3. When should an economy open? One way to address this question is to review the experiences of four Asian economies that, as summarized ...
3. When should an economy open? One way to address this question is to review the experiences of four Asian economies that, as summarized in table 7, offer practical demonstrations of the competing approaches. Hong Kong (China) committed to the market strategy while it was still a colony of the United Kingdom of Great Britain and Northern Ireland, with no barriers to trade and very little other state intervention in the market. Singapore did experiment briefly with import-substitution policies upon achieving its independence, but quickly moved towards openness. By contrast, Japan and then the Republic of Korea pursued essentially mercantilist strategies for most of the twentieth century, using import restrictions and other instruments to promote favoured industries. It was only after they achieved high levels of development, and also came under increasing pressure from their partners, that these two countries adopted more market-oriented policies.
The data show that all four of these economies would be considered successful by any reasonable standard, and all are now predominantly dedicated to free trade (with the notable exception of protection of agricultural sectors for Japan and the Republic of Korea). They are all leaders in the exportation of high-technology goods, and none of them impose high barriers to imports of non-agricultural goods. All of them are actively en20 TRADE POLICY FRAMEWORKS FOR DEVELOPING COUNTRIES: A MANUAL OF BEST PRACTICES gaged in multilateral trade negotiations, and all except Hong Kong (China) are also involved in several regional initiatives. The economies differ in the degree to which they depend on trade, with the share of trade in GDP being several multiples higher in Hong Kong (China) and Singapore than it is in Japan and the Republic of Korea, and also in the extent to which they complement trade openness with other pro-market policies. Depending on a person’s perspective, Hong Kong (China) and Singapore could be seen either as pioneers or as exceptional cases (sometimes called “black swans”). The conclusions that might be reached from the evidence depend on the aspect that are considered most important. The strongest argument from a Smithian perspective comes in the final results: Income levels in Hong Kong (China) and Singapore are far above those in Japan and the Republic of Korea, and the speed with which they developed is even more impressive than what their East Asian neighbours achieved. By contrast, the strongest argument from a Listian perspective comes in the initial differences: Hong Kong (China) and Singapore are more like city States than large and diverse countries, have virtually no agricultural hinterland, generally depend on others for national defence, and enjoy the aforementioned special advantages of islands, isthmuses and peninsulas. There are few other polities, whether in modern times (e.g. Dubai and Macao, China) or in history (e.g. Athens and Venice), that might be directly compared to them. It could therefore be argued that they offer not a model that most other developing countries can reasonably hope to emulate, but a pair of sui generis cases that ultimately rest on special circumstances. It may not be possible for other developing countries to replicate all of the elements that went into the success stories of Hong Kong (China) and Singapore, but there are some elements of their formula that merit close attention. They both score considerably higher on the index of economic freedom than do Japan and the Republic of Korea. Countries’ place on this index, which is based on 10 quantitative and qualitative factors grouped into four broad categories,6 correlate closely with their levels of income (table 8). Hong Kong (China) and Singapore are the only two developing economies classified as fully “free” on this index
distinction shared by only three developed countries (i.e. Australia, New Zealand and Switzerland). Average incomes in these two economies are 18.9 times higher than they are in the developing countries that are classified as mostly unfree or repressed. There is also a stepped progression in which incomes are higher in the group of moderately free countries than they are in the least open, and higher still among those that are classified as mostly free. It is important to note that the correlation between income and a country’s place on this index is stronger than the one observed earlier with respect to income and trade dependence. This implies that trade policy is best seen not as a wholly independent variable, but as a component in a wider set of economic policies. Taking the broadest view, a country’s approach to trade is one aspect of the largest decision that every Government must make in its economic policies, namely the roles that it will assign to the market and to the state in determining what is produced, consumed, imported, and exported. That point is equally valid for those countries that give a leading Table 8. Relationship between economic freedom and income (Average GDP per capita for non-oil developing countries) Sources: Economic freedom based on Heritage Foundation data at http://www.heritage.org/index/ranking; GDP per capita based on World Bank data at http://data.worldbank.org/indicator/NY.GDP.PCAP.CD. Free Mostly free Moderately free Mostly unfree Africa Income: — Number: 0 Income: $7 739 Countries: 2 Income: $3 758 Countries: 8 Income: $1 777 Countries: 35 Americas Income: — Countries: 0 Income: $12 525 Countries: 4 Income: $8 332 Countries: 13 Income: $5 313 Countries: 9 Asia and the Pacific Income: $47 656 Countries: 2 Income: $38 524 Countries: 3 Income: $10 257 Countries: 6 Income: $2 561 Countries: 19 Total Income: $47 656 Countries: 2 Income: $20 128 Countries: 9 Income: $7 405 Countries: 27 Income: $2 519 Countries: 63 [I]mport substitution implies raising costs and, perhaps temporarily, reducing efficiencies plus domestic availability of the commodities concerned. If temporary, these effects could be absorbed, presumably, but if they are not temporary then they risk compounding the horizontal deficits listed here, and more. It is difficult to see how that would promote Namibia’s sustainable integration into the global economy on a long-term competitive basis. Trade Policy Framework: Namibia (2016) role to the Government, others that prefer to let the market decide, and those that are in a transition from one emphasis to the other. The observed relationship underlines the view that a modern, developed economy that aims to compete effectively in the global market will have at its base efficient and well-governed institutions that facilitate, but do not seek to control, the development of private enterprise. What remains at issue is how far, and for how long, a country should rely on governmental direction and intervention to achieve that level of development. That is a core question to be answered in each TPF.
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