Grp04 S03 - Bhagwati Ch05
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Objective and Motivations The objective of the writer is to present to us the different views regarding the relationship between world trade, growth and poverty. Some people regard free trade as a hindrance towards economic growth and might even increase poverty. Free trade proponents on the other hand suggest otherwise. Therefore, the big question is whether trade enhances growth or reduces growth. The writer also wishes to highlight on how globalization and trade affect the economies of different nations and the society of these nations. He also seek to expose the fallacies and inaccuracies of the claims and views of the anti-globalists. Growth and Poverty Different forms of growth may either help reduce poverty or make them indifferent. The Far Eastern economies in the post war years have grown rapidly through outward trade orientation, where they export labour intensive goods which promote employment and eventually reduce poverty rapidly. Immiserise Growth However, a country can also experience “immiserize” growth if it over produces and over supplies the market. This causes the market price to fall, thus resulting in export earning to fall drastically. Net earnings could eventually be worst off even with extra export. The way to avoid this outcome is to restrain production so that market price will be maintained at profit maximizing. Appropriate policies will always enable us to profit from growth and to moderate or prevent unpleasant outcomes for the poor. How growth can benefit the poor? Many economist in the early years favored a growth strategy that relied on massive imports substitution in heavy industry (eg: electrical and steel) compared to light manufactures (eg: toys and garments). This actually reduces the demand of unskilled workers, namely the poor. If growth has been outward oriented with labour intensive, light manufacturing goods, it would increase the demand in labour and helped the poor far more. Countries can also improve the access of the poor to expanding opportunities by making investment fund more accessible. A great breakthrough came with the invention of micro-credit programs in India, which reached the very poor. It lends small sum of money to poor clients for tiny investments and improve their ability to earn a livelihood.
The ability of the poor to access the growth process and to share in the prosperity depends at least as much on their ability to get their voice heard tin the political process. Democracy gives the poor precisely that voice, but it obviously works well only when there are political alternatives instead of a single party state. The link between trade and growth Bhagwati was examining the probability where trade can actually disrupt growth instead of having the opposite effect. There were some scholars such as Paul Bairoch who argued that protectionism actually helped increase trade and aided the country in its growth whereas having free trade will result in stagnation. His views were further supported by the work of economic historians Kevin O’Rourke and Jeff Williamson where they found out that between 1875 and 1914, there was economic growth as a result of import tariffs. It was later realized that such a claim is too simple an assumption because it fails to put into consideration that some countries impose tariffs because they need additional revenues and such tariffs have little effect on creating protectionism. Contrary to beliefs, such countries are actually very pro-trade in nature and it was trade that put their economies well ahead. In other cases such as the case where the United States imposed a tariff on tinplate imports in order to protect its young domestic tinplate industry. Although the industry grew rapidly, it was due to the fact that the prices of steel and iron inputs are becoming similar to Britain and France and therefore in any case, the US tinplate industry will become profitable. However, tariffs actually caused the overall economy to lose more as consumers will have to pay a higher price. Why are Trade Restrictions harmful to growth? If there are trade restrictions, foreign direct investments would be reduced and there will be lower productivity since investments will ultimately focus on the domestic industry instead of the world market. Competitiveness will be reduced and economies of scale will also not be realized. Why an Outward Approach is preferable? It is pointed out that outward economies benefit more from trade and that tariffs will expectedly cause prices of ordinary commodities to rise. Free trade also promotes competitiveness and will eventually help the domestic industry because foreign firms will put pressure on domestic firms to perform better. Outward oriented economies take the world market into consideration when they plan for their investments. These countries export a lot and in turn use the revenues gained from exports to purchase even more capital. Therefore these countries were able to achieve growth by adopting a liberal trade policy. When trade barriers such as tariffs are cut, growth actually increased.
India, China and Elsewhere Freer Trade leads to Higher Growth Higher Growth leads to Reduced Poverty Thus, Growth reduces Poverty. Countries chosen: China and India -Why? Both have the largest pool of world poverty. -How did they counter this problem? Both shifted to outward orientation, which contributed to their higher growth. -What China did? They adopted outward-oriented economic policies aggressively. •
What India did?
They began opening up its economy in a more systematic and bold manner. The results were: China’s poverty reduced from 28% to 9%. India’s poverty reduced from 51% to 26%. A study by Xavier Sala-i-Martin between Africa and Asia: -in 1970s, Africa had 11% of world’s poor and Asia had 76% of world’s poor. -in 1998, Africa had 66% of world’s poor and Asia’s share declined to 15%. -reversal was caused by different aggregate growth performances. -poverty reduced in Asia because Asian countries grew but not the African countries. Thus, we can conclude this section by saying that: -globalization, in the shape of trade or direct investment helps and not harms the cause of poverty reduction in poor countries.
What about Inequality? -Inequality is acceptable as it excites and creates aspiration and hope to the poor. -Makes the poor fancy that these “prizes” may come to them one day -Sala-i-Martin calculates the inequality of the world and concludes that: o
Global inequality has declined substantially over the last two decades.
-Globalisation decreases poverty and decrease world inequality.
The ability of the poor to access the growth process and to share in the prosperity depends at least as much on their ability to get their voice heard tin the political process. Democracy gives the poor precisely that voice, but it obviously works well only when there are political alternatives instead of a single party state. The link between trade and growth Bhagwati was examining the probability where trade can actually disrupt growth instead of having the opposite effect. There were some scholars such as Paul Bairoch who argued that protectionism actually helped increase trade and aided the country in its growth whereas having free trade will result in stagnation. His views were further supported by the work of economic historians Kevin O’Rourke and Jeff Williamson where they found out that between 1875 and 1914, there was economic growth as a result of import tariffs. It was later realized that such a claim is too simple an assumption because it fails to put into consideration that some countries impose tariffs because they need additional revenues and such tariffs have little effect on creating protectionism. Contrary to beliefs, such countries are actually very pro-trade in nature and it was trade that put their economies well ahead. In other cases such as the case where the United States imposed a tariff on tinplate imports in order to protect its young domestic tinplate industry. Although the industry grew rapidly, it was due to the fact that the prices of steel and iron inputs are becoming similar to Britain and France and therefore in any case, the US tinplate industry will become profitable. However, tariffs actually caused the overall economy to lose more as consumers will have to pay a higher price. Why are Trade Restrictions harmful to growth? If there are trade restrictions, foreign direct investments would be reduced and there will be lower productivity since investments will ultimately focus on the domestic industry instead of the world market. Competitiveness will be reduced and economies of scale will also not be realized. Why an Outward Approach is preferable? It is pointed out that outward economies benefit more from trade and that tariffs will expectedly cause prices of ordinary commodities to rise. Free trade also promotes competitiveness and will eventually help the domestic industry because foreign firms will put pressure on domestic firms to perform better. Outward oriented economies take the world market into consideration when they plan for their investments. These countries export a lot and in turn use the revenues gained from exports to purchase even more capital. Therefore these countries were able to achieve growth by adopting a liberal trade policy. When trade barriers such as tariffs are cut, growth actually increased.
India, China and Elsewhere Freer Trade leads to Higher Growth Higher Growth leads to Reduced Poverty Thus, Growth reduces Poverty. Countries chosen: China and India -Why? Both have the largest pool of world poverty. -How did they counter this problem? Both shifted to outward orientation, which contributed to their higher growth. -What China did? They adopted outward-oriented economic policies aggressively. •
What India did?
They began opening up its economy in a more systematic and bold manner. The results were: China’s poverty reduced from 28% to 9%. India’s poverty reduced from 51% to 26%. A study by Xavier Sala-i-Martin between Africa and Asia: -in 1970s, Africa had 11% of world’s poor and Asia had 76% of world’s poor. -in 1998, Africa had 66% of world’s poor and Asia’s share declined to 15%. -reversal was caused by different aggregate growth performances. -poverty reduced in Asia because Asian countries grew but not the African countries. Thus, we can conclude this section by saying that: -globalization, in the shape of trade or direct investment helps and not harms the cause of poverty reduction in poor countries.
What about Inequality? -Inequality is acceptable as it excites and creates aspiration and hope to the poor. -Makes the poor fancy that these “prizes” may come to them one day -Sala-i-Martin calculates the inequality of the world and concludes that: o
Global inequality has declined substantially over the last two decades.
-Globalisation decreases poverty and decrease world inequality.
