Naked Economics: Undressing the Dismal Science pdfdrive com

Openness to trade. We’ve had a whole chapter on the theoretical benefits of
trade. Suffice it to say that those lessons have been lost on governments in many
poor countries in recent decades. The fallacious logic of protectionism is alluring
—the idea that keeping out foreign goods will make the country richer.
Strategies such as “self-sufficiency” and “state leadership” were hallmarks of the
postcolonial regimes, such as India and much of Africa. Trade barriers would
“incubate” domestic industries so that they could grow strong enough to face
international competition. Economics tells us that companies shielded from
competition do not grow stronger; they grow fat and lazy. Politics tells us that
once an industry is incubated, it will always be incubated. The result, in the
words of one economist, has been a “largely self-imposed economic exile.”
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At great cost, it turns out. The preponderance of evidence suggests that open
economies grow faster than closed economies. In one of the most influential
studies, Jeffrey Sachs, now director of The Earth Institute at Columbia
University, and Andrew Warner, a researcher at the Harvard Center for
International Development, compared the economic performance of closed
economies, as defined by high tariffs and other restrictions on trade, to the
performance of open economies. Among poor countries, the closed economies
grew at 0.7 percent per capita annually during the 1970s and 1980s while the
open economies grew at 4.5 percent annually. Most interesting, when a
previously closed economy opened up, growth increased by more than a
percentage point a year. To be fair, some prominent economists have taken issue
with the study on the grounds (among other quibbles) that economies closed to
trade often have a lot of other problems, too. Is it the lack of trade that makes
these countries grow slowly, or is it general macroeconomic dysfunction? For
that matter, does trade cause growth or is it something that just happens while
economies are growing for other reasons? After all, the number of televisions
sold rises sharply during extended spells of economic growth, but watching
television does not make countries richer.
Conveniently for us, a recent paper in the American Economic Review, one of
the most respected journals in the field, is entitled “Does Trade Cause Growth?”
Yes, the authors answer. All else equal, countries that trade more have higher per
capita incomes.
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Jeffrey Frankel and David Romer, economists at Harvard and
UC Berkeley, respectively, conclude, “Our results bolster the case for the
importance of trade and trade-promoting policies.”
Researchers have plenty left to quibble about. That is what researchers do. In
the meantime, we have strong theoretical reasons to believe that trade makes
countries better off and solid empirical evidence that trade is one thing that has
separated winners from losers in recent decades. The rich countries must do their