Must-read: Paul Krugman: “Globalization and Growth”

Must-Read: Paul Krugman: Globalization and Growth: “Brad DeLong… arguing that the really big benefits of globalization come from technology diffusion…

…which make it a much more positive force than I suggest. I used to believe the same thing, and still find myself thinking along those lines now and then. But I’d argue that economists need to be, at the least, upfront about the argument’s limitations. First, it doesn’t come out of the models. As Brad says, the map is not the territory; but guesses about such things are, well, guesses. There was a time when everyone knew that import-substituting industrialization was the key to economic takeoff, based on loose historical reasoning (America and Germany did it!). Then developing countries tried it en masse, and the results weren’t great.

Furthermore, my sense is that nonstandard free-trade arguments tend to involve, often unintentionally, a kind of bait and switch. Economists love to talk about comparative advantage…. Somewhere Alan Blinder said that economists would almost all agree on the slogan ‘Yay free trade.’ But the seeming authority of the comparative-advantage case then ends up being carried over, illegitimately, to arguments for trade that have nothing to do with comparative advantage. Yes, there could be positive externalities associated with trade, but there could be positive externalities associated with lots of things, and Ricardian models don’t give us any special reason to think that the trade ones are more important.

So how would you test such arguments? Well, in a way we did carry out an experiment. In the early 1990s there was a widespread orthodoxy that ‘outward-looking’ development policies were much more favorable to growth than ‘inward-looking’ policies… the rapid growth of Asian economies, which had followed an export-oriented path rather than… import substitution… in the 50s and 60s. The question, however, was whether you would see dramatic acceleration of growth in other places, such as Latin America, when policy shifted away from inward focus. And the answer turned out to be, not so much. Look at Mexico, which did a radical trade liberalization in 1985-88, then joined NAFTA. It has seen a transformation of its economy in many ways; it has gone from an economy that didn’t export much besides oil and tourism to a major manufacturing export power. And the effect on development has been… underwhelming.

So Brad could be right; but the evidence is far from conclusive. I would still argue very strongly that it’s crucial to keep markets open for poor countries. But we should be cautious in our claims about the virtues of free trade.