Trade andDevelopment

So influential have been the ideas of Ian Little, and parallel thinkers, on the role of trade in economic development that it is difficult now to recover the intellectual climate of early post-war economic thinking on this topic.

For India, the Soviet Union provided a model of successful economic development for a large country based on forced industrialisation and little international trade with the capitalist West. There was an appreciation of undoubted Soviet successes, including the defeat of Nazi Germany, rapid growth, and impressive development of some sectors. For example, the Soviet Union had by a long way the world's largest shoe industry. However, there was less understanding of the severe deficiencies of the Soviet economy. Agriculture was a disaster sector, the victim of forced confiscation of output, collectivisa­tion, and discriminatory pricing. The delivery of consumer goods was extremely poor. Even those millions of shoes were in wrong sizes and styles.

Indians, like everyone else, were in a poor position to view the true nature of the Soviet economy, hidden as it was behind propaganda and misleading statistics. Had they been able to enjoy a clearer view they could have drawn useful lessons concerning economic management and economic planning. Among these lessons would have been the danger of grandiose projects under­taken without proper assessment of costs and benefits. Another lesson would have been the cost of neglecting export opportunities. Had forestry not been starved of inputs, the Soviet Union could have exported timber to its benefit rather than failing to meet even domestic needs. Finally, the five-year plan model, under which growth targets for various sectors were laid down in advance, led to the misallocation of scarce inputs and the underweighting of consumer needs.

Whatever the problems of economic planning, it was required in some form by newly independent countries. Hardly anyone thought that simply introducing laissez-faire would produce the results required. The question was what form should planning take, and, in particular, in what direction it should point economic development? Should it favour heavy industry over light? What place should it give to international trade, to imports and to exports? Little was a product of his time, and he started out firmly in favour of eco­nomic planning. However, over time, experience and sharp observation mod­ified his views.

I am widely regarded as having shifted from uncritical belief in dirigiste planning to excessive trust in the price mechanism. Apart from the adjectives, this is broadly true. All economists are conversant with the faults of the price mecha­nism, some would suppress it altogether. Many liberals, including myself, wanted to tinker with it, and to rely on government to implement the tinkering. We were slow to realize that the most prevalent reason for market failure was government itself. Governments were driven by false economic ideology— heavy industry, protection, and import substitution—and also became increas­ingly self-serving and corrupt. My own change in emphasis is obvious.. It was driven by experience and research. However, although the change is insidious from I960 to 1990, my India visit of 1965 was a watershed. It led directly to my research programme at the OECD, and hence to increasing emphasis on free trade and the reduction of domestic controls (CaR 1999: 81).

Ian's evolving views on trade and development were laid out extensively and provided with solid empirical support in the fine volume that he co­authored with Tibor Scitovsky and Maurice Scott, henceforth Industry and Trade. This volume draws together the conclusions of several OECD studies of individual countries—Brazil, India, Mexico, Pakistan, the Philippines, and Pakistan. The essence of the approach adopted in this volume is the following. Beginning students of economics learn that the advantages of international trade lie in the exploitation of comparative advantage: a country should do what it does relatively best, and rely on imports for what it does badly. It then seems clear that numerous qualifications destroy this simple conclusion. Among these are terms of trade that vary with the volume of exchange, exter­nalities and infant industry considerations, issues of income distribution, and more.

Industry and Trade is a volume that cannot be fairly summarised in a short chapter. It examines the issues involved in great depth and breadth. However, picking out some of its leading points gives a good sense of its contributions. Chapters 2 and 5 discuss the magnitude of protection, and distinguish between the “nominal” rate of protection (how much protection raises domes­tic prices), and effective protection (how far protection permits the value added in production to exceed what it would be in its absence). Effective protection is often far higher than its nominal cousin, and sometimes, when outputs are more heavily protected than inputs, even allows activities with negative value added at world prices to survive.

Chapter 6 looks at the pernicious consequences of reliance on controls, a characteristic of a planned, and overplanned, economy. Widespread controls on investment and other activities are costly and they blunt private initiatives. Entrepreneurs gain more from playing the planning system than from innova­tion and productivity improvements. Industrialisation has aggravated income inequalities. The extra profits made in industry are not a net gain to the com­munity. Protection of large-scale industry implies the anti-protection of light industry and agriculture, sectors in which incomes are low. Chapter 2 notes that a major source of saving and investment is the profits of heavy industry inflated by protection. These profits are invested to a great extent in the same industries that generated them, thus adding force to the bias against light manufacturing and agriculture. Protection biased in favour of heavy industry is bad for employment and the full utilisation of capital. Finally, and crucially, the protection of heavy industry leads to the neglect of comparative advan­tage. This echoes points made above concerning biases in the Soviet system.

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