Recent decades have witnessed an acceleration of economic globalisation, in particular international trade. Is trade openness the key strategy to achieve economic development? What lessons could you draw for policymaking?

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Recent decades have witnessed an acceleration of economic globalisation, in particular international trade. Is trade openness the key strategy to achieve economic development? What lessons could you draw for policymaking?

1.0 Introduction:

   These days the support for economic development has become an essential issue in the discussion of world trade. More attention to the issue of trade and development has been brought about by the increasing participation of developing countries in the world trading system. Multilateral institutions such as the IMF, World Bank, OECD frequently propagate advice established on the belief that openness generates growth. The significance of this subject is highlighted by the WTO agreement which positioned the facilitation of development as a key objective along with the Doha Round which also includes a development plan. Trade is thought to play an essential role in the facilitation of economic development and countries such as Taiwan, Hong Kong, Singapore achieved impressive economic development within a few decades due to their growth in exports. There is a large amount of literature discussing the contribution of trade to development but at the same time there is also a lot of scepticism regarding globalisation and its effects alongside the hype of trade openness. This paper assesses the subject of trade openness and if indeed it is a key strategy to achieve economic development.

2.0 Definitions:

2.1 Economic globalisation:

   A thorough evaluation of the above statement is not possible without a proceeding definition of globalisation, trade openness and economic development. There is generally no accepted definition of globalisation and so various meanings have been put forward such as;

“…globalization is a process by which the economies of the world become increasingly integrated, leading to a global economy and, increasingly, global policy making, for example, through international agencies such as the World Trade Organisation (WTO).” (Todaro and Smith p. 589). More specifically for others: Gao Shangquan, (2000), “economic globalisation refers to the increasing interdependence of world economies as a result of the growing scale of cross-border trade of commodities and services, flow of international capital and wide and rapid spread of technologies”.  J. Bhagwati , (2004), “Economic globalization constitutes integration of national economies into the international economy through trade, direct foreign investment (by corporations and multinationals), short-term capital flows of workers and humanity generally, and flows of technology…”. It might be worth assessing if the definition of globalisation you use affects the consequences or effects you attribute to the phenomenon? As Jan Aarte Scholte noted many debates about globalisation never even get past disputes over the first point because “people often hold radically different definitions of the term”.

2.2 Economic development:

   Economic development is defined as “qualitative change and restructuring in a country's economy in connection with technological and social progress. The main indicator of economic development is increasing  (or GDP per capita), reflecting an increase in the economic productivity and average material wellbeing of a country's population. Economic development is closely linked with ”. Since this definition verifies that development and growth often go together, both terms will be used concurrently to argue the same point throughout this paper although I will state my awareness of the measure GDP not taking into account other aspects such as, environmental quality, health, leisure time or social justice which economic development involves. There are many models of economic development such as the Harrod–Domar model, exogenous growth model, Endogenous growth model, Information-led development etc all examining how economic development is achieved.

3.0 Trade liberalisation:

3.1 Free trade theories:

   Two examinations of the basis for international trade are the Ricardian model and the Hecksher-Ohlin model. But before studying these models we need to define terms of trade and comparative advantage. The terms of trade measures the rate of exchange of one good or service for another when countries trade with each other. For international trade to be equally beneficial for each country, the terms of trade must be within the opportunity cost ratios for both countries.  The relationship between the price of a unit of export and a unit of import is the commodity terms of trade. If x refers to exports, m to imports and p to price, then terms of trade is Px/Pm. Absolute advantage is the ability for a country to produce a good at a lower cost than another country. A country has a comparative advantage in producing a good if it has the ability to produce it at a lower opportunity cost than another country. Trade between two countries can benefit both countries if each country exports the goods in which it has comparative advantage. 

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One of the simplest examinations of the basis for international trade is the Ricardian Model of comparative advantage. Although this model suffers from ‘restrictive assumptions’ it does prove to be useful in outlining basic trade theory and in demonstrating the gains from trade. The model assumes that:

Labour is the only factor of production

Total amount of labour is fixed in each country

Level of technology is given for both countries and differs between them (therefore providing the single reason for productivity differences.)

Production function has constant returns to scale.

Full employment.

The model explains that free trade among countries lead ...

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