Trade is good but…

The World Bank has a new Chief Economist– Pinelopi Goldberg. As twitterverse was posting congratulatory messages, a VoxDev article of hers (with Nina Pavcnik) popped up. Interesting snippets from the concluding remarks below:

It’s hard to conclude the reason behind China’s economic success…

 First, the massive trade liberalisations were in many instances accompanied by domestic policies that directly or indirectly benefited exporters (industrial policies, subsidies, preferential credit). For example, we do not know for sure whether China is a success story because it opened up or because its government actively supported exports (McMillan and Rodrik 2011).

It is important to pay attention to distributional consequences even if just to ensure that free trade survives…

Second, one important lesson from international trade theory is that trade liberalisation generates winners and losers. And while it is in principle possible for the winners to compensate the losers in such a way that no one is worse off in the end, such compensation does not always happen in practice. At a minimum, compensating the losers requires knowledge of who the losers are and how much they lost. In the context of developing countries, much research has focused on the effects of liberalisation on the income distribution of these countries. We will leave discussion of these findings to a future column. At present, it is important to note that establishing that a policy (e.g., trade liberalisation) has beneficial effects in the aggregate, does not guarantee that this policy will be implemented or continued. If the policy has adverse distributional effects, it is likely that the losers will try to block it or reverse it. Hence, even if one believes that for developing countries the distributional consequences of free trade are second-order relative to the first-order issues of growth and poverty reduction, it is still critical to understand these distributional consequences if one wants free trade to survive.


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