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Re: [Re: Globalisation kills Indian Industry??!!]



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Vamsi Musunuru wrote:

 > ....... [re liberalization and globalization]
 > In fact, in Modern Economics the two can be unified effortlessly (I 
assume).

Since you bring up  'Modern Economics', the attached article on
referencing studies of protected vs liberalised economies is relevant.

My own position is that I do not endorse the pervasive government
control of industry engenderd by licence-raj, but neither do I support
surrendering that control to the even less accountable local and global 
corporate interests that would replace the power currently exercised by 
government.

For those of you lacking the patience to wade through the examples
and references in the full article, here are some excerpts:

     ...even if there are efficiency gains from freer trade, when the
     terms of trade are set by free market forces there is every reason to 
believe the lion’s share of any efficiency gain will be distributed to the 
country that was better off in the first place -- thereby aggravating global 
inequality. Not only is the empirical evidence that the terms of trade have 
declined for LDCs so overwhelming that even the IMF publishes studies 
confirming this fact, theoretical considerations provide every reason to 
expect this to occur.

     “New trade theory” and “new growth
     theory” do not predict that free trade necessarily leads to the most 
rapid economic growth for LDCs. Instead the newest theoretical models 
predict a  positive role for protectionist measures to guide the development 
of comparative advantages yielding higher long-run growth trajectories.

full article:
_________________________________________________________
More Free Trade is Good and More Protectionism is Bad. NOT!
By Robin Hahnel

Six months ago, before the Battle of Seattle against the WTO and the War in 
Washington against the IMF and World Bank, most anti-globalization activists 
were intimidated by one of the great myths of mainstream economic theory:
“More free trade is good and more protectionism is bad.” The truth was most 
of us were cowed by what was commonly accepted as fact: “freer trade leads 
to global efficiency gains through specialization, while protectionism is 
inefficient because it  prevents gains from international specialization.”
After thousands of  articles, pamphlets, essays, talks and teach-ins, our 
movement is now blessed with a swarm of “organic intellectuals” who can 
explain why free trade is usually bad, and why protectionism is usually 
necessary for economic development.

We can now explain that even in static economic models, even abstracting 
from the true social costs of transportation, even abstracting from the 
adjustment costs of moving resources and people from one industry and 
location to another, it is only the case that more specialization and trade 
yields efficiency gains if relative prices inside countries reflect the true 
social opportunity costs of producing things, which is often not  the case. 
Otherwise, commercial comparative advantage as calculated by commercial 
prices will not be the same as true comparative advantage calculated in 
terms of true social opportunity costs, and freer trade may well lead to 
efficiency losses rather than gains.

For example, NAFTA led to less shirt production and more corn production in 
the US and less corn production and more shirt production in Mexico. This 
was because the price of shirts relative to the price of corn was higher in 
the US than in Mexico, so reducing Mexican tariffs on corn and US tariffs on 
shirts reduced profits for corn farming in Mexico and for shirt making in 
the US while raising profits for shirt making in Mexico and corn farming in 
the US. But the price of making corn in the US did not include the 
environmental costs of pesticide run off or full price water for 
agricultural use, much less the positive probability that there will be 
future costs of GMO corn seeds. These are real costs of producing corn the 
way we grow it here in the US that are not included in the commercial cost 
of corn. On the other hand, the price of making more shirts in Mexico did
not include the social costs of moving Mexicans out of villages into urban 
slums. In traditional villages Mexicans enjoy centuries old kinship safety 
nets and lower exposure to crime and disease. It is not at all clear that if 
we take these external costs of living in Mexican urban slums and shanty 
towns into account that Mexico’s true comparative advantage is in shirt 
production, and if we take the environmental external costs of modern corn 
farming into account the US actually enjoys a comparative advantage in corn 
production. Therefore, it is not necessarily the case that by promoting more
free trade between the US and Mexico NAFTA has yielded efficiency gains 
rather than losses. (See David Barkin, Distorted Development: Mexico in the 
World Economy, (Westview Press, Boulder CO,  1990, and David Barkin,Rosemary 
Batt, and Billlie DeWalt, Food Crops vs. Feed Crops: Global Substitution of 
Grains in Production, (L. Rienner, Boulder CO, 1990.)

And many in the movement against corporate sponsored globalization can now 
point out that even if there are efficiency gains from freer trade, when the 
terms of trade are set by free market forces there is every reason to 
believe the lion’s share of any efficiency gain will be distributed to the 
country that was better off in the first place -- thereby aggravating global 
inequality. Not only is the empirical evidence that the terms of trade have 
declined for LDCs so overwhelming that even the IMF publishes studies 
confirming this fact, theoretical considerations provide every reason to 
expect this to occur.

Predictable differences in the income elasticity of demand for LDC and MDC 
exports would yield this result. (See Raul Prebisch, The Economic
Development of Latin America and its Principal Problems, United Nations, NY, 
1950, and H. Singer, “The Distribution of Gains Between Investing and 
Borrowing Countries,” American Economic Review 40, 1950: 473-485.) More 
downwardly rigid wages in more highly unionized MDCs as compared to LDCs 
would yield this result. (See Raul Prebisch, Towards a New Trade Policy for 
Development, Report by the Secretary General of UNCTAD, United Nations, NY, 
1964.) And even simple static models where international markets are assumed 
to be competitive and elasticities of demand are all assumed to be infinite, 
predict that a greater share of efficiency gains from specialization and 
trade will go to countries where capital is relatively abundant and a lower 
share will go to countries where labor is relatively abundant. (See Robin 
Hahnel, Panic Rules! Everything You Need to Know About the Global Economy, 
South End Press, Cambridge MA, 1999, appendix B, and John Roemer, “Unequal
Exchange, Labor Migration, and International Capital Flows: A Theoretical 
Synthesis,” in Marxism, Central Planning, and the Soviet Economy, P. Desai, 
ed. (MIT Press, Cambridge MA, 1983.) This important fact about the 
international economy, which mainstream economists love to ignore, implies 
that even if commercial prices did reflect true social opportunity costs 
(which they do not) so that freer trade would invariably produce efficiency 
gains (rather than sometimes yield efficiency losses), promoting more 
international trade at free market prices will almost always aggravate 
economic inequalities between countries.

Many of us are also now adept at pointing out that besides aggravating
economic inequality between countries, mainstream economic theory predicts 
that freer trade will usually aggravate economic inequality within countries 
as well. Heckscher-Ohlin trade theory predicts that freer trade lowers 
payments to relatively scarce factors within national economies and raises
payments to relatively abundant factors. There is no reason to doubt the
essential logic and relevance of this theory which predicts that freer trade
will put downward pressure on unskilled labor compared to skilled labor in
the MDCs, as well as downward pressure on wages in general compared to the
returns to capital – thereby aggravating inequality within MDCs. But there
is good reason to doubt that globalization will produce a beneficial
Heckscher-Ohlin effect reducing income inequalities in LDCs.  Trade
liberalization in agriculture, combined with elimination of restrictions on 
foreign ownership of land in many LDCs, has dislodged so many peasants from 
traditional agricultural pursuits that low skill labor markets have been 
flooded throughout the third world. This effect overwhelms the 
Heckscher-Ohlin effect in LDCs putting downward pressure on rural and urban 
wages thereby increasing returns to employers and landlords and aggravating 
inequality within LDCs as well as MDCs. (See Peter Gottschalk and Timothy 
Smeeding, “Cross-National Comparisons of Earnings and Income Inequality,” in 
the Journal of Economic Literature XXXV, June 1997: 633-87.)

And finally we can cite the most recent theoretical advances in mainstream 
trade theory as witness on our behalf. “New trade theory” and “new growth 
theory” do not predict that free trade necessarily leads to the most rapid 
economic growth for LDCs. Instead the newest theoretical models predict a 
positive role for protectionist measures to guide the development of 
comparative advantages yielding higher long-run growth trajectories. (See 
Paul Krugman, who is no friend to demonstrators against corporate sponsored 
globalization, Rethinking International Trade, MIT Press, Cambridge MA, 
1996). If one prefers simpler models to “cutting edge” models of trade and 
growth theory, there is nothing wrong with the old infant industry argument 
illustrated in every introductory text by a concavity [inward bending dip] 
in a country’s [otherwise bowed out] production possibility curve giving 
rise to a suboptimal local maximum where free trade would keep the country 
producing.

But the most compelling evidence that protectionism can promote economic 
development while free trade does not is empirical rather than theoretical. 
If ever there was need to be reminded that comparative advantages are to be 
created rather than accepted as acts of God, and that protectionism can play 
an important role in changing comparative advantages, empirical studies of 
the relatively few successful cases of national economic development reveal 
that protectionism almost invariably has, in fact, played a crucial positive 
role. The Asian development model responsible for the Japanese economic 
“miracle” of the 1950’s and 1960’s, and for the Asian “miracles” in South 
Korea and Taiwan in the 1980’s and 1990’s (see Alice Amsden, Asia’s Next 
Giant: South Korea and Late Industrialization, (Oxford University Press, NY, 
1989), and in Thailand, and Indonesia in the 1980’s and 1990’s, the German
development model dating back to the the nineteenth century, (see Andrew 
Shonfield, Modern Capitalism, Oxford University Press, NY, 1970), and even 
the US development experience in the ninteenth century all speak volumes to 
the positive role protectionism can play for late comers to the global 
economy. And for all the criticism import substitution has received by 
neoliberals, it remains the case that Latin America has never grown more 
rapidly than during the period when it was most cut off from international 
trade and investment during the Great Depression and World War II and Latin 
governments pursued import substitution policies. Finally, we have as 
evidence the forgotten economic development success stories of the twentieth 
century – the centrally planned “socialist” economies during their heydays.
These economies outperformed their capitalist counterparts for decades and 
stand as further examples of the advantages of protection from international 
markets and limited reliance on politically managed, as opposed to free 
market trade.
_________________________________________________________
This article was first published  by Z/ZNet.
To learn more about the project consult ZNet (http://www.zmag.org)

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