Posted by on September 3, 2019 8:02 pm
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After years when it was presented as an inevitable trend, globalization now seems to be everyone’s favorite political whipping boy, blamed for everything from rising inequality and unchecked immigration to global warming and fake news. But ending or even reversing globalization by erecting trade barriers would have a disastrous impact on economic growth in low- and middle-income countries, according to a new op-ed by Shanta Devarajan of the Brookings Institution, which finds that trade liberalization measures have been closely associated with increased prosperity in LMICs.



  • Devarajan’s piece draws on research tracking the economic growth of countries before and after liberalizing trade, which shows a roughly 2 percentage point increase in GDP growth rates after trade liberalization measures versus before.



  • Additionally Devarajan dismisses another common complaint, the bogeyman of inequality, by noting that “there is no systematic relationship between trade liberalization and inequality. In some globalizing countries inequality rose, while in others it fell.”



  • However Devarajan concedes that the effects of trade liberalization are uneven at best: the 2 percentage point figure is just an average, after all, meaning that a good number of countries didn’t see the hoped-for boost from trade liberalization.



  • So what’s preventing those countries from reaping the benefits? A number of other measures have to be in place for prosperity to take off, whose absence kneecaps growth. For example, African infrastructure remains in a lamentable state, while a large part of India’s vast population — a huge potential source of cheap labor — remains too poorly educated to take advantage of job opportunities in manufacturing.



  • Further, Devarajan points out that large swathes of the economies of LMICs, and especially non-tradable services, remain in effect state monopolies or, even worse, under the control of politically connected monopolists who aren’t affected by outside competition. This rent-seeking and inefficiency in turn negatively affects inputs for key economic drivers like exports.



  • The solution therefore is not less more globalization, but more: “If this competition can be spread to the nontradable sectors, we will see greater competition in those sectors and bigger gains from trade liberalization.”