Import Liberalization and Industrial Performance: Theory and Evidence

There appears to be at least implicit agreement among neoclassical development economists on certain propositions: free trade (at least as a benchmark ideal) optimizes global resource allocation; increased import competition leads to greater industrial efficiency, increases welfare in developing countries and allows specialization in accordance with natural comparative advantage; trade interventions are justifiable only under particular restrictive conditions, and even then are nearly always a second-best measure; and developing countries that pursue liberal trade policies industrialize faster and more efficiently than those that intervene in trade. According to this view, the role of government in promoting industrialization should be restricted to alleviating rather narrowly defined market failures. The concomitant and largely neoliberal policy prescription is that, where trade interventions exist, their rapid removal is likely to be the best policy. This is particularly the view of the Bretton Woods institutions, constituting what John Williamson has called the ‘Washington consensus’. The government, in this view, can at best act as a mild corrective force in enabling a natural and largely given development path.