Protect free trade, economies

Posted Jan. 21, 2009, at 7:43 p.m.

As you read this, thousands of ships are plying the high seas, carrying goods produced in developing countries to hundreds of destinations. They carry machinery from China, crude oil from Nigeria, soybeans from Brazil.

Until a few months ago, exports from developing countries were growing rapidly. But now these exports are slowing down, hampered by the international financial crisis that started in the U.S. Falling exports could eventually lead to lower output and personal incomes and to recession.

What should be done? Some analysts claim that the current system of free trade and free movement of capital between countries has caused developing countries’ current problems and damaged their economies. To end this damage, they say, we should abandon the present international arrangements that support free trade. These analysts do not explicitly advocate protectionist trade policies; but the dismantling of the current international system easily could tempt countries down the protectionist path.

These analysts’ claims about “damaged economies” are dead wrong. They fly in the face of the historical record: developing countries’ economies have been growing rapidly — they are not damaged — and free trade has not stopped this growth.

Here is the historical record on developing countries’ economic growth. In the last 40 years, these countries as a group have experienced strong growth in gross domestic product (total economic output) per person, the best single indicator of economic progress. Since 1970, GDP per person in the developing world has increased about 200 percent. For years, Africa did not share in this general progress, but since 2001 it too has grown rapidly.

Such rapid growth is unprecedented. Historical data indicate that during the four centuries before 1950 such widespread and rapid economic growth never occurred. In addition, developing countries have been growing more rapidly than developed ones.

Further, poverty is declining. Since 1990, the proportion of people living in extreme poverty has dropped from 32 percent to 19 percent, according to the United Nations.

Remarkable social progress also has been achieved. Child mortality has dropped, nutrition has improved, and school enrollment has risen. For example, UN data show that child mortality has fallen by 60 percent since 1960 and it has fallen in all regions of the developing world, including Africa.

This is not how damaged economies perform.

As developing countries have enjoyed this rapid progress, they also have rapidly expanded their involvement in the international economy. Since 1950, world trade, amazingly, has grown 27-fold, and the developing world has shared in this rapid growth. On top of this, the flow of capital into developing countries has risen by leaps and bounds — foreign investment in developing countries since 1970 has risen four times as fast as their rapidly rising GDPs.

So the critics are ignoring history: Developing countries have not been severely damaged by international trade and investment.

I believe it is no coincidence that this progress was accompanied by an impressive rise in trade and investment; instead, the progress took place in large part because of the rise. A recent detailed study by the economists Gonzalo Salinas and Ataman Aksoy, of Oxford University and the World Bank, supports this conclusion.

History also demonstrates the importance of guarding against protectionism. During the Great Depression of the 1930s, protectionism — the dismantling of free trade — badly hurt the entire world. It contributed to the spread of unemployment from country to country, to diminished output, and to greater poverty.

In light of this history, the world’s policymakers have a task: Instead of dismantling the international system that sustains free trade, they should protect it.

A second, equally important, task is to prevent another severe international financial crisis, whether it originates in the U.S. or elsewhere. This will require reforms. We need to change the rules governing banking in all countries and also those governing international capital flows. These reforms should not be designed to hamper international financial flows, but to stabilize them.

So the world’s policymakers should scorn those who scorn history. Let’s keep those thousands of ships on the seas and let’s help developing countries return to booming export growth. This will help Americans — though that is another story — and it will greatly benefit people in developing countries.

Edwin Dean, an economist and seasonal resident of Vinalhaven, writes monthly about economic issues.

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