Does trade openness helps or hinders industrialization?

Does Trade Openness Favour or Hinder Industrialization and Development? Mehdi Shafaeddin* A paper prepared for the Intergovernmental Group of Twenty-Four on International Monetary Affairs, to be presented at the Technical Group meeting, Geneva, 16-17 March 2006 Abstract The purpose of this study is to examine whether free trade helps or hinders industrialization and development. The author argues that there is neither a theoretical justification nor historical and empirical evidence to support what he refers to as “trade liberalization hypothesis”(TLH). The theory behind TLH is the doctrine of comparative cost advantage which can not be used as a guide to caching up and achieving dynamic comparative advantage which is a policy-based effort. Almost all successful industrializers went through a long period of selective infant industry protection before subjecting their industries to trade liberalization gradually. The forced trade liberalization imposed on the third world during the colonial era led to their de-industrialization, specialization in primary commodities and underdevelopment. On the basis of empirical study of a sample of developing countries which have undertaken trade liberalization during the last quarter of a century and the case study of Mexico, which has been the champion of liberalization, the author also concludes: that trade liberalization is essential when an industry reaches a certain level of maturity, provided it is undertaken selectively and gradually; that the way it is recommended by neo-liberals under the label of “Washington Consensus”, however, it is a recipe for destruction of the industries at their early stages of infancy, or development; that if through NAMA negotiations of the Doha Round, developing countries submit to developed countries to accept their proposed Swiss formula, with a low coefficient (10), and binding of their tariff lines at low levels, it would be at the cost of halting their industrialization process; that the low income countries and others at early stages of industrialization, in particular, will be trapped in production and exports of primary commodities, simple processing and at best assembly operation and/or other simple labour intensive industries. Finally, as international trading rules are not conducive to industrialization and development, he argues for the need for a different framework of industrial and trade policies outlined elsewhere**. Such a framework, however, requires a radical change in international trade rules. Developing countries should not be worried, he emphasizes, to be “blamed” for defending their policy autonomy in order to enhance their development. *The author is a development economist, affiliated to the Institute of Economic Research, University of Neuchate. He is the former head of Macroeconomics and Development Policies Branch, Globalization and Development Strategies Division of UNCTAD and the author of Trade Policy at the Crossroads; the Recent Experience of Developing Countries, Macmillan, 2005 as well as a number of articles on trade, industrial and development policies. The author is grateful to Mr A. Buira, the Director of G24 Secretariat, for his comments on an earlier draft. His thanks also go to J. Pizzaro for his helpful assistance in processing data. **Shafaeddin, M. (2005.c) “Towards an Alternative Perspective on Trade and Industrial Policies”, Development and Change, 36.6:1143-1162. Shafaeddin 1