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Countries that react to growth opportunities by opening up will enjoy sustained success

Arvind Panagariya

FT: Letter, May 10, 2004

Sir, Martin Wolf ("How managing growth can consign poverty to history", May 5) is right on the mark when he points out that trade openness is a necessary, even if not sufficient, condition for sustained, rapid growth. Ironically, some globalisation advocates have ended up hurting their cause by suggesting indirectly that trade openness by itself is sufficient to raise the growth rate. Such a suggestion is implicit, for example, in the claims, made on the basis of cross-country econometric studies, that an X per cent reduction in trade barriers will lead to a Y per cent increase in the growth rate. Critics are then readily able to counter such claims by citing numerous examples of countries in Africa and Latin America that lowered barriers during the 1980s and 1990s but failed to push up the growth rate.

Nonetheless, it remains true that the countries that have grown rapidly on a sustained basis have almost always done so while experiencing very high growth in exports and imports. In my recent paper "Miracles and Debacles: In Defense of Trade Openness", I consider virtually all countries that have grown at rates of 3 per cent or more in per capita terms on a sustained basis between 1961 and 1999. I consistently find that these growth miracles are accompanied by rapid growth in trade. In terms of trade policies, either low or declining trade barriers consistently accompany the miracle growth rates. It is rare to find examples of countries that were highly protected and managed to grow rapidly on a sustained basis without lowering the level of protection.

In parallel, I look at growth debacles - cases of stagnation or declining per capita incomes over long periods. Contrary to the globalisation critics, I find little evidence to support the claim that rapid growth in imports is a principal cause of growth debacles. Generally, very low or negative growth in imports accompanies growth debacles.

The message from my research is loud and clear: we may not know precisely what it is that triggers growth but we do know that countries that are open or react to growth opportunities by opening up (as South Korea did, beginning in the early 1960s) are successful in sustaining growth and those that choose autarkic policies (as India did between 1950 and 1980) are condemned to low growth even when they manage to raise their savings and investment rates and achieve macroeconomic stability.