Re: CJE 2001 critical review of trade theory and policy

["Leigh Harkness" <Leigh@xxxxxxxxxxx>]

I would agree with the these conclussions within the current
monetary/exchange rate regime

> CONCLUSIONS
> p821 "the thrust of the theoretical and empirical literature is far from
> supportive of such postures" [sc for "free trade"]
> p821 "it is totally inappropriate to address trade theory and policy
> separately from other aspects of industrial policy and performance and
> macroeconomic considerations."

Free trade would be the best outcome if a country could operate at full
employment without balance of payments difficulties.

However, that is not possible under our current monetary/exchange rate
mechanism.  There are two stable equilibrium positions under the floating
exchange rate system:

1.  Either the country is a net importer of foreign capital and has growing
foreign debt, low growth and high unemployment; or
2. The country is a net exporter of capital with rising foreign assets, with
growth and employment dependant upon the level of monetary growth.

Japan is an example of the second type.  When it had rapid monetary growth,
it had  rapid economic growth and high level of employment.  When the
monetary growth slowed or stopped, the economy slowed or stopped.

Most of us seem to live in countries of the first type.  Monetary growth
also contributes to economic growth in our countries but it also contributes
to foreign debt and inflation.  Hence, in an attempt to restrict the rate of
inflation and the growth of foreign debt, monetary growth has to be
constrained.  This constrains the level of economic growth and the level of
employment.

If our monetary/exchange rate systems generated a single stable equilibrium
point that produced full employment and a stable external account, then we
could advocate free trade.  But while the current monetary/exchange rate
system exists, the best we can do is try to compensast for the distortions
created by that system.

Regards

Leigh








----- Original Message -----
From: "g kohler" <kohlerg@xxxxxxxx>
To: <pkt@xxxxxxxxxxxxxxxx>
Sent: Sunday, March 10, 2002 1:56 AM
Subject: CJE 2001 critical review of trade theory and policy


> The Cambridge Journal of Economics 2001 has an interesting critical
> review article on trade theory and policy. Any comments?
> Gert Kohler
>
> Reference:
> Sonali Deraniyagala and Ben Fine,
> "New trade theory versus old trade policy: a continuing enigma"
> Cambridge Journal of Economics 2001, 25, 809-825
>
> My EXCERPTS ------------------------------------
> p809 "As reported in Prasch (1996), support for free trade amongst
> academic economists in the USA is astonishingly high at 97%!"
>
> p810 "Section 1 examines conventional theoretical arguments relating to
> trade liberalisation and
> Section 2 reviews recent developments in new trade theory.
> Section 3 examines the empirical research relating to liberalisation
> dealing with both cross-country research and industry and firm-level
> studies.
> We close with a brief summary."
>
> TRADITIONAL THEORY
> STATIC GAINS
> p810 "Static, once-and-for-all gains arise as the misallocation of
> resources under protection and import substitution is corrected, . . .
> empirical estimates of the welfare costs of these relative price
> distortions rarely exceed 2 or 3 percentage points of GDP . . .
> negligible welfare gains . . ."
>
> "DYNAMIC, LONG-TERM GAINS FROM LIBERALISATION"
> The authors examine rent seeking, X-efficiency, IRS, and long-term
> productivity arguments and find that
> p810 arguments for those are "lacking both theoretical consistency and
> empirical validity"
>
> NEW TRADE THEORY
> p.812 "established in the 1980s (Ethier, 1982; Krugman, 1984, 1986;
> Brander and Spencer, 1985; Eaton and Grossman, 1986; Grossman and Horn,
> 1988; Grossman and Helpman, 1991)."
> p812 "incorporating a fuller range of factors. However, they provide
> few, if any, unambiguous conclusions."
>
> LINKS WITH NEW GROWTH THEORY
> p814 "Models linking trade and endogenous growth . . . provide few
> generalisable conclusions."
>
> EMPIRICAL EVIDENCE from Cross-Country Research
> p817 "many of these studies suggest that the effects of liberalisation
> on growth are ambiguous and complex"
> p818 Greenaway et al 1998 - "use panel data across liberalisers and
> non-liberalisers (with/without and before/after) to come to a negative
> conclusion on the effect of trade reform on growth . . ."
> p820 "liberalisation beyond trade, to capital markets, has not been
> favourable to industrial performance" - The authors mention the
> influence of other factors, including exchange rates, interest rates,
> demand.
>
> CONCLUSIONS
> p821 "the thrust of the theoretical and empirical literature is far from
> supportive of such postures" [sc for "free trade"]
> p821 "it is totally inappropriate to address trade theory and policy
> separately from other aspects of industrial policy and performance and
> macroeconomic considerations."
>
>
>
>
>
>
>
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