Free trade and economic growth

Freer trade – from reduced tariffs, regulations and restrictions – raises a country's level of output and stimulates economic growth, says economist Arnold C. Harberger of the University of California, Los Angeles. It has contributed to unprecedented economic growth and rising living standards around the globe over the last 25 years or so.

According to the United Nations' 2003 Human Development Report, from 1975 to 2001:

Per capita income in developing countries grew an average of 2.3 per cent annually compared to 2.1 per cent for Organisation for Economic Co-operation and Development (OECD) countries.

In the 1990s, developing-country per capita income growth rose to 2.9 per cent and high-income OECD growth fell slightly, to 1.7 per cent.

In fact, an examination of 59 high-growth episodes that occurred in 41 countries from 1960 to 2001 found that exports grow faster than gross domestic product, and usually much faster, even after adjusting for price inflation:

Exports grew over 2 percentage points faster in 37 cases and faster by over 4 percentage points in 21 of the 59 cases.

Exports grew faster by 5 percentage points or more in 18 of the 59 cases.

Mexico, for example, had a very high rate of export growth compared to GDP, with exports growing 12.5 percentage points faster from 1995 to 2000. Cameroon had the highest rate, with exports outpacing GDP by 14.4 percentage points between 1994 and 2001.

The necessary circumstances for growth can be achieved by liberalising trade and mobilising resources through free markets, concludes Harberger. Government policies can foster the growth of human capital, facilitating the process by which firms make productive investments and, above all, creating a favourable environment for seeking and implementing real cost reductions. Government policies cannot create these forces, but government can and should open the door.

Source: Arnold C. Harberger, Trade and Economic Growth, Parts I & II, National Center for Policy Analysis, Brief Analysis No. 553 and No. 554, May 25, 2006.

For text "Trade & Growth, Part I,": http://www.ncpa.org/pub/ba/ba552/

For text "Trade & Growth, Part II,": http://www.ncpa.org/pub/ba/ba553/

For more on Trade: http://www.ncpa.org/pd/trade/trade.html

FMF Policy Bulletin/ 30 May 2006