Market Liberalization or Free Trade?

Perhaps, if you ask this question a World Bank official or somebody from the WTO, the answer will be: “But it is the same thing!” Isn’t it really? I would say, it’s not.

The kind of market liberalization advocated by the Bretton Woods institutions contains actually two parts: the actual free trade (i.e., trade of goods) and the financial market liberalization. While the former bears above all problems of understanding, as I will argue, the latter is a problem of its own.

The problem with free trade in the form it seems to be advocated by WTO, IMF and WB, is the fact that it is called for very one-sided. While there is the premise that free trade will benefit developing countries, and they therefore should open their markets, most developed countries still remain at least partly engaged in protectionism. The reason for the latter is straightforward – in contrast to poorer countries, the industrial ones are able to use various kinds of trade protection (be it tariffs or quotas, be it safeguards or subventions) without harming themselves (at least in the short run). So what should be done instead of pushing for the developing countries to open their markets fully, while they have not enough access to the markets in the developed world? There is an interesting proposal given by Joseph Stiglitz inter alia with co-author Andrew Charlton in their 2006 book “Fair Trade for All. How Trade Can Promote Development”: it is, in short, a system in which every country in the world opens its (goods) markets fully to all countries being poorer. Of course, there is the question of a way of asserting, who is poorer and why. But the principle remains the same – regardless of the particular formula, African countries, e.g. would get full access to American markets. And you can be sure that the latter can bear it. Thus the developing world would be benefited by free trade, without being harmed by the fact that the markets are open only in one direction. This, of course, would mean that abolishment of most agricultural subvention schemes in the industrial countries (particularly the US and the EU) would be substantial.

Let’s come to the second point. Here the answer is easier: there is no empirical evidence that financial markets liberalization is in any way beneficial to developing countries. It rather is a source of volatility and thus danger to the real economy. Among others, there are two reasons for that: first, financial markets in the developing countries are mostly not as far developed as those in the “West” – but in the case of liberalization they must bear the same risks and complexity (and the 2008 crisis have shown that even industrial countries aren’t fully able to bear them). Second, in the case of a crisis, developing countries’ States are mostly too weak to rescue their economies. Compare the 2008 crisis in Europe or Northern America with, e.g., the East Asian crisis on the eve of the 21st century. The former did far better – also because they were able to proceed as they wanted, not being dependent on the advise of the IMF.

One point still: what also is important and seemingly often forgotten by the IFIs, is the fact that free trade doesn’t mean growth and development by itself. Without structural change it won’t be helpful. Consider countries whose economies rely on natural resources export. No matter how free the trade in this area be – oil, coal, uranium etc. don’t bring real growth (i.e., employment, higher living standards and more well-being) with them. And that a system like that proposed by Joseph Stiglitz can be helpful in such a structural change, was advocated already by the 19th century’s economist Friedrich List and impressively shown by the Asian Tigers.

Thus, the answer is: real free (and fair) trade, yes. Market liberalization, especially the financial one, no.

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