimes yield efficiency losses), promoting more
international trade at free market prices will almost always aggravate
economic inequalities between countries.

Many of us are also now adept at pointing out that besides aggravating
economic inequality between countries, mainstream economic theory predicts
that freer trade will usually aggravate economic inequality within countries
as well. Heckscher-Ohlin trade theory predicts that freer trade lowers
payments to relatively scarce factors within national economies and raises
payments to relatively abundant factors. There is no reason to doubt the
essential logic and relevance of this theory which predicts that freer trade
will put downward pressure on unskilled labor compared to skilled labor in
the MDCs, as well as downward pressure on wages in general compared to the
returns to capital – thereby aggravating inequality within MDCs. But there
is good reason to doubt that globalization will produce a beneficial
Heckscher-Ohlin effect reducing income inequalities in LDCs.  Trade
liberalization in agriculture, combined with elimination of restrictions on
foreign ownership of land in many LDCs, has dislodged so many peasants from
traditional agricultural pursuits that low skill labor markets have been
flooded throughout the third world. This effect overwhelms the
Heckscher-Ohlin effect in LDCs putting downward pressure on rural and urban
wages thereby increasing returns to employers and landlords and aggravating
inequality within LDCs as well as MDCs. (See Peter Gottschalk and Timothy
Smeeding, “Cross-National Comparisons of Earnings and Income Inequality,” in
the Journal of Economic Literature XXXV, June 1997: 633-87.)

And finally we can cite the most recent theoretical advances in mainstream
trade theory as witness on our behalf. “New trade theory” and “new growth
theory” do not predict that free trade necessarily leads to the most rapid
economic growth for LDCs. Instead the newest theoretical models predict a
positive role for protectionist measures to guide the development of
comparative advantages yielding higher long-run growth trajectories. (See
Paul Krugman, who is no friend to demonstrators against corporate sponsored
globalization, Rethinking International Trade, MIT Press, Cambridge MA,
1996). If one prefers simpler models to “cutting edge” models of trade and
growth theory, there is nothing wrong with the old infant industry argument
illustrated in every introductory text by a concavity [inward bending dip]
in a country’s [otherwise bowed out] production possibility curve giving
rise to a suboptimal local maximum where free trade would keep the country
producing.

But the most compelling evidence that protectionism can promote economic
development while free trade does not is empirical rather than theoretical.
If ever there was need to be reminded that comparative advantages are to be
created rather than accepted as acts of God, and that protectionism can play
an important role in changing comparative advantages, empirical studies of
the relatively few successful cases of national economic development reveal
that protectionism almost invariably has, in fact, played a crucial positive
role. The Asian development model responsible for the Japanese economic
“miracle” of the 1950’s and 1960’s, and for the Asian “miracles” in South
Korea and Taiwan in the 1980’s and 1990’s (see Alice Amsden, Asia’s Next
Giant: South Korea and Late Industrialization, (Oxford University Press, NY,
1989), and in Thailand, and Indonesia in the 1980’s and 1990’s, the German
development model dating back to the the nineteenth century, (see Andrew
Shonfield, Modern Capitalism, Oxford University Press, NY, 1970), and even
the US development experience in the ninteenth century all speak volumes to
the positive role protectionism can play for late comers to the global
economy. And for all the criticism import substitution has received by
neoliberals, it remains the case that Latin America has never grown more
rapidly than during the period when it was most cut off from international
trade and investment during the Great Depression and World War II and Latin
governments pursued import substitution policies. Finally, we have as
evidence the forgotten economic development success stories of the twentieth
century – the centrally planned “socialist” economies during their heydays.
These economies outperformed their capitalist counterparts for decades and
stand as further examples of the advantages of protection from international
markets and limited reliance on politically managed, as opposed to free
market trade.
_________________________________________________________
This article was first published  by Z/ZNet.
To learn more about the project consult ZNet (http://www.zmag.org)

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