Forum Series on the Role of Institutions in Promoting Economic Growth Trade Liberalization: Winners and Losers, Success and Failures Implications for SMEs

Despite the long tradition in economics of trade being seen as net welfareimproving, criticism of trade and hence trade liberalization policies has cropped up from time to time, especially as far as LDCs are concerned. Among the concerns of trade liberalization from the LDC perspective were fears of terms of trade deterioration for primary exporters, the harmful effect of dependence on allegedly endemically unstable exports, unbalanced political and economic power that tilt the enforcement and practice of liberalized trade rules in favor of rich countries, and that the benefits of international trade in LDCs might accrue largely to large multinational companies (MNCs). Yet, modern empirical research has shown most of these concerns to have been vastly overblown and that the ISI policies employed by most LDCs seemed to be leading to a dead end. explaining why so many LDCs adopted trade and other reforms beginning in the mid-1980s. By the early 1990s, the sentiment for trade liberalization and other reforms was so widespread and dominant that a “Washington Consensus” was declared. The paper is organized as follows: Section 1 identifies types of trade liberalization and provides examples of each. Section 2 summarizes the experience. This turns out to have been much more mixed than was expected both on the basis of theory and that early experience of the East Asian miracle. In short, (1) fewer countries have undertaken trade reforms than might have been expected; (2) those that have undertaken trade liberalization have done so only tentatively or partially; and (3) in many cases countries that have liberalized trade have had some substantial unwanted effects. Section 3 asks why more countries have not undertaken reforms; Section 4 asks why the reforms undertaken have often been tentative or discontinued; and Section 5 asks why the countries that have gone quite far in implementing trade reforms have had such unwanted effects. Section 6 concludes. 1 See especially Prebisch 1949, 1950, Singer 1950 2 See especially Yotopoulos and Nugent (1976) and Krueger (