Chapter

Introduction and Discussion Summary

Editor(s):
Paul Streeten
Published Date:
September 1988
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I. Introduction

In discussing structural adjustment, we may ask the following questions: Adjustment for what? To what? Of what? By whom? and How? The first question is adjustment for what purpose? Any adjustment must have some end in view. Sometimes constraints are considered as if they were objectives of policy, and, of course, they can take the form of intermediate objectives. Thus the elimination of a deficit in the balance of payments or in the budget or in public enterprises, though a constraint, can become an overriding short-term objective. Or we may wish to adjust from a strategy of import substitution to one of export orientation, or to growing debt service, or to more food production. Or we may wish to correct other distortions in order to improve the allocation of resources. Or we may wish to reduce high rates of inflation. These are, at best, intermediate objectives.

Among the objectives of structural adjustment are usually cited (1) the reduction or elimination of a balance of payments deficit, (2) the resumption of higher rates of economic growth, and (3) the achievement of structural changes that would prevent future payments and stabilization problems. One of the most important purposes of structural adjustment is to make the economy less vulnerable to future shocks. This can be done by increasing flexibility and adaptability. The success of a structural adjustment program depends largely on the absence of rigidities. But it may also be its aim to reduce such rigidities. Unless they can be removed, structural adjustment can be very costly, or altogether out of reach. Growing flexibility is therefore both a condition for and an objective of adjustment policy.

Flexibility can be applied to the market for products or the market for factors of production. If it is confined to products, but factors remain inflexible, large rents would arise which have no economic function.

There are more fundamental objectives, such as the elimination of hunger and malnutrition; the alleviation of poverty; or development of cultural autonomy, self-reliance, or greater national strength and military power. Some would say that accelerating economic growth is also such a fundamental objective, although growth is simply the time dimension of other goals of policy such as consumption, or poverty alleviation, or reduced inequality, or more employment. Whatever the technical intricacies of the adjustment process, it is useful to bear its purpose in mind, if only because some of these objectives may conflict with one another.

The next question to be asked is adjustment to what? Adjustments may be to an unexpectedly favorable turn of events, or, more normally, to an unfavorable turn of events. Adjustments to a favorable turn may be to an exceptionally good harvest; to an improvement in the terms of trade; to a rise in export prices, such as that experienced by oil exporting countries in the seventies or in response to a rise in the price of coffee of the Cote d’lvoire or Colombia; to unexpected inflows of financial resources; or to a sharp drop in the price of oil for oil importing countries, such as occurred in 1986. Inability to adjust to such favorable turns can lead to opportunity losses and can be almost as important as inability to adjust to unfavorable turns of events.

The large literature on the “Dutch disease” that arose from the bonanza of natural gas discoveries in the Netherlands testifies to the fact that a large rise in the supply of foreign exchange can be, at best, a mixed blessing, and, at worst, a curse. The exchange rate appreciates; exports of goods and services other than the one whose price has risen, decline; competitive imports flood into the country; domestic employment declines while inflation rises, as the demand for non-tradables increases. The removal of the foreign exchange and savings constraints can bring to the fore other obstacles. Adjustment policies should then be devoted to their identification and removal. Among these will be promotion of exports other than the commodity whose price has risen; some control of imports, possibly through a dual exchange rate; sterilization of some of the inflowing foreign exchange; control of domestic inflation; and creation of alternative productive assets. Even a favorable turn of events can cause serious adjustment problems.

Much more common, unfortunately, is the need to adjust to an unfavorable turn of events. Adjustments may have to be made inresponse to shocks that are expected to last a long time or a short time, and they may have their origins in macroeconomic or in microeconomic factors. A widely accepted distinction is that between the need to adjust to shocks caused by external factors, or exogenous shocks, such as a drastic deterioration of the international terms of trade; a reduction in the demand for export volumes, resulting, for example, from a world recession, or a rise in interest rates for countries with large debts, and those caused by domestic events or policies, or endogenous shocks, such as an excessively lax fiscal and monetary policy, price distortions, losses of public enterprises, excessive protection, excess foreign borrowing, or domestic upheavals, including revolutions. On the face of it, the distinction is clear enough. Foreign reductions in demand, owing to a new technology, to a change in tastes, to rising competitors, or to a recession abroad, or a sudden and large rise in the prices of essential imports are very different phenomena from domestic harvest failures, strikes, corrupt policies, mismanagement, or political change. Yet, on closer inspection, the distinction becomes blurred. If prices of a country’s exports drop and its terms of trade deteriorate, it is a matter of good policy to have foreseen this event, or at least its possibility, and to be ready to move out of the declining export trade into more profitable lines. Thailand, Malaysia, and the Philippines diversified their crops and raised productivity in existing crops in response to declining price prospects (for example, rubber in Malaysia), while other countries failed to do this (for example, Tanzania for sisal).

Alertness to expected future changes in comparative advantage and new opportunities in technology and demand, and flexibility and mobility in response to unexpected changes are domestic responses to international influences. To get stuck producing goods in declining export lines can be, at least partly, attributed to a failure of domestic policy. In this case, deteriorating terms of trade, apparently owing to external forces, must be attributed to deficiencies in domestic policy. The distinction between exogenous and endogenous causes gives no clue to the source of the fault and the allocation of blame or entitlements to foreign aid. Events originating in the domestic economy may be just as much beyond policy control as some outside events. A failure of the domestic harvest, a flood, a hurricane, or an earthquake cannot be attributed to domestic mismanagement, though provision for such emergencies-like provision against shocks from abroad, such as ample foreign exchange reserves, inventories, or spare capacity—is prudent. The exogenous/endogenous distinction is sometimes taken as a basis for the justification of international assistance. External shocks, beyond the control of the country, should entitle a country to foreign aid, but not economic problems with internal causes. But some events entirely within the domestic economy are beyond the control of policymakers, such as a prolonged drought, whereas some external causes could, and perhaps should, have been anticipated and planned for. The external-internal distinction is not a useful guide for allocating fault or blame or entitlements to finance.

In addition, the use of the words “exogenous” and “endogenous” can be misleading. Though they are applied in this context as meaning originating outside or inside the country in question, they normally mean in economic analysis originating outside or inside the variables of an analytical model. And this model could comprise external variables as parts of its interdependent system, in which case they would be endogenous, and domestic determinants could be assumed to be outside its system, and they would then be exogenous.

Even if the distinction between external and internal origins were helpful in allocating blame or fault, unless more external assistance were forthcoming in one case than in the other, it would not be helpful in determining what measures to adopt. For even faults that lie entirely outside the country have to be ajusted to, just as if they originated in the country.

Some of the major changes arising mainly from the world economy which call for adjustments by the developing countries are these:

  • (1) growing debt service, combined with fewer loans and higher interest rates;

  • (2) deteriorating terms of trade, whether resulting from rises in import prices, such as that of oil, or drops in export prices, such as those of major export crops;

  • (3) high levels of inflation in the world;

  • (4) slower growth in the Organization for Economic Cooperation and Development (OECD) countries; and

  • (5) technical innovations, such as those in electronics, that change the location of industries.

In addition, the following factors may also necessitate adjustment:

  • (6) continuing high rates of population growth;

  • (7) urbanization;

  • (8) scarcities of land and certain raw materials;

  • (9) scarcities of foodgrains;

  • (10) policies adopted by the developed countries to protect their industry, agriculture, and services;

  • (11) environmental pollution;

  • (12) international migration;

  • (13) natural disasters, such as prolonged droughts; and

  • (14) man-made disasters, such as the arms race or wars.

Adjustment may be made to disturbances caused by domestic policies or by the policies of other countries. With regard to domestic policies, a good deal of attention has recently been paid to the losses of public enterprises, whose pricing policies are one of the most common sources of budget deficits in many developing countries. There are clearly some cases where the losses of a public enterprise benefit a particular vulnerable group or achieve a social objective, either of which may be part of the reason for the enterprise’s existence.

In some cases, keeping the prices of the products and services supplied by public enterprises low helps to combat cost-push inflation. Policymakers have to weigh the demand-inflationary impact of budget deficits to finance public enterprise losses against the cost-inflationary impact of permitting their prices, and with them wages, to rise.

Public enterprises should also be judged by their ability to contribute, directly and indirectly, to foreign exchange earnings or savings, to the introduction of appropriate technologies, and to the protection of the natural environment. But, in fact, the losses of these enterprises far exceed the costs of achieving these social objectives, and in many instances do not achieve them at all. Far from subsidizing poor consumers, they subsidize fairly-well-off consumers and private enterprises. The losses can be understood mainly in terms of political pressures. Structural adjustment loans by the World Bank can help to exercise counterpressures for more rational policies of these enterprises.

A particular type of adjustment, often very difficult, is that to the policies of the advanced industrial countries. It is of the essence of interdependence that single nation-states are, by unilateral action, capable of inflicting considerable harm on other countries. The main danger here arises from beggar-my-neighbor protectionist policies. Disguised as regional or industrial policies, even policies that go under the name of adjustment assistance often can amount to adjustment resistance. Such measures affect most directly the newly industrializing countries (NICs), which are in search of markets for their growing manufactured exports. But the low-income countries, also, can be harmed by these measures.

Exchange rate flexibility on the part of developed countries has trade-reducing effects on developing countries and, if the latter peg their rates to one major trading country, trade-diverting effects from the rest of the world. Both represent costs for countries attempting to increase and diversify their trade.

A difficult problem is presented to the developing countries by the impact of the U.S. mix of monetary and fiscal policies on other industrial countries. The recent combination of loose fiscal and tight monetary policies combines the burden of high interest rates with depressed demand for exports from developing countries, as other developed countries have to put up their interest rates to avoid excessive capital outflows. What is needed is a higher degree of North-North coordination in government policies, as well as North-South and South-South cooperation. The best scenario would be a continuing U.S. expansion while the U.S. budget deficit was brought under control. U.S. interest rates would drop, easing the debt burden, Europe and Japan would expand with easier monetary policies, and demand for the exports of the developing countries would grow. A higher degree of North-North cooperation and coordination of policies would be a great help to the developing countries. Structural adjustment for the advanced countries, like charity, begins at home.

So far we have discussed adjustments as mainly responses to shocks, whether external or internal. But adjustments may be required as a result of more active initiatives for a change in strategy. A government may wish to change from import-substituting industrialization to export orientation, or to change from a conventional concentrated growth strategy to a more egalitarian one, or to institute a land reform or a tax reform, or to make poverty eradication one of its principal targets. The adjustment problems that such transitions create are therefore often inadequately treated and sometimes misunderstood. These will include sectoral imbalances in supply and demand, manifesting themselves in unemployment combined with inflation, and disturbances in the balance of payments, and will increase the time period for financing adjustments. Some of these adjustment problems are mistaken for manifestations of mismanagement, which, of course, especially for inexperienced reformist governments, may independently add to their difficulties.

Economists have been better in analyzing comparative statics and comparative dynamics than at determining the optimal transition path from one type of strategy to another. We completely lack a handbook for reform-minded prime ministers and presidents who would like to know how to manage the transition to a better society. The international community, in turn, should be ready to assist such reform-minded leaders with Radical (or Reformist) Adjustment Loans (RALs) to ease the transition, to help overcome the dislocations, and to provide more flexibility and elbow room.

Next there are the questions as to adjustment of what and by whom. In developed countries adjustment sometimes means the revival, with new technology, of old industries, which rise like phoenixes from the ashes, and at other times it means the creation of new industries at the frontiers of technological knowledge. And the question then often posed is whether labor should move to the industries or whether capital and entrepreneurs should move to the labor. Developing countries have a much smaller industrial base and the question is normally a different one: Should there be adjustment of policies, particularly pricing policies, say from protection to freer trade or from keeping food prices down to raising them to the level of world prices, or should there be adjustment of institutions? These may refer to a land reform, or to population control, or to the administrative system, or to education and training. Whatever the adjustment, the distribution of benefits and losses will be different for different arrangements, and some groups will bear the brunt of the adjustment. This, in turn, will often be a function of the power distribution in the country. Proper pricing policies often work best in conjunction with certain actions in the public sector. It is of little use to have high agricultural incentive prices if there are no roads to get the crops to the market, or no irrigation systems to water the crops.

It is often claimed that a prime candidate for a source of switching expenditure is military and defense expenditure. How many village pharmacies could we have for one tank? Many men and women of good will see in the large and rising military expenditures a source that should be tapped for better purposes. But the presentation of more attractive alternatives has no impact on the military establishment. If we wish to make an impact on the military establishment, we shall have to convince it that growing defense expenditure can be counterproductive in terms of its own objective: security. It is probably one of the areas in which the Laffer curve applies. Beyond a certain point, more defense expenditure reduces, rather than increases, national security. If this point can be established, and we can show that we have transgressed it, for multilateral and for unilateral disarmament, resources would be freed for social and other objectives.

Other candidates for expenditure cuts are found under various headings in the budget and include the losses of public enterprises. As we have seen, these losses constitute a major element in the budget deficits of many developing countries. The purported social purposes of many public enterprises appear to legitimize their losses. Before this conclusion is accepted, though, two questions should be asked. First, are these social purposes actually achieved, or are the public subsidies to these enterprises not, in fact, counterproductive in terms of the claimed objectives? Second, even where the social purposes are achieved, could this not be done at lower costs, more efficiently, and therefore with smaller losses or, possibly, with surpluses? One way of testing this hypothesis is to calculate the precise amount of the cost of any “social objective,” to hand this amount of subsidy to the enterprise, and to then ask it to cover its total costs.

When we consider the question of adjustment by whom, the candidates are labor or capitalists, the rich or the poor, men or women and children. How can we bring about the required adjustment with the minimum harm to the most vulnerable groups? Some cuts in expenditure are required. Much investment is productive investment and we do not want to cut this, for it would undermine long-term growth. In low-income countries the rich are few, and some consumption cuts are bound to fall on the poor. But it is possible to prevent the poorest and most vulnerable groups, such as children and women, from suffering cuts in their consumption.

The last question is closely linked to the question how? What means are to be employed to bring about the adjustment? Adjustment policies generally comprise measures additional to stabilization, such as the reduction of tariffs, trade liberalization, the elimination of controls on wages and prices, the creation of institutions to facilitate export credits, and the improvement in infrastructure.

The analysis can be conducted by determining the answers to three questions:

  • (1) How severe will be the adjustment problem—the disease—as registered in the balance of payments deficit? (A secondary and, more important, but more difficult, calculation to make would be that of the costs imposed by alternative corrective measures, such as deflation, devaluation, import restrictions, tariffs, etc.)

  • (2) What range of medicines is available? For example, exchange rate flexibility increases the number of medicines, while pegging exchange rates reduces the number of medicines in the cupboard by one; forswearing increases in tariffs reduces it by another. The possibility of retaliation complicates matters.

  • (3) How effective is any given medicine? For example, when the volume of trade is growing more slowly, demand elasticities will be lower and exchange rate adjustments less effective. Within a free trade area or common market, elasticities may be expected to be higher than elsewhere.

The task of policy is to combine the financing of deficits with steps to bring about their eventual elimination in such a way as to minimize reductions in employment, output, and the standard of living of the poor (as well as the sacrificing of any other objectives, such as income distribution). Appropriate methods of financing deficits, combined with the right type of conditionality, do not frustrate the process of adjustment but instead can facilitate it and reduce its costs.

II. Discussion Summary

Chart 1 shows the adjustment process for a number of countries between 1981 and 1985. According to our textbooks, adjustment should take the form of raising exports and reducing imports, a movement from southeast to northwest. Only Colombia, Mexico, and Brazil conform to this pattern. Most countries reduced both exports and imports (but imports by more), while Turkey and the Republic of Korea increased both imports and exports (but exports by more). (The fact that Korea did not register a surplus during this period shows that it could borrow.) Since we know that many of the export prices of these countries declined for independent reasons, it would be quite illegitimate to attribute the whole of this process to the adjustment policies. Nevertheless, the result has a bearing on any discussion of how to “adjust with growth.” A decline over five years of both exports and imports is not an indicator of vigorous growth.

Chart 1.Developments in the Merchandise Trade of 16 Indebted Countries: 1985 Compared with 1981

(Billion U.S.dollars)

Source: Giovanni Andrea Cornia and others, eds,. Adjustment with a Human Face: protecting the Vulnerable and Promoting Growth, Vol. I (Oxford, England: Clarendon Press, 1987), p. 64.

Note: Points on the diagonal line correspond to balanced trade: exports (f.o.b.) equal imports (c.i.f,), based on customs returns.

A question that occupied the seminar was why did Latin America fare so much worse in the early 1980s than East Asia? Professor Jeffrey Sachs’s study throws some light on this question.1 The Latin American economies shrank in that period, whereas the East Asian ones grew almost as fast as they did in the 1970s. Among the factors explaining the difference, the following have been mentioned: (1) greater external economic shocks (e.g., oil prices and interest rates); (2) higher debt service; (3) higher burden of taxation; and (4) higher government-expenditure ratios. Sachs shows that none of these can explain the difference in performance. The biggest difference is, as Azizali Mohammed pointed out, the rapid rises in the shares of exports in gross domestic product (GDP) in East Asia, compared with much smaller rises in Latin America. As a result the ratio of debt service to exports averaged 153.8 percent for six Latin American countries and only 61.7 percent for four East Asian ones. Latin America had therefore to slash imports and thereby brought on the recession of the early 1980s. Those who believe in exchange rates will find comfort in the fact that in 1982-83 the black market discount on the currencies of the Latin American countries averaged 40.4 percent, compared with 6.9 percent for the East Asian countries. The explanation of why East Asia was so much more successful in exporting may lie in the area of political economy. Whereas in 1980, 72 percent of the population of Latin America lived in towns, in East Asia the proportion was only 32 percent. The strength of agricultural and rural interests in East Asia who benefit from devaluation and exports may explain its success in exporting. Today the rural-urban proportions in the two regions are not nearly so different.

On the other hand, we have been taught by Mancur Olson that large interest groups often lack the cohesion (as a result of too many free riders) to pursue their interests successfully, and that smaller groups are more effective in mobilizing government action in their interest. It is the small rural interests in high-income countries and the small urban interests in low-income countries that dominate policy.

One of the participants pointed to the greater capital flight from countries more severely hit by the debt crisis. But capital flight is a function of lack of confidence and as much a consequence as a cause of mismanagement and difficulties.

Insofar as the Latin American situation has to be attributed to the wrong policies, perhaps inspired by urban bias, there was apprehension lest the ways of dealing with the debt crisis reward greedy lenders and profligate borrowers at the expense of financial flows to the sober, prudent, and careful countries of South Asia, which avoided inflation, borrowed wisely, and made good use of the loans.

There was much concern about “negative resource transfers” and the relation between new capital inflows and debt service. In a dynamic setting, as long as the rate of new lending and investment exceeds the rate of interest and amortization payments, no foreign exchange leaves the borrowing country. But the current situation, in which a “negative transfer” has occurred, could be described as one in which the borrowing countries are investing in order to restore creditors’ confidence, so that the required net inflow can be resumed. At the same time, the advice to the South Asian countries to go to the commercial capital markets may be premature, in view of their still-low incomes and high interest rates. We should avoid breeding a Latin American situation in India in ten years. By almost any set of criteria, whether poverty, ability to make good use, democratic government, political stability, good past performance, or strategic location, India deserves more concessional development aid.

There was, at the seminar, a clear presentation of the theory of comparative advantage and the analytical basis for advocating liberal trade policies. At the same time some qualifications were introduced. Some of the assumptions of the doctrine of comparative advantage may not be realistic.

(1) If production is subject to increasing returns, neither the Ricardo nor the Heckscher-Ohlin version of the doctrine applies. Adam Smith said that the division of labor is limited by the (geographical) extent of the market. Allyn Young added that the extent of the market (determined also by the size of incomes) is limited by the division of labor (including cost-reducing innovations). On the interaction between these two causal chains hinges economic progress. But it has to be analyzed along lines very different from conventional trade theory. There would, for example, be no tendency toward factor-price equalization.

(2) The doctrine must assume an efficient mechanism by which comparative real advantages (and disadvantages) are translated into absolute price advantages (and disadvantages). For it is not the doctrine, but market prices, that guide the behavior of businessmen. This mechanism can be domestic monetary policy or exchange rates. If this mechanism does not work, because massive speculative capital movements interfere with the process of translation, the doctrine no longer applies. The recent volatility of exchange rates is not reassuring on this score.

(3) In the old days comparative advantage was regarded as God-given, or at least given by nature. Economists spoke of “factor endowments” as if they were inherited genes. Today, comparative advantage has become increasingly the result of the direction of research efforts and research and development expenditure. And it changes continually. The benefits from extra output and income have therefore to be weighed against these repeated adjustment costs. Particularly for an affluent society, free trade may therefore not be the best way of advancing its national self-interest, disregarding any obligations to low-income exporters in developing countries. On the other hand, many countries probably protect their agriculture and industry far beyond the point where the marginal costs of disruption equal the marginal benefits from further international division of labor.

In the discussion of public enterprises, much attention was paid to the impact of their losses on macropolicies and social objectives. There is, above all, the contribution of public enterprises, positive or negative, to the surplus available for reinvestment. There is the conflict between encouraging cost inflation by raising prices and encouraging demand inflation by running budget deficits to finance the losses. There is the impact of the losses on income distribution. There is the impact on employment. There is the contribution to foreign exchange earnings and foreign exchange savings, as well as the impact on the natural environment and on the use of appropriate technology. In none of the these areas have public enterprises been particularly successful in achieving the social objectives. On the other hand, it was pointed out that there are other forms of enterprise than either private or centrally run public ones; cooperatives; self-managed enterprises; and various hybrid forms, including enterprises with profit sharing, workers’ councils, and management participation, many of which might be explored.

There was an unexpectedly high degree of consensus on most fundamental policy issues, although many participants expressed a strong desire for more financial resources for their countries, on easier terms. The Indians said that the design of their own policies, quite independently, completely coincided with the conditions of the Fund loan.

Much of the discussion concerned the limitations of outward-looking trade strategies. The following points were made:

(1) There is no sharp line of demarcation between import substitution and export industries and firms. Often a phase of import substitution precedes a phase of export, laying the foundations for successful export performance. This is true of both firms and countries. Volkswagen Brazil started as an import-substituting firm and has become a very successful exporter. Bharat Heavy Electricals in India is now exporting — after having been denounced as a high-cost “white elephant.” (The rate of time discount that might have to be applied to the investment may, however, be very low or negative.) Brazil laid the foundations for its export capacity in the years of the Depression and World War II, when it was cut off from world trade. China, Turkey, Taiwan Province of China in the 1950s; South Korea in the 1960s; Japan; and even England are examples of phases of “breathing in” preceding phases of “breathing out.”

(2) Even analytically, the distinction between inward- and out-ward-looking is untenable. Much of development consists in substituting domestic inputs for imported inputs into exports. Is this import substitution, because it substitutes domestic production for imports, or is it export promotion, because it adds more value to export earnings?

(3) Clearly, not all import substitution provides a good foundation for subsequent export. The skill consists in efficient import substitution. The success of the successful exporters lies not in export promotion and looking exclusively outward, but in doing both import substitution and export promotion efficiently. Economic doctrine has habituated us to looking at movements on the production frontier in the direction of comparative advantage. Formal theory has much less to say about improving incentives, institutions, organization, and the provision of information so that we can move nearer to the production frontier. The market has an allocative and creative function. Success has to be sought much more in the creative function, in pushing production feasibilities outward, than in the allocative function, reallocating resources between import substitutes and exports.

(4) What matters for investment decisions in manufacturing and agriculture is not past or current prices and opportunities, but future prices and market opportunities. These are uncertain. The world market for exports may be different in the late 1980s and 1990s from the buoyant markets of the 1960s and 1970s. It is, of course, true that action on gloomy prophecies can be self-justifying. But the appropriate way to meet an uncertain future is to attempt to calculate and compare the high costs of import substitution if export opportunities are lost, with the costs of excess capacity or deteriorating terms of trade or unsold stocks of potential exports if markets do not materialize. The answer to planning in conditions of uncertainty is to provide for flexibility between import substitution and exports (and adequate foreign exchange reserves), even at some increase in average costs for the most probable outcome.

(5) Next, there is the fallacy of generalizing from a few countries to all developing countries. If all developing countries matched Taiwan Province of China’s proportion of the labor force or gross domestic product (GDP) in exports, the need to absorb a vastly larger volume of exports would run into difficulties. Formally, of course, it is true that the extra revenue earned by these exports would be spent on extra imports. The phasing of trade liberalization will be different for different countries, and not all exports will be dumped simultaneously. The commodity composition and the export/GDP ratios will also be different for different countries and at different times. Many developing countries will continue to export primary products. Since labor-rich, resource-poor developing economies like the Republic of Korea, Taiwan Province of China, Singapore, and Hong Kong are likely to have a larger proportion of their labor force in exports than are resource-rich, labor-poor countries like Brazil and Argentina, the impact on world markets will be reduced. Some exports will be directed to other Third World countries whose vested interests in clamoring for protection are less strong. And, as a result of trade liberalization, counter-protectionist pressure groups in the developed countries, such as farmers in the United States, may gain in strength.

In spite of these mitigating circumstances, there are bound to be adjustment problems in the importing countries. If growth rates are sluggish and unemployment is high, protectionist barriers are likely to worsen, or the terms of trade are likely to deteriorate for exports of manufactured products.

(6) In making recommendations about trade liberalization, it would be useful to distinguish according to a set of criteria for a country typology. Important among these would be the size of the economy. Taiwan Province of China, Singapore, and Hong Kong can create jobs by producing labor-intensive exports; but India and China are bound to devote the bulk of their efforts to designing products and technologies for their vast domestic markets.

(7) The Republic of Korea and Taiwan Province of China have not promoted exports solely by means of the “invisible hand.” This “invisible hand” was supported by the highly visible and strong arm of the state. The issue is not government intervention versus laissez-faire, but efficient forms of intervention versus crippling ones. The countries that are often cited as shining examples of free markets have powerfully and efficiently intervened in the allocation of investment (steering the private sector by differential interest rates and other interventions), have used a battery of import controls and export incentives, and have had large public sectors.

(8) Finally, two points of political economy were made. More liberal economic policies (and in spite of and through state intervention, some policies are more market-oriented) do not often go with liberal political policies.

(9) Rousseau said: “Man is born free, and everywhere he is in chains.” Similarly, we might say: “All economists recommend free trade, and everywhere there is protection.” Why? It was argued that we should replace the notion of political will with that of political base—through an analysis of the constituencies, the pressure groups, and the political leverage that could be mobilized for trade liberalization. Independent retailers, consumer organizations, and bankers each have an interest in freer trade, and their power and influence could be harnessed to the cause. By and large, people are quite good at pursuing their self-interest without the support of political scientists and political economists, but there may be obstacles, inhibitions, and ignorance—to whose removal political analysis could contribute.

Perhaps the most important general lesson that emerged was that there are no general lessons, and that each case has to be treated separately and on its merits. This pragmatic approach made it possible to discuss policies without getting bogged down in ideological or dogmatic positions.

Jeffrey D. Sachs, “External Debt and Macroeconomic Performance in Latin America and East Asia,” Brookings Papers on Economic Activity: 2 (1985) (Washington), pp. 523-64.

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