Protectionism as a Skin Disease.

• Author: Lemieux, Pierre

Free Trade & Prosperity

By Arvind Panagariya

384 pp.; Oxford

University Press, 2019

There was a time, culminating in the 1960s, when most mainstream economists and public institutions such as the World Bank believed that, although free trade might be good for developed countries, it was bad for underdeveloped ones. The governments of the latter were advised to go the route of import substitution, implementing protectionist measures to substitute domestic production for imported goods. The General Agreement on Tariffs and Trade, the treaty that would lead to the formation of the World Trade Organization, allowed underdeveloped countries to retain many protections. Trade was perhaps good for the rich but certainly exploitative and bad for the poor, it was reasoned.

Economists were not the only ones thinking along these lines. The intelligentsia generally believed that government planning and socialism were the wave of the future. Protectionism was part of that.

A cracking consensus / Fortunately, with their methodological individualism, understanding of spontaneous order, and penchant for data, trained economists make bad cult members. Starting in the 1960s and especially in the 1970s, they became more and more skeptical of this protectionist wisdom. The dazzling economic takeoff of ardently free-trade Hong Kong and other countries with some degree of liberalized trade--Taiwan, Singapore, South Korea--contrasted with the stagnation of autarkic countries such as India, which was pursuing democratic socialism, and China, where the government was busy launching the Great Leap Forward and the Cultural Revolution, and achieving economic stagnation and deadly famines.

While the future of democratic-socialist India was deemed rosy, more capitalistic South Korea was deemed hopeless. But exports of goods and services as a proportion of South Korean gross domestic product rose from only 4.6% in 1963 to 28.7% in 1973. Over the same period, it fell from 4.5% to 4.0% in India. The South Korean economy grew at an annual rate of more than 9.5% over those years, compared to 3.4% for the Indian economy, observes Columbia University economist Arvind Panagariya in his book Free Trade & Prosperity. In Taiwan, Singapore, and Hong Kong, growth was even more impressive.

Economists who had been protectionist or even socialist changed their minds. As late as 1970, Columbia University economist Jagdish Bhagwati and Harvard economist Padma Desai wrote in their book India: Planning for Industrialization that government planning was required in India and was compatible "with the basic objectives of a socialist society... which we fully share." To their credit, they changed their minds.

That same year, economists Ian Little, Tibor Scitovsky, and Maurice Scott, the first two already well-known, published Industry and Trade in Some Developing Countries: A Comparative Study. They noted "a number of astonishingly successful exports achievements," including Taiwan and Hong Kong. They suggested that

developing countries would benefit from...