“Free Trade and Prosperity”

I recently picked up Arvind Panagariya‘s excellent 2019 book, Free Trade and Prosperity: How Openness Helps the Developing Countries Grow Richer and Combat Poverty. I’m only about ten percent through, but I thought I’d give some highlights.

From the Preface:

“[I]n assessing the impact of trade openness on growth and poverty alleviation, . . . the proponents of free trade must provide watertight evidence of freer trade having a causal effect on growth and poverty alleviation. In contrast, the opponents have only to point out a few flaws in the underlying data and methodology to raise doubts about the evidence, thereby allowing them to deny the connection and claim victory. Whereas the proponents are held to the highest standard of proof that the latest techniques permit, opponents get away with offering fragmented evidence that free trade causes damage to production and dislocates workers. . .

“To appreciate the asymmetry, suppose for a moment that we were to ask the opponents to provide evidence causally linking high and rising protection to faster growth and declining poverty ratios. Will they be up to the task? Not by a long shot. . . . I know of no serious econometric study that even attempts to find such a link.”

From Chapter 1: Setting the Stage:

“[By embracing openness to trade and global markets, t]he four “Asian tigers,” or newly industrialized economies (NIEs), as they eventually came to be called, achieved in three decades the kind of prosperity that Western industrial economies had taken a century or longer to achieve.

“By contrast, the two largest countries of the world by population, China and India, remained staunchly wedded to protectionist, even near-isolationist, trade policies. The entire effort of these countries was geared toward replacing more and more imports by domestic production, with the state playing a direct and dominant role in the production activity. Both countries performed poorly economically, with their per capita incomes becoming a small fraction of those of the four tiger economies by 1980.”

From Chapter 2: The Positive Case for Trade Openness:

“We can identify three distinct channels through which pro-competitive effects work. First, we have cost reductions and quality improvements that result from “rubbing shoulders” with the best in the world and from having to satisfy the most discriminating and demanding customers. . . .

“The second way in which pro-competitive effects obtain is when trade leads to the exit of less productive firms and paves the way for the expansion of more productive firms to fill the gap in demand. . . . This outcome is consistent with a substantial body of empirical evidence showing that the firms that export exhibit higher productivity than those confined to the domestic market, and the exporters also operate on a larger scale.

“Finally, trade openness also serves as an antitrust policy. . . . The analytically simplest case of the antitrust role of free trade arises when a single firm supplies the entire market in a country that is small relative to the world market. Under autarky [i.e. the total absence of international trade], this firm would behave as a monopolist, pricing the product above marginal cost and earning pure economic profits. Freeing up trade would force it to charge the world price, with its monopoly power entirely eliminated.”

The book is obviously a little technical in its language, but it’s very readable to the college-level intellect, though he be economically uninitiated.