Trade and the Competitiveness Agenda

The dramatic expansion in global trade over recent decades has contributed significantly to diversification, growth, and poverty reduction in many developing countries. This period of rapid export growth has been enabled by two critical structural changes in global trade: (1) the vertical and spatial fragmentation of manufacturing into highly integrated “global production networks,” and (2) the rise of services trade and the growth of “offshoring.” Both of these, in turn, were made possible by major technological revolutions; and they were supported by multilateral trade policy reforms and broad liberalizations in domestic trade and investment environments worldwide. The global economic crisis came crashing into the middle of this long-running export-led growth party during 2008 and 2009. Between the last quarter of 2007 and the second quarter of 2009, global trade contracted by 36 percent. But as the recovery started to strengthen in 2010 (at least until the clouds began to form over Europe), the longer-term impacts of the crisis on the policy environment regarding trade and growth were becoming more apparent. Indeed, in addition to raising concerns over the global commitment to trade liberalization, the crisis has also led to some serious rethinking of some of the conventional wisdom regarding the growth agenda—the most important result of which is the likelihood that governments will play a much more activist role in the coming years. There are three principal reasons why governments are likely to be more actively involved in industrial and trade policy in the coming years. First, the crisis has undone faith in markets and discredited laissez-faire approaches that rely simply on trade policy liberalization. Instead, governments and local markets have been “rediscovered.” In this sense, the demand for activist government is likely to go well beyond financial markets and regulation, and it will affect the policy environment in which trade and industrial strategies are designed. Second, the crisis has highlighted the critical importance of diversification (of sectors, products, and trading partners) in reducing the risks of growth volatility. The recent era of globalization contributed to substantial specialization of The global economic crisis has forced a major rethinking of the respective roles of governments and markets in the processes of trade and growth. Indeed, industrial policy seems to be back in fashion—or, at least, talking about it is. But a renewed “activism” by government in the trade and growth agenda need not mean a return to old-style policies of import substitution and “picking winners.” Instead, it may mean a stronger focus on competitiveness by unlocking the constraints to private sector–led growth. This note discusses the renewed role of government in trade and growth policy from the competitiveness angle, and it suggests some priorities for the new competitiveness agenda. P VE TY I