During the 1950s and 60s a wave of criticism against the free trade doctrine swelled and broke.
I do not intend to summarize the lively debate that occurred during that period, but a few glimpses at the prevailing ideas of the time may be important in order to provide some historical colour to current discussions. Free trade, and specialization according to each country’s comparative advantage, benefits all countries.
A great deal of criticism was directed at what was perceived to be an idealized view of the blessings foreign trade brought to developing nations. Raul Prebisch (the first and extremely influential Secretary General of UNCTAD), Ragner Nurkse and various other famous economists claimed that the long-term export prospects for raw material producers were extremely bleak.
As a consequence of factors such as industrialized countries protectionism, low income elasticity of the developing nations most important export goods, falling raw material contents in modern industrial goods and a successive transition from natural to synthetic materials, prices of raw materials as compared to finished goods would be inexorably weakened.
Other arguments that pointed in the same direction, for example warnings about continued dependence on the export of raw materials in an uncertain world market, were that commodity prices tend to fluctuate more than earnings from exports of industrial goods (Gunnar Myrdal and others).
Some authors (Nurkse, Myrdal and others) also stressed that the dynamic effects of raw materials production are insignificant in terms of enhancing educational and technological development, and that technical advances in such production tend to be transferred to consumers in rich countries in the form of lower consumer prices (Prebisch, Hans Singer and others) rather than in the form of higher margins for producers. Another common argument was that the industrialized nations control raw materials prices through the powerful bargaining position of their transnational companies.
Criticism has also been leveled at the static nature of concepts such as comparative advantage. Should poor countries really be satisfied with having comparative advantages in commodities such as peanuts and bananas, while rich countries are constantly improving their comparative advantages in modern industry and advanced services?
Criticism of the traditional foreign trade theory and the doctrine of free trade were linked, naturally enough, with recommendations for rapid industrialization. The catchword was “import substitution”. With the help of tariffs and other barriers to imports, domestic industries in developing nations were to be protected against competition from developed industrialized nations.
This message elicited considerable response from influential groups in developing countries. Import substitution strategies also became attractive to emerging political leaders in the third world: many problems could be blamed on external factors (Colonialism and imperialism according to radical leaders, unfavorable trading conditions and deteriorating terms of trade amongst the less radical),
while industrialization policies and protectionism were politically rewarding tools to expand the role of the state in the domestic economies and boost the national identities of political leaders (and sometimes their power and sources of income as well). (Stefan De Vylder, 2007).
During the 1950s and 60s, more or less sophisticated import substitution strategies were applied in the overwhelming majority of all independent developing nations.
In certain cases protectionism was purely defensive, more in an attempt to protect a precarious balance of payments situation; this was the case when import substitution policies were first introduced in Latin America during the great depression of the 1930s.
However, in other cases, industrialization based on import substitution became the cornerstone of official development policies. The majority of Overseas Development Assistance (Foreign Aid) providers from the industrialized nations and international development banks also favored these industrialization policies and helped finance them.
During the last few decades we have witnessed what could be called the renaissance of David Ricardo, at the expense of industrialization based on import substitution and protected domestic markets. Ricardo did not consider foreign trade to be a zero sum game but rather as something mutually advantageous.
According to him, if two or more countries specialize in producing the goods for which they have comparative advantages, all parties gain by the exchange of trade.
Criticism of the import substitution strategy has included such factors as the insignificant size of domestic markets in most developing nations and inefficiency and rent-seeking behavior or outright corruption in protected industries.
The discrimination against the agricultural sector which often resulted from industry’s preferential treatment also came under attack when food production stagnated as the domestic terms of trade for agricultural products deteriorated.
“Export Promotion” gradually replaced “import substitution” as the conventional wisdom. The debt crisis of the 1980s further strengthened this tendency.
With structural adjustment programmes and conditionality as powerful levers, a large majority of the world’s poor countries have now adapted their economies along more liberal, free trade-friendly lines.
At the same time, international organizations such as the World Bank, General Agreement on Tariffs and Trade (GATT) and later the World Trade Organization (WTO) have purposefully worked to successively reduce tariffs and other types of trade barriers to world trade although without success in important areas such as the agricultural policies of richer countries.
The 1980s and 90s witnessed mere pale echoes of the criticism of the free trade doctrine first heard several decades (or even centuries) ago. Only, a handful of economists adhere to protectionism today, and very few leading politicians advocate inward looking development strategies. Concepts such as “self reliance”, which were frequent a few decades ago, are now brushed aside as destructive or simply ridiculous.
However, despite the free trade-friendly spirit prevalent today, not all criticism should be dismissed as ridiculous or based on ignorance. Not all claims made by the supporters of import substitution policies were wrong, and new questions have arisen. There is an apparent swing of the pendulum in recent development theory debates.
Where do we stand today? What issues remain?
“Openness to international trade accelerates development of poor countries, this is one of the most widely held beliefs in the economics profession, one of the few things on which Nobel Prize winners of both the left and the right agree” (David Dollar & Aart Kraaay, 2000, p.3)
Majura is an Advocate of the High Court of Tanzania, a lecturer in Law and Business Studies with Mount Meru University in Arusha, a Business Consultant and a French and German Translator. Email: email@example.com Tell. No. +255 754 269 563