Trade and Growth: Takeoff in Asia
As we have seen, by the 1970s there was widespread disillusionment with import-substituting
industrialization as a development strategy. But what could take its place?
A possible answer began to emerge as economists and policy makers took note of
some surprising success stories in the developing world—cases of economies that
experienced a dramatic acceleration in their growth and began to converge on the incomes
of advanced nations. At first, these success stories involved a group of relatively small
East Asian economies: South Korea, Taiwan, Hong Kong, and Singapore. Over time,
however, these successes began to spread; today, the list of countries that have
experienced startling economic takeoffs includes the world’s two most populous nations,
China and India.
Figure 11-3 illustrates the Asian takeoff by showing the experiences of three countries:
South Korea, the biggest of the original group of Asian “tigers”; China; and
India. In each case, we show per-capita GDP as a percentage of the U.S. level, an
indicator that highlights the extent of these nations’ economic “catchup.” As you can
see, South Korea began its economic ascent in the 1960s, China at the end of the 1970s,
and India circa 1990.
What caused these economic takeoffs? Each of the countries shown in Figure 11-3
experienced a major change in its economic policy around the time of its takeoff. This new
policy involved reduced government regulation in a variety of areas, including a move
266 PART TWO International Trade Policy
1955
1958
1961
1964
1967
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
2009
India
South Korea
China
2
4
8
16
32
64
GDP per capita as % of U.S. level
Figure 11-3
The Asian Takeoff
Beginning in the 1960s, a series of economies began converging on advanced-country levels of income.
Here we show GDP per capita as a percentage of its level in the United States, using a proportional scale to
highlight the changes. South Korea began its ascent in the 1960s, China at the end of the 1970s, and India
about a decade later.
Source: Total Economy Database.
toward freer trade. The most spectacular change was in China, where Deng Xiaoping, who
had taken power in 1978, converted a centrally planned economy into a market economy
in which the profit motive had relatively free rein. But as explained in the box on page 267,
policy changes in India were dramatic, too.
In each case, these policy reforms were followed by a large increase in the economy’s
openness, as measured by the share of exports in GDP (see Figure 11-4). So it seems fair to
say that these Asian success stories demonstrated that the proponents of import-substituting
industrialization were wrong: It is possible to achieve development through export-oriented
growth.
What is less clear is the extent to which trade liberalization explains these success
stories. As we have just pointed out, reductions in tariffs and the lifting of other import
restrictions were only part of the economic reforms these nations undertook, which makes
it difficult to assess the importance of trade liberalization per se. In addition, Latin
American nations like Mexico and Brazil, which also sharply liberalized trade and shifted
toward exports, did not see comparable economic takeoffs, suggesting at the very least that
other factors played a crucial role in the Asian miracle.
So the implications of Asia’s economic takeoff remain somewhat controversial. One
thing is clear, however: The once widely held view that the world economy is rigged against
new entrants and that poor countries cannot become rich have been proved spectacularly
wrong. Never before in human history have so many people experienced such a rapid rise in
their living standards.
CHAPTER 11 Trade Policy in Developing Countries 267
Exports as a percentage of GDP
0
10
20
30
40
50
60
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
India
South Korea
China
Figure 11-4
Asia’s Surging Trade
India, with a population of more than 1.1 billion people,
is the world’s second-most-populous country.
It’s also a growing force in world trade—especially
in new forms of trade that involve information rather
than physical goods. The Indian city of Bangalore
has become famous for its growing role in the global
information technology industry.
Yet a generation ago, India was a very minor
player in world trade. In part this was because the
country’s economy performed poorly in general:
Until about 1980, India eked out a rate of economic
growth—sometimes mocked as the “Hindu rate of
growth”—that was only about 1 percentage point
higher than population growth.
This slow growth was widely attributed to the stifling
effect of bureaucratic restrictions. Observers
spoke of a “license Raj”: Virtually any kind of business
initiative required hard-to-get government permits,
which placed a damper on investment and innovation.
And India’s sluggish economy participated little in
world trade. After the country achieved independence
in 1948, its leaders adopted a particularly
extreme form of import-substituting industrialization
as the country’s development strategy:
India imported almost nothing that it could produce
domestically, even if the domestic product was far
more expensive and of lower quality than what
could be bought abroad. High costs, in turn,
crimped exports. So India was a very “closed”
economy. In the 1970s, imports and exports averaged
only about 5 percent of GDP, close to the
lowest levels of any major nation.
Then everything changed. India’s growth accelerated
dramatically: GDP per capita, which had
India’s Boom
268 PART TWO International Trade Policy
SUMMARY
1. Trade policy in less-developed countries can be analyzed using the same analytical
tools used to discuss advanced countries. However, the particular issues characteristic
of developing countries are different from those of advanced countries. In particular,
trade policy in developing countries is concerned with two objectives: promoting
industrialization and coping with the uneven development of the domestic economy.
2. Government policy to promote industrialization has often been justified by the infant
industry argument, which says that new industries need a temporary period of protection
against competition from established industries in other countries. However, the
infant industry argument is valid only if it can be cast as a market failure argument for
intervention. Two usual justifications are the existence of imperfect capital markets
and the problem of appropriability of knowledge generated by pioneering firms.
3. Using the infant industry argument as justification, many less-developed countries
have pursued policies of import-substituting industrialization in which domestic
industries are created under the protection of tariffs or import quotas. Although these
policies have succeeded in promoting manufacturing, by and large they have not
delivered the expected gains in economic growth and living standards. Many economists
are now harshly critical of the results of import substitution, arguing that it has
fostered high-cost, inefficient production.
4. Beginning about 1985, many developing countries, dissatisfied with the results of
import-substitution policies, greatly reduced rates of protection for manufacturing. As
a result, developing-country trade grew rapidly, and the share of manufactured goods
in exports rose. The results of this policy change in terms of economic development,
however, have been, at best, mixed.
5. The view that economic development must take place via import substitution, and the
pessimism about economic development that spread as import-substituting industrialization
seemed to fail, have been confounded by the rapid economic growth of a number of Asian
economies. These Asian economies have grown not via import substitution but via
exports. They are characterized both by very high ratios of trade to national income and
by extremely high growth rates. The reasons for the success of these economies are highly
disputed, with much controversy over the role played by trade liberalization.
risen at an annual rate of only 1.3 percent from 1960
to 1980, has grown at close to 4 percent annually
since 1980. And India’s participation in world trade
surged as tariffs were brought down and import
quotas were removed. In short, India has become a
high-performance economy. It’s still a very poor
country, but it is rapidly growing richer and has
begun to rival China as a focus of world attention.
The big question, of course, is why India’s growth
rate has increased so dramatically. That question is the
subject of heated debate among economists. Some
have argued that trade liberalization, which allowed
India to participate in the global economy, was crucial.*
Others point out that India’s growth began accelerating
around 1980, whereas the big changes in trade
policy didn’t occur until the beginning of the 1990s.†
Whatever caused the change, India’s transition
has been a welcome development. More than a
billion people now have much greater hope for a
decent standard of living.
*See Arvind Panagariya, “The Triumph of India’s Market Reforms: The Record of the 1980s and 1990s.” Policy Analysis
554, Cato Institute, November 2005.
†See Dani Rodrik and Arvind Subramanian, “From ‘Hindu Growth’ to Productivity Surge: The Mystery of the Indian
Growth Transition,” IMF Staff Papers 55 (2, 2005), pp. 193–228.
As we have seen, by the 1970s there was widespread disillusionment with import-substituting
industrialization as a development strategy. But what could take its place?
A possible answer began to emerge as economists and policy makers took note of
some surprising success stories in the developing world—cases of economies that
experienced a dramatic acceleration in their growth and began to converge on the incomes
of advanced nations. At first, these success stories involved a group of relatively small
East Asian economies: South Korea, Taiwan, Hong Kong, and Singapore. Over time,
however, these successes began to spread; today, the list of countries that have
experienced startling economic takeoffs includes the world’s two most populous nations,
China and India.
Figure 11-3 illustrates the Asian takeoff by showing the experiences of three countries:
South Korea, the biggest of the original group of Asian “tigers”; China; and
India. In each case, we show per-capita GDP as a percentage of the U.S. level, an
indicator that highlights the extent of these nations’ economic “catchup.” As you can
see, South Korea began its economic ascent in the 1960s, China at the end of the 1970s,
and India circa 1990.
What caused these economic takeoffs? Each of the countries shown in Figure 11-3
experienced a major change in its economic policy around the time of its takeoff. This new
policy involved reduced government regulation in a variety of areas, including a move
266 PART TWO International Trade Policy
1955
1958
1961
1964
1967
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
2009
India
South Korea
China
2
4
8
16
32
64
GDP per capita as % of U.S. level
Figure 11-3
The Asian Takeoff
Beginning in the 1960s, a series of economies began converging on advanced-country levels of income.
Here we show GDP per capita as a percentage of its level in the United States, using a proportional scale to
highlight the changes. South Korea began its ascent in the 1960s, China at the end of the 1970s, and India
about a decade later.
Source: Total Economy Database.
toward freer trade. The most spectacular change was in China, where Deng Xiaoping, who
had taken power in 1978, converted a centrally planned economy into a market economy
in which the profit motive had relatively free rein. But as explained in the box on page 267,
policy changes in India were dramatic, too.
In each case, these policy reforms were followed by a large increase in the economy’s
openness, as measured by the share of exports in GDP (see Figure 11-4). So it seems fair to
say that these Asian success stories demonstrated that the proponents of import-substituting
industrialization were wrong: It is possible to achieve development through export-oriented
growth.
What is less clear is the extent to which trade liberalization explains these success
stories. As we have just pointed out, reductions in tariffs and the lifting of other import
restrictions were only part of the economic reforms these nations undertook, which makes
it difficult to assess the importance of trade liberalization per se. In addition, Latin
American nations like Mexico and Brazil, which also sharply liberalized trade and shifted
toward exports, did not see comparable economic takeoffs, suggesting at the very least that
other factors played a crucial role in the Asian miracle.
So the implications of Asia’s economic takeoff remain somewhat controversial. One
thing is clear, however: The once widely held view that the world economy is rigged against
new entrants and that poor countries cannot become rich have been proved spectacularly
wrong. Never before in human history have so many people experienced such a rapid rise in
their living standards.
CHAPTER 11 Trade Policy in Developing Countries 267
Exports as a percentage of GDP
0
10
20
30
40
50
60
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
India
South Korea
China
Figure 11-4
Asia’s Surging Trade
India, with a population of more than 1.1 billion people,
is the world’s second-most-populous country.
It’s also a growing force in world trade—especially
in new forms of trade that involve information rather
than physical goods. The Indian city of Bangalore
has become famous for its growing role in the global
information technology industry.
Yet a generation ago, India was a very minor
player in world trade. In part this was because the
country’s economy performed poorly in general:
Until about 1980, India eked out a rate of economic
growth—sometimes mocked as the “Hindu rate of
growth”—that was only about 1 percentage point
higher than population growth.
This slow growth was widely attributed to the stifling
effect of bureaucratic restrictions. Observers
spoke of a “license Raj”: Virtually any kind of business
initiative required hard-to-get government permits,
which placed a damper on investment and innovation.
And India’s sluggish economy participated little in
world trade. After the country achieved independence
in 1948, its leaders adopted a particularly
extreme form of import-substituting industrialization
as the country’s development strategy:
India imported almost nothing that it could produce
domestically, even if the domestic product was far
more expensive and of lower quality than what
could be bought abroad. High costs, in turn,
crimped exports. So India was a very “closed”
economy. In the 1970s, imports and exports averaged
only about 5 percent of GDP, close to the
lowest levels of any major nation.
Then everything changed. India’s growth accelerated
dramatically: GDP per capita, which had
India’s Boom
268 PART TWO International Trade Policy
SUMMARY
1. Trade policy in less-developed countries can be analyzed using the same analytical
tools used to discuss advanced countries. However, the particular issues characteristic
of developing countries are different from those of advanced countries. In particular,
trade policy in developing countries is concerned with two objectives: promoting
industrialization and coping with the uneven development of the domestic economy.
2. Government policy to promote industrialization has often been justified by the infant
industry argument, which says that new industries need a temporary period of protection
against competition from established industries in other countries. However, the
infant industry argument is valid only if it can be cast as a market failure argument for
intervention. Two usual justifications are the existence of imperfect capital markets
and the problem of appropriability of knowledge generated by pioneering firms.
3. Using the infant industry argument as justification, many less-developed countries
have pursued policies of import-substituting industrialization in which domestic
industries are created under the protection of tariffs or import quotas. Although these
policies have succeeded in promoting manufacturing, by and large they have not
delivered the expected gains in economic growth and living standards. Many economists
are now harshly critical of the results of import substitution, arguing that it has
fostered high-cost, inefficient production.
4. Beginning about 1985, many developing countries, dissatisfied with the results of
import-substitution policies, greatly reduced rates of protection for manufacturing. As
a result, developing-country trade grew rapidly, and the share of manufactured goods
in exports rose. The results of this policy change in terms of economic development,
however, have been, at best, mixed.
5. The view that economic development must take place via import substitution, and the
pessimism about economic development that spread as import-substituting industrialization
seemed to fail, have been confounded by the rapid economic growth of a number of Asian
economies. These Asian economies have grown not via import substitution but via
exports. They are characterized both by very high ratios of trade to national income and
by extremely high growth rates. The reasons for the success of these economies are highly
disputed, with much controversy over the role played by trade liberalization.
risen at an annual rate of only 1.3 percent from 1960
to 1980, has grown at close to 4 percent annually
since 1980. And India’s participation in world trade
surged as tariffs were brought down and import
quotas were removed. In short, India has become a
high-performance economy. It’s still a very poor
country, but it is rapidly growing richer and has
begun to rival China as a focus of world attention.
The big question, of course, is why India’s growth
rate has increased so dramatically. That question is the
subject of heated debate among economists. Some
have argued that trade liberalization, which allowed
India to participate in the global economy, was crucial.*
Others point out that India’s growth began accelerating
around 1980, whereas the big changes in trade
policy didn’t occur until the beginning of the 1990s.†
Whatever caused the change, India’s transition
has been a welcome development. More than a
billion people now have much greater hope for a
decent standard of living.
*See Arvind Panagariya, “The Triumph of India’s Market Reforms: The Record of the 1980s and 1990s.” Policy Analysis
554, Cato Institute, November 2005.
†See Dani Rodrik and Arvind Subramanian, “From ‘Hindu Growth’ to Productivity Surge: The Mystery of the Indian
Growth Transition,” IMF Staff Papers 55 (2, 2005), pp. 193–228.
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