Trade liberalization has had both positive and negative effects on developing countries. An evident increase in trading occurred during the 1980s and 1990s in the developing countries as trade reforms were both broadened and secured after a decrease of protectionism in the 1970s. More exactly in South Asia, East Asia, Latin America, Eastern Europe, and somewhat in the Middle East and Africa (Trade Liberalization: Why So Much Controversy?, 2005, pg. 133). Twenty-two percent of countries in 1960 had open trade policies, which rose to ninety-three percent in 2000 (McCartney, 2015, pg. 62). For some countries, such as China, trade liberalization has brought upon economic growth and an increase in quality of life, while in other countries, trade liberalization reforms have failed as the results were not as positive as had been hoped, such as in Pakistan. A successful result of trade liberalization would include most, if not all, of the following criteria: reduced levels of poverty, reduced income inequality in the country and compared to other countries, economic growth, and a more stable political institution. In its best implementations, trade liberalization results in increased investments and competition. Trade liberalization can have positive effects for a whole country while simultaneously having negative effects on some industries and sectors (Trade Liberalisation, 2016). The effects of trade liberalization on poverty depend on its effects on employment and prices. It can create new opportunities in the export sector, but only if the sector is already established to a certain extent (Lopez, Thirwall, pg. 8).
Pakistan is an example of trade liberalization failing to bring upon the promises of economic growth and prosperity in the country. In the late 1980s, along with many other developing countries, Pakistan’s international trade was liberalized. It did not lead to substantial export led growth as was thought; “Pakistan’s degree of involvement with the world economy was little higher in 2015 than it had been in 1990” (McCartney, 2015, pg. 60). The outcome was disappointing in terms of economic growth and export growth as well. It was thought at the time that tariffs inhibited the pressure on Pakistan’s newly emerging industrial sectors that was necessary to compete against imports by improving their price competitiveness and quality. There was also a notion that the use of tariffs and quotas allowed for political corruption (McCartney, 2015, pg. 62). Trade liberalization was thought to encourage more imports into the country in an effort to “compel producers to upgrade and become more efficient and so enable them to expand and to export.” (McCartney, 2015, pg. 62). GDP averaged at 6 percent between 1961 and 1991, but only averaged at 4.3 percent between 1992 and 2011. Pakistan’s exchange rate after its independence was fixed and overvalued to lower the cost of raw materials and imports, but when trade was liberalized, Pakistan had to devalue their exchange rate to prevent an influx of cheaper consumer imports. Pakistan implemented trade laws that were favourable for exporters, yet growth after 1990 remained low. Matthew McCartney states that there are specific circumstances where trade liberalization could be more beneficial for Pakistan; there would have to be laws in place to promote private investment, government revenue from trade would have to be more heavily redirected into public investment, and if liberalization would result in industrial and technological enhancement (McCartney, 2015, pg. 71). The effects of trade liberalization in Pakistan have been not been substantial; the promised effects of rapid economic growth and prosperity did not occur.
An example of trade liberalization having incredibly positive effects on developing countries is the case of the East Asian Miracle. These countries, which include a majority of developing countries, are Hong Kong, China, Singapore, South Korea, Malaysia, Thailand, Taiwan, Indonesia and Japan. They have each had varying rates of growth, but there has been an overall increase across the board. In this case, trade openness allowed for rapid growth and poverty reduction. These countries strived for an “outward-oriented strategy of development, whose outcome is reflected in the rising shares of exports and imports as a proportion of these economies’ GDP.” (Quibria, 2002, pg. 23). This allowed for higher incomes for citizens and improved quality of life. These countries developed policies to have competitive exchange rates which in turn allowed for exporters to have easy access to international import resources, as well as investing in new institutions such as export processing zones. By the 1990s, tariff rates continued to decrease in these countries, falling to below five percent in South Korea, Indonesia, and Malaysia. There are various conclusions as to why these East Asian countries were more successful after their trade liberalization compared to other developing countries, such as Pakistan. One of these theories is that the increased ability to import resources allowed for new technology to enter the countries, allowing them to “circumvent the diminishing returns associated with increased accumulation of capital.” (Quibria, 2002, pg. 26), this new technology further allowed for them to keep up with the increasingly modern technology of Western countries. Another theory is that the East Asian countries’ outward-directed policies allowed them to avoid inadequate domestic demand and inadequate availability of foreign exchange which can limit economic growth.
China’s trade liberalization has allowed its economy to grow quickly in the past few decades, and its poverty rates show a favourable correlation between the two. From 1981 to 2010, sixty-eight million people were lifted out of extreme poverty. In 1980, China’s extreme poverty rate was eighty-four percent and in 2013 it was ten percent (The Economist, 2013). China has perhaps the most open economy compared to other emerging economies. For China, their open economy allowed for increased competition in the domestic market and that has been particularly important in the transformation of its economy.
A study looking at Bolivia’s economic growth, financial development and trade openness was examined from 1940-2010. Throughout this time period, Bolivia experienced vast unsteadiness in terms of their political and economic states, such as the military dictatorship in the 1940s, the increased nationalization of major sectors and the first bout of serious inflation in the 1950s and 1960s, the growth in the 1970s that brought forth lots of foreign debt, and the hyperinflation in the 1980s (Bojanic, 2012, pg. 55). During the late 1980s and 1990s, Bolivia made an effort to follow other developing countries in liberalizing their trade, in contrast to their previous protectionist policies. Around 2000, heavy backlash began against these trade reforms and they were reversed. Today in Bolivia, income inequality and unemployment is high, and it is the poorest country in South America. In the 1990s, following the reform of many policies targeted at a more outward-oriented economy, Bolivia saw economic growth. These policies included lowering tariff rates to ten percent, decreasing the originally very overvalued exchange rate, and the transfer of previously state-owned sectors and industries into privately-owned sectors and industries. Bolivia’s economy was fairly stagnant between 1970 and 1985. When the trade reforms were established, Bolivia’s GDP and economy started to grow slightly, as well as both imports and exports increasing. One of the goals for the reforms was to diversify their exports, which has occurred; in 2004 no exporting sector was over forty percent of total exports. This indicates that the trade liberalization had positive effects on Bolivia’s economy. Bolivia’s trade liberalization did not yield the exact results that were expected and that were occurring in other developing countries such as the East Asian countries discussed earlier. It can be understood that the Bolivian trade reforms were not perfectly suited for the country’s initial circumstances and opportunities which prevented the rapid economic growth that was expected.
Major international institutions such as the IMF and World Bank believe that developing countries need to liberalize trade in order to grow their economies and benefit their citizens. Under the right circumstances, these goals can be achieved by means of trade liberalization as is indicated by the success of the East Asian countries discussed earlier. However, as the examples of Pakistan and Bolivia have shown, trade liberalization does not always bring forth these promises. Lopez and Thirwall argue in ‘Has Trade Liberalisation in Poor Countries Delivered the Promises Expected?’ that the promises of trade liberalization are completely false and that globalization and trade reform has not had positive effects, especially on the world’s poorest. For example, they state that the poverty declines in China in the 1980s were not because of trade liberalization’s supposed positive effects, but because of agricultural reform. They also state that liberalized trade can increase poverty by increasing unemployment levels, citing that after NAFTA came into effect, two million Mexican maize farmers lost their jobs because they could not keep up with the prices of subsidized maize farming in the United States (Lopez, Thirwall, 2009, pg. 8). However, Lopez and Thirwall also state that the effects of trade liberalization depend on how the trade reforms affect employment and prices. This supports the idea that trade liberalization is not a uniform transition and it can have very different outcomes.
In conclusion, trade liberalization can have varying effects on a developing country’s poverty rate, income inequality rate, employment rate, growth rate, and level of political stability. Matthew McCartney states that trade policy reform is only useful when it prompts workers to move away from less productive sectors to more productive sectors that are more export-oriented. This shift requires more government investment to account for the low domestic savings. If a country’s government does not have the capability to invest like this, or if it does not invest accordingly, it is likely that it will result in high foreign debt. Investment rates of approximately thirty percent and above of a country’s GDP are usually correlated with rapid economic growth (as seen in some parts of Asia). Utkulu and Ozdemir (2004) found that it is plausible for there to be a positive association between open trade and economic growth, pointing out that “a reduction in trade distortions is linked to growth, highlighting the importance of trade policy on the economic performance of that country” (Bojanic, 2012, pg. 54). The impact trade liberalization can have on a developing country depends on the country’s “level of market integration, relative terms of trade, bargaining power in the world economy, the composition of their economies and the degree of comparative advantage in different sectors” (Pereznieto, Jones, 2005). Not all developing countries can open their economies and liberalize their trade and expect the same results as another country. Policy makers have to be able to identify which steps are best for their own country based on the initial economy, institutional constraints, and starting-out conditions. It may be better for one country to only open up certain sectors to liberalized trade, or it could be better for others to establish export processing zones, like in China (Trade Liberalization: Why So Much Controversy?, 2005, pg. 133).