Chapter 3: Import Liberalization and Industrial Performance: The Conceptual Underpinnings (with Wolfram Latsch)
3. Import liberalization and industrial performance: the conceptual underpinnings* INTRODUCTION There is widespread agreement, at least among neoclassical development economists, on certain propositions: free trade optimizes global resource allocation; increased import competition leads to greater industrial efﬁciency and increases welfare for developing countries (and, indeed, for the world as a whole) even if they face trade restraints in other markets; trade interventions are justiﬁable only under highly restrictive conditions, and even then are a second-best measure; and developing countries that pursued liberal trade policies have industrialized faster and more efﬁciently than those that have intervened in trade. In the neoclassical approach, widely propagated by the so-called ‘Washington consensus’, there can only be a role for governments in promoting industrialization under certain, narrowly circumscribed, conditions. In general, the policy prescription that emerges is that, where trade interventions exist, their rapid removal is the best policy prescription. Over time, and despite widespread criticism, these propositions have acquired an almost axiomatic status. Most of the criticisms of liberalization take the underlying economic model for granted, and focus on its empirical impact, either in particular countries or between liberalizing and nonliberalizing countries. While such exercises do contribute usefully to the debate, they (admittedly) face difﬁcult methodological problems in identifying and separating the effects of liberalization. More important, however, they tend not to question the basic assumptions of the arguments on which the case for liberalization rests. This chapter reviews the literature on trade liberalization and industrial growth, focusing on these...
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