Chapter 6: Trade liberalisation, the balance of payments, growth, inequality and poverty
In the last 40 years or so, orthodox economics and the world’s major institutions, such as the International Monetary Fund (IMF), the World Bank and the World Trade Organisation (WTO), have placed great faith in trade liberalisation as a means of promoting growth and development, and reducing poverty in the world economy in general, and the developing economies in particular. Barriers to trade, it is argued, distort the allocation of resources and reduce the level and growth of output below what it would otherwise be if countries pursued the law of comparative advantage and free trade. In this chapter we consider the question of whether trade liberalisation has improved the macroeconomic performance of countries on a sustainable basis, and improved the overall welfare of countries, measured by the growth of GDP, and also taking into account the effect of liberalisation on the distribution of income within and between countries and the level of poverty. Since a major constraint on the growth of output is the balance of payments, as we outlined in the previous chapter, we shall be particularly concerned with whether trade liberalisation has relaxed the balance of payments constraint on growth by leading to a faster growth of exports than imports.
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