chapter  1
16 Pages

Trade liberalisation and poverty in South Asia: reforms, stylised facts and preview: Prema-chandra Athukorala, Jayatilleke S. Bandara and Saman Kelegama

ByPREMA-CHANDRA ATHUKORALA, JAYATILLEKE S. BANDARA

The role of trade policy1 in economic development and poverty reduction in developing countries has remained at the centre of the debate on economic policy making in developing countries. Trade policy, through its influence on the levels and composition of imports and exports, impacts on the structure of production and pattern of development of all economies. The emphasis placed on trade policy is usually very high in developing countries for reasons associated with their shared economic backwardness. The typical developing country adopts its development strategy from an initial position characterised by limited capacity to produce manufactures and dependence of domestic firms on imported inputs and technology for their ability to produce output. Therefore the nature of the trade regime, in particular the mechanism used to repress import demand, could have important implications for resource allocation, efficiency and income distribution in the economy. In the 1950s and 1960s there was a broad consensus in the economics pro-

fession that the basic strategy for development should be based on ‘import substitution’ (IS) – the promotion of industries oriented towards the domestic market by using import restrictions, or even import prohibition, to encourage the replacement of imported manufactures by domestic products. The case for the import-substitution strategy was so widely accepted at the time that ‘developing-country exemptions’ were even incorporated into the General Agreement on Tariff and Trade (GATT),2 enabling developing countries to pursue protectionist policies at a time when developed countries were removing their tariffs to increase the openness of their economies. Moreover, the two Bretton Woods institutions (the International Monetary Fund and the World Bank) and other international organisations with commitment to economic development in developing countries generally supported the basic thrust of the import-substitution policy (Krueger 1997). The period from about the late 1960s has witnessed a decisive shift in

development thinking and policy away from the entrenched importsubstituting views and in favour of outward-orientated (export-oriented) trade strategy. The case for this policy was based on a number of multi-country

studies of the contrasting experiences of developing countries under alternative trade policy regimes.3 Policy advocacy based on this ‘neo-classical revival in the applied trade and development literature’ (Diaz-Alejandro 1975: 94) soon became an integral part of aid conditionality of the World Bank and the International Monetary Fund (IMF) and the major bilateral donors. Reflecting this new ideological orientation (popularly known as ‘the Washington Consensus’), coupled with the influence of aid conditionality, trade liberalisation became the linchpin of policy reforms in many countries around the world. The new orthodoxy in favour of trade liberalisation also provided the setting for dismantling of trade concessions for developing countries under the trade policy reforms in the Uruguay Round. The past two decades have seen the emergence of a strong revisionist school

of thought in response to the lacklustre outcome of policy reforms in many countries. The revisionists do accept that the old-style import-substitution strategy bordering on autarchy has outlived its usefulness and that growth prospects for developing countries can be greatly enhanced through integration into the global economy. But they argue that trade can help achieve selfsustained growth with poverty alleviation only through cautious liberalisation combined with the right kind of government action to make ‘openness work’.4