TRADE OPENNESS: A KEY PIECE IN THE PUZZLE

Increased economic freedom in trade involves lower trade barriers in developing and developed countries alike, leading to lower costs and greater efficiency as entrepreneurs determine the activities in which they have a global or regional competitive advantage. These gains translate into increased economic growth and per capita income.

To measure a country's willingness to interact with the global economy, The Heritage Foundation developed a "Trade Openness Index" from a subset of four of the 10 factors used in the Index of Economic Freedom: trade policy, capital flows and foreign investment, property rights, and regulation. These four factors were deemed most influential over decisions to engage in international transactions.4 (See Chart 3.)

Analysis of the relationship between trade openness and per capita GDP reveals that open economies have an average GDP per capita over twice that of mostly open economies, mostly open economies have a GDP per capita seven times that of mostly closed economies on average, and mostly closed economies have a per capita GDP a bit less than twice that of closed economies.

The relationship between trade openness as measured by the Index of Economic Freedom and higher per capita GDP holds for sub-Saharan Africa. Mostly open economies in sub-Saharan Africa have a GDP per capita three times that of mostly closed economies on average, and mostly closed economies have a per capita GDP a bit less than twice that of closed economies. (See Chart 4.) Unsurprisingly, more open economies on average have higher levels of trade as a percentage of GDP. (See Chart 5.)

The relationships I have outlined are supported by economic analysis. For instance, one World Bank study found that increased integration into the world economy from the late 1970s to the late 1990s by 24 developing countries with over 3 billion people led to higher growth in income. These countries achieved average growth in income per capita of 5 percent per year in the 1990s. 5

By contrast, the non-globalizing nations have seen poor economic growth of only 1.4 percent on average in the 1990s, and many saw negative growth. The losers in the age of globalization are the countries that refuse to embrace the international market.

What is perhaps more interesting are the conclusions reached on the impact of globalization on issues often raised by anti-globalization activists. The study found that "In the long run workers gain from integration [with the world economy]. Wages have grown twice as fast in globalized developing countries than in less globalized ones...."6 "Despite widespread fears," the study continued, "there is no evidence of a decline in environmental standards. In fact, a recent study of air quality in major industrial centers of the new globalizers found that it had improved significantly in all of them."7

The most important conclusion, however, is that globalization is good for the poor. A related World Bank study found that increased growth resulting from expanded trade "leads to proportionate increases in incomes of the poor... globalization leads to faster growth and poverty reduction in poor countries."8 Another fact little remarked upon is that the absolute number of people in poverty (less than $1 a day) has declined since 1980 by some 200 million individuals.

LESSONS FOR DEVELOPMENT

The important lessons here are plain. The economic futures of developing countries lie predominantly in their own hands through the policies that they choose to adopt and enforce. If countries want to increase per capita GDP, they should adopt policies that are most likely to achieve that result: economic freedom and the rule of law.

It is economic freedom and the rule of law that catalyze economic growth. It is the increased wealth resulting from economic freedom that allows parents the luxury of educating their children instead of making them work to help provide for their families; that enables individuals to value green spaces for their aesthetic value rather than their potential as fields for crops or trees for fuel; that permits the workforce to worry about the quality of the work environment rather than the lack of employment; and that gives families the means to engage in preventive health practices that lead to longer lives.

Important achievements, such as increased literacy and lower infant mortality, can all be for naught if the government abandons the rule of law and sound economic policy. The most obvious example of this fact is Zimbabwe, held up by development agencies as a model of development for the region until President Robert Mugabe's policies destroyed the economy.

The tragic situation in Zimbabwe also illustrates the importance of the rule of law to economic freedom. The rule of law serves as the supporting structure of an economy, without which it cannot operate profitably. It ensures entrepreneurs that (1) policies will have lasting power and can be changed only through transparent, widely recognized procedures, permitting an environment conducive to long-term investment; (2) the rules will apply equally to all, rather than exempting some or being subject to change at the behest of the powerful; and (3) they will have legal recourse if policies unlawfully affect their activities, thereby reducing the risk of investments.

The fact that development lies predominantly in the hands of developing country governments does not mean that there is no role for developed countries. Economic assistance can help growth in countries with good economic policies and institutions--countries that embrace economic freedom and the rule of law. Assistance should focus on rewarding good performers. This is the essence of President George W. Bush's Millennium Challenge Account proposal.

Developed nations should also reduce trade barriers to developing nations. While developed countries maintain low average trade barriers, their highest trade barriers tend to apply to the goods that developing countries export, such as textiles and agriculture products. Similarly, many developed countries provide large subsidies for agricultural production, which acts as an indirect trade barrier. Agricultural subsidies encourage production and put downward pressure on agricultural prices, which makes it difficult for developing countries to compete.

The World Bank and Oxfam estimate that trade barriers by developed countries cost developing countries $100 billion a year--twice the amount they receive in official development assistance.9 Michael Moore, former Director-General of the World Trade Organization, goes further, estimating that removing all tariff and non-tariff barriers "could result in gains for developing countries in the order of $182 billion in the services sector, $162 billion in manufactures and $32 billion in agriculture."10

CONCLUSION

Removing barriers to trade is one of the most important actions that developed countries can take to aid development in poor nations and should be pursued in all possible ways. The United States has taken some impressive first steps through the African Growth and Opportunity Act, which appears to have increased trade and investment between eligible nations and the U.S. But efforts to open developed country markets to developing country goods and services must increase, particularly through the WTO negotiations, if developing countries are to maximize their potential for growth.

In short, developed countries can help by lowering their trade barriers and by focusing development assistance to those countries that are making improvements in economic freedom. But, of utmost importance, developing countries must make their own internal reforms by implementing policies that promote economic freedom, that promise economic growth. Only then will developing countries be on the path to economic development.

Brett D. Schaefer is Jay Kingham Fellow in International Regulatory Affairs in the Center for International Trade and Economics at The Heritage Foundation. These remarks were delivered at a conference on "AGOA: The NGO Perspective on Implementation, Progress and Future Objectives" in Phoenix, Mauritius, on January 13-17, 2003.