Chapter 1: The Theory and Measurement of Trade Liberalisation
1. The theory and measurement of trade liberalisation Politicians and economists who promise that trade liberalisation will make everyone better off are being disingenuous. Economic theory (and historical experience) suggests the contrary. (Stiglitz, 2006) Introduction To consider the relationship between trade liberalisation and economic development, it is important to state at the outset what we mean by the process of economic development. The traditional measure of economic development, and what the theory of trade liberalisation focuses on, is the standard of living measured by the average level of per capita income of the citizens of a country. The static gains from trade liberalisation are supposed to raise the level of income in the process of resource reallocation according to the law of comparative advantage; and the dynamic gains from trade, associated with more competition, the ﬂow of new knowledge and a faster rate of capital accumulation, are supposed to raise the growth of income. The focus on national income, or on the growth of income, as a measure of development 1 2 Trade liberalisation and the poverty of nations is not enough, however, for two main reasons. Firstly, what happens to the distribution of income within countries matters for the measurement of economic welfare. Trade liberalisation does not guarantee that all sectors of society will beneﬁt equally. On the contrary, in the very process of liberalisation itself some groups will gain, but others, previously protected, will undoubtedly lose either relatively or absolutely through unemployment or a reduction in their...
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