3. When should an economy open?
One way to address this question is to review
the experiences of four Asian economies that, as
summarized in table 7, offer practical demonstrations
of the competing approaches. Hong Kong (China)
committed to the market strategy while it was still a
colony of the United Kingdom of Great Britain and
Northern Ireland, with no barriers to trade and very
little other state intervention in the market. Singapore
did experiment briefly with import-substitution policies
upon achieving its independence, but quickly moved
towards openness. By contrast, Japan and then the
Republic of Korea pursued essentially mercantilist
strategies for most of the twentieth century, using
import restrictions and other instruments to promote
favoured industries. It was only after they achieved
high levels of development, and also came under
increasing pressure from their partners, that these two
countries adopted more market-oriented policies.
The data show that all four of these economies would
be considered successful by any reasonable standard,
and all are now predominantly dedicated to free trade
(with the notable exception of protection of agricultural
sectors for Japan and the Republic of Korea). They are
all leaders in the exportation of high-technology goods,
and none of them impose high barriers to imports of
non-agricultural goods. All of them are actively en20 TRADE POLICY FRAMEWORKS FOR DEVELOPING COUNTRIES: A MANUAL OF BEST PRACTICES
gaged in multilateral trade negotiations, and all except
Hong Kong (China) are also involved in several regional
initiatives. The economies differ in the degree to which
they depend on trade, with the share of trade in GDP
being several multiples higher in Hong Kong (China)
and Singapore than it is in Japan and the Republic of
Korea, and also in the extent to which they complement trade openness with other pro-market policies.
Depending on a person’s perspective, Hong Kong
(China) and Singapore could be seen either as
pioneers or as exceptional cases (sometimes called
“black swans”). The conclusions that might be reached
from the evidence depend on the aspect that are
considered most important. The strongest argument
from a Smithian perspective comes in the final results:
Income levels in Hong Kong (China) and Singapore are
far above those in Japan and the Republic of Korea,
and the speed with which they developed is even more
impressive than what their East Asian neighbours
achieved. By contrast, the strongest argument from
a Listian perspective comes in the initial differences:
Hong Kong (China) and Singapore are more like city
States than large and diverse countries, have virtually
no agricultural hinterland, generally depend on others
for national defence, and enjoy the aforementioned
special advantages of islands, isthmuses and
peninsulas. There are few other polities, whether in
modern times (e.g. Dubai and Macao, China) or in
history (e.g. Athens and Venice), that might be directly
compared to them. It could therefore be argued that
they offer not a model that most other developing
countries can reasonably hope to emulate, but a pair
of sui generis cases that ultimately rest on special
circumstances.
It may not be possible for other developing countries
to replicate all of the elements that went into the
success stories of Hong Kong (China) and Singapore,
but there are some elements of their formula that merit
close attention. They both score considerably higher
on the index of economic freedom than do Japan and
the Republic of Korea. Countries’ place on this index,
which is based on 10 quantitative and qualitative
factors grouped into four broad categories,6
correlate
closely with their levels of income (table 8). Hong Kong
(China) and Singapore are the only two developing
economies classified as fully “free” on this index
distinction shared by only three developed countries
(i.e. Australia, New Zealand and Switzerland). Average
incomes in these two economies are 18.9 times
higher than they are in the developing countries that
are classified as mostly unfree or repressed. There
is also a stepped progression in which incomes are
higher in the group of moderately free countries than
they are in the least open, and higher still among those
that are classified as mostly free.
It is important to note that the correlation between
income and a country’s place on this index is stronger
than the one observed earlier with respect to income
and trade dependence. This implies that trade policy
is best seen not as a wholly independent variable, but
as a component in a wider set of economic policies.
Taking the broadest view, a country’s approach to
trade is one aspect of the largest decision that every
Government must make in its economic policies,
namely the roles that it will assign to the market
and to the state in determining what is produced,
consumed, imported, and exported. That point is
equally valid for those countries that give a leading
Table 8. Relationship between economic freedom and income (Average GDP per capita for non-oil developing countries)
Sources: Economic freedom based on Heritage Foundation data at http://www.heritage.org/index/ranking; GDP per capita
based on World Bank data at http://data.worldbank.org/indicator/NY.GDP.PCAP.CD.
Free Mostly free Moderately free Mostly unfree
Africa Income: —
Number: 0
Income: $7 739
Countries: 2
Income: $3 758
Countries: 8
Income: $1 777
Countries: 35
Americas Income: —
Countries: 0
Income: $12 525
Countries: 4
Income: $8 332
Countries: 13
Income: $5 313
Countries: 9
Asia and the Pacific Income: $47 656
Countries: 2
Income: $38 524
Countries: 3
Income: $10 257
Countries: 6
Income: $2 561
Countries: 19
Total Income: $47 656
Countries: 2
Income: $20 128
Countries: 9
Income: $7 405
Countries: 27
Income: $2 519
Countries: 63
[I]mport substitution implies raising costs and, perhaps
temporarily, reducing efficiencies plus domestic availability
of the commodities concerned. If temporary, these
effects could be absorbed, presumably, but if they are
not temporary then they risk compounding the horizontal
deficits listed here, and more. It is difficult to see how that
would promote Namibia’s sustainable integration into the
global economy on a long-term competitive basis.
Trade Policy Framework: Namibia (2016)
role to the Government, others that prefer to let the
market decide, and those that are in a transition from
one emphasis to the other. The observed relationship
underlines the view that a modern, developed
economy that aims to compete effectively in the global
market will have at its base efficient and well-governed
institutions that facilitate, but do not seek to control,
the development of private enterprise. What remains
at issue is how far, and for how long, a country should
rely on governmental direction and intervention to
achieve that level of development. That is a core
question to be answered in each TPF.