Vietnam and Mexico
Source Autoplectic
Date 05/12/14/20:22

Two countries, one booming, one struggling: which one followed the
free-trade route?

A look at Vietnam and Mexico exposes the myth of market liberalisation

Larry Elliott, economics editor
Monday December 12, 2005
The Guardian

Expect much gnashing of teeth in Hong Kong this week. The chances of
securing a comprehensive trade deal are non-existent, with the talks
now really about damage limitation and the apportionment of blame.

The development charities will say that the selfish behaviour of the
developed world has condemned poor nations to further penury.
Washington and Brussels will say the negotiations have been stymied by
the obduracy of India and Brazil. Economists will have a field day
explaining how the world is turning its back on millions of dollars'
worth of extra growth, and that the poor countries will be the ones
who will really suffer if the global economy lapses back into a new
dark age of protectionism.

That's certainly the accepted view. An alternative argument is that
the trade talks are pretty much irrelevant to development and that in
as much as they do matter, developing countries may be buying a pup.

The Harvard economist Dani Rodrik is one trade sceptic. Take Mexico
and Vietnam, he says. One has a long border with the richest country
in the world and has had a free-trade agreement with its neighbour
across the Rio Grande. It receives oodles of inward investment and
sends its workers across the border in droves. It is fully plugged in
to the global economy. The other was the subject of a US trade embargo
until 1994 and suffered from trade restrictions for years after that.
Unlike Mexico, Vietnam is not even a member of the WTO.

So which of the two has the better recent economic record? The
question should be a no-brainer if all the free-trade theories are
right - Mexico should be streets ahead of Vietnam. In fact, the
opposite is true. Since Mexico signed the Nafta (North American Free
Trade Agreement) deal with the US and Canada in 1992, its annual per
capita growth rate has barely been above 1%. Vietnam has grown by
around 5% a year for the past two decades. Poverty in Vietnam has come
down dramatically: real wages in Mexico have fallen.

Rodrik doesn't buy the argument that the key to rapid development for
poor countries is their willingness to liberalise trade. Nor, for that
matter, does he think boosting aid makes much difference either.
Looking around the world, he looks in vain for the success stories of
three decades of neo-liberal orthodoxy: nations that have really made
it after taking the advice - willingly or not - of the IMF and the
World Bank.

Rather, the countries that have achieved rapid economic take-off in
the past 50 years have done so as a result of policies tailored to
their own domestic needs. Vietnam shows that what you do at home is
far more important than access to foreign markets. There is little
evidence that trade barriers are an impediment to growth for those
countries following the right domestic policies.

Those policies have often been the diametric opposite of the
orthodoxy. South Korea and Taiwan focused their economies on exports,
but combined that outward orientation with high levels of tariffs and
other forms of protection, state ownership, domestic-content
requirements for industry, directed credit and limits to capital

Rodrik says: "Since the late 1970s, China also followed a highly
unorthodox two-track strategy, violating practically every rule in the
guidebook. Conversely, countries that adhered more strictly to the
orthodox structural reform agenda - most notably Latin America - have
fared less well. Since the mid-1980s, virtually all Latin American
countries opened up their economies, privatised their public
enterprises, allowed unrestricted access for foreign capital and
deregulated their economies. Yet they have grown at a fraction of the
pace of the heterodox reformers, while also being buffeted more
strongly by macroeconomic instability."

This is an argument taken up by Ha Joon Chang in a recent paper for
the South Centre, the developing countries' intergovernmental forum.
Chang argues that "there is a respectable historical case for tariff
protection for industries that are not yet profitable, especially in
developing countries. By contrast, free trade works well only in the
fantasy theoretical world of perfect competition."

Going right back to the mid-18th century, Chang says Pitt the Elder's
view was that the American colonists were not to be allowed to
manufacture so much as a horseshoe nail. Adam Smith agreed. It would
be better all round if the Americans concentrated on agricultural
goods and left manufacturing to Britain.

Alexander Hamilton, the first US Treasury secretary, dissented from
this view. In a package presented to Congress in 1791, he proposed
measures to protect America's infant industries. America went with
Hamilton rather than Smith. For the next century and a half, the US
economy grew behind high tariff walls, with an industrial tariff that
tended to be above 40% and rarely slipped below 25%. This level of
support is far higher than the US is prepared to tolerate in the trade
negotiations now under way.

The lesson is clear, Chang says. South Korea would still be exporting
wigs made from human hair if it had liberalised its trade in line with
current thinking. Those countries that did liberalise prematurely
under international pressure - Senegal, for example - saw their
manufacturing firms wiped out by foreign competition.

Infant industry

He draws the comparison with bringing up children. "In the same way
that we protect our children until they grow up and are able to
compete with adults in the labour market, developing country
governments need to protect their newly emerging industries until they
go through a period of learning and become able to compete with the
producers from more advanced countries."

As with children, infant industry protection can go wrong. But, says
Chang, "just as failures in the world of parental protection are
hardly an argument against parenting itself, so cases of failures of
infant industry protection do not constitute an argument against
infant industry protection per se - especially when history shows that
with startlingly few exceptions, successful countries in the past and
in the present have used infant industry protection".

The chances of success are increased if the choice of target infant
industries is realistic, protection is combined with an export
strategy, the state imposes discipline on the firms receiving
protection and the government is competent.

Another counter-argument is that while a modicum of protection may be
necessary, most developing countries now have tariff rates much higher
than those used by today's developed countries in the past. Chang says
this ignores one vital point: the productivity gap between rich and
poor countries today is far higher than it was in the past, so it is
perfectly logical for tariffs to be higher.

For example, Britain and the Netherlands were perhaps up to four times
as rich as Japan or Finland in the 19th century; today, Switzerland or
the US is 50 or 60 times as rich as Ethiopia or Tanzania. Yet in Hong
Kong the pressure will be on the bigger developing countries to make
the big concessions on industrial tariffs, cutting them to levels
below those that existed in most rich countries until the early 1970s.

History suggest that accepting the demands of Washington and Brussels
would be unwise, to say the least.

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