4.- HYPOTHESES ABOUT TRADE AND DEVELOPMENT

Trade was first considered a central element in a country's development path in the 1950s and 1960s; at the same time, planning was becoming the 'normal' way of development. Both these owed their new significance partly to the experience of the developed countries in the 1930s and then in World War II: the breakdown of the trading system in the 1930s and the further disruption by war had had a serious effect on many of them, and the need to mobilise all national resources in the war had underlined the importance and demonstrated the feasibility of planning. All the countries at war had used active government intervention to direct production sectors to maximise performance during the war. There was also the tradition of public works from the depression of the 1930s.

For the developing countries, development was seen as a stage, in which there would be rapid transition to a more stable state of growth, and therefore a stage where different policies from those suitable for equilibrium countries were likely to be appropriate. There were no examples of countries that were still clearly 'developing', but competing against 'industrial countries' in some industries. Analysts and policy makers thus saw a discontinuity, but also a potentially successful strategy: a planned economy.


4.a)  Import substitution

Much of the literature on the role of trade in the 1960s, which followed the observation of the success of countries which industrialised and increased their income (and growth rates) by means of increasing internal consumption and production, attributed this to import substituting trade policy. Empirical observation, and the history of primary product consumption within countries, had suggested that demand for their primary exports would grow less rapidly than average demand in the developed countries, and much less rapidly than their objectives for their own growth. Therefore, it seemed that the only path open to them was to continue to specialise in primary products for export, but concentrate on increasing production of other goods for home consumption. Because of the constraint from the expected limited growth in demand for their exports, they would have to substitute an increasing proportion of their imports with home production to avoid having foreign exchange as a constraint on their growth. In terms of trade policy, as export promotion was (by assumption) not likely to be successful, this meant a concentration on policies to control imports, not only their quantity but their composition, to concentrate limited resources on the goods least replaceable by local production. Following the policy precedents of the 1940s, they would do this by active intervention on trade and production. The objective was that the country would be 'developed' in the sense of at a comparable income to the North American and European countries, but even that did not then imply the high degree of trade dependence seen now.

The closed economy model assumed that the allocation and efficiency effects were either unobtainable because of structural defects in the economy (which had to be corrected before any trade effects could be achieved) or that there were alternative ways of changing the way resources were allocated among sectors. Countries had to plan and restructure their own economies, with trade necessary to provide certain inputs. Therefore exports were necessary to permit these imports, but they had no special advantages in themselves. But if we go back to Malawi, with too small an economy to develop on the basis of national demand, and little hope of extracting an investible surplus form its exports, this strategy offers no answer.


4.b)  Export-led growth

The export led model went to the opposite extreme: trade in itself would bring development: all the potential effects listed here would happen automatically if trade flowed.

The literature of the 1980s and early 1990s observed the success of the Asian NICs, and attributed the association between high and rapidly growing exports and rapid growth of manufacturing and total output to a policy of 'export-led growth'. What are the steps in this argument? Three possible cases where exports can be exceptionally useful to development have been considered: that there is unemployed capacity, X-inefficiency, or a technology gap. The step from this to advocating exports as the best strategy is to assume that, for each of these, exports are the only solution: to providing demand, to stimulating efficiency, or to acquiring technology, rather than one possible means, to be considered along with others.

The importance of the experience of the NICs was that they showed that it was not necessary for a country to develop an integrated national industry before competing with developed countries in manufactures. It was possible to specialise in exports of one or a few manufactured goods, and therefore secure a better export market prospect than from primary goods. There seemed to be an alternative strategy, and a very successful one. Their exports grew substantially faster than those of the industrial countries; while this seemed 'normal' by the 1980s, it had not been true before the early 1970s (and started to cease to be true again in the 1990s).

This interpretation of the trade led model was thus that the principal effect of trade on the economy was not in the conventional economic forms (higher demand, changes in composition), but partly in the extended economic (technology transfer), and more in the changes in the way in which economic decision-makers responded to incentives. For Malawi, handicapped by high trading costs, achieving competitiveness in exports would be difficult.

Later analysis emphasised that in most cases the successful exporters had first had a period of import substitution. There remains disagreement about whether this is because they were mistaken, and then found the better solution, or because the import substituting period was necessary as a preparation. This, however, extended the interpretation, by suggesting that it is necessary to develop the efficiency of firms through appropriate stimuli, in other words, through the use of incentives which fall outside economic analysis, whether government or market stimuli. For the sequence analysis, the argument was that it was necessary to start in a market that was 'easier': the home market offered less competition and was familiar. When a company was ready and when the country needed more complex integration into the world economy, the protection could be removed, and the opposite incentive, the threat from competition, would be effective.

But there are unspoken assumptions in the theory. The economic size of a country will influence the length of time an import substitution strategy may be viable; for some small countries this may be a negligible period, while large ones can have a long period. A small country, like Malawi, may need to move to exporting before its efficiency or responsiveness is 'ready', and therefore may be unlikely to succeed without special measures to help exports.

If there is a sequence of correct policies, which must be followed, and if some policies require specific conditions, whether of size of country, good national characteristics, or good luck in external circumstances, it becomes questionable whether there are general rules about the role of trade in development, or whether the particular characteristics of the country or the nature of the external environment are the dominant influences.

Although these trade-based views of the policies which have been followed are common, an alternative view of the successful countries, both Latin American and Asian, is that they followed policies with national objectives, in particular of industrialisation, and that they used the trade instruments as one element, but not the only one, in this. The effects of trade on development are therefore of interest in analysing their success, but not necessarily central to all countries at all times.

Development and industrialisation had been regarded as synonymous for the present industrial countries (the most common term for what are now called 'developed' until at least the 1980s). Industrialisation had traditionally been argued to have the effects of improving efficiency and technology that are attributed to trade in the analysis above. The process requires a shift in production, and therefore productivity gains through reallocation of resources and specialisation. Industry produces high-income elasticity goods. If industry may have these effects, it has the same claim to be an instrument of development as exports.

Even the more sophisticated trade-based interpretation suggested that some identifiable minimum level of policy was necessary: efficient investment, labour mobility, training. And in addition to the traditional list, there has been increasing emphasis on 'good macroeconomic policy' and 'good governance'. These do not have formal definitions, so their correlation with improved output growth or development is (at least) as difficult to test as that of 'openness'. They seem to have emerged not, like the analysis of export-led growth from observing success and looking for its explanation, but from observing failure (in particular, the debt crises). This origin also makes them more difficult to test as conditions for success. And these policies require resources, so for a poor country like Malawi they require external commitment as well as ‘good’ national policy.

At the same time as this changed interpretation of the role of national policies emphasised the need for a broad range of good policies, rather than the role of individual policies, understanding of international economic policy was increasingly recognising that the role of organisations like the WTO and other international institutions was at least as much to provide regulatory certainty as to 'liberalise'. This led to an emphasis, at the national level as well, on the need for strong institutions as a tool for development.


5.- Conclusion