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Comparative advantage, Free Trade and Development Issues

By Edited Jun 19, 2015 0 0


In the current context of globalization and deregulation, free trade based on the concept of comparative advantage. That is, it is beneficial to all countries as it increases economic growth and development imbalances are automatically adjusted by the free market. However, the empirical evidence and historical evidence is not supporting this argument. For example there are several  theories other than comparative advantage like new trade theories, which take in to account real world complexities and the benefits of trade particularly for the developing world. In this article,  I will discuss the basis of comparative advantage and its assumptions and how the theory, do not explain  imbalances and in many respects  contrary to the real pattern of trade and development not based on free trade. There are many economists who  disagree with comparative advantage, due to its flawed economic model and they  rejected the claim, that free trade benefits all countries particularly in the context of  developing world.

Criticism of free trade agenda by Economists and Other International Bodies

Many prominent Economists and other leaders critique trade liberalization, outside Washington Consensus on the basis of empirical evidence and theoretical claims, that liberalization benefits in boosting economic development and growth. For example, in a book by Agosin and Tusssie, 1993, page 7 has identified that export growth has come from selective trade policies and industrialization and not from trade liberalization. As well, these authors have highlighted that this is applicable to rich countries in the past and even today. They have pointed out in their book that rich countries have used protectionism, used subsidies, ignored patent laws and intellectual property rights. As well these authors have also pointed out in their book that these polices practiced  by rich countries even today. In addition, IMF has grudgingly accepted, contrary to its theoretical model predictions, systematic examination of empirical evidence leads to the conclusion that there is no proof that financial globalization has benefits growth  in developing countries. The trade policies of IMF and World Trade Organization is critiqued by Joseph Stiglitz, which still echoes in the world. The critiques of trade policies and free trade is attacked by many economists who are prominent, begs the question whether the theoretical model of  comparative advantage is flawed or they are simple and do not explain and predict real world trade and development issues, particularly in the context of developing countries.

The comparative advantage theory as a basis of free trade model and its critique

Comparative advantage rests on three important premises. Firstly, it rests on the premise of constant return to scale and the impact of trade on local economy is painless or temporary for all countries. Secondly, if there is trade imbalances  rectify within a short period in adjustments in terms of trade as quickly as possible with little or no pain on the local economy. Thirdly, comparative advantage rest on the presumption all countries enjoy full-employment or near full-employment as market forces tends to come into equilibrium at or near full-employment if market forces are allows to work with least interference in the market economy.

Most of  conventional trade theory based on comparative advantage is criticized by economists on grounds of theoretical basis as well as empirical basis. For example, the presumption that full-employment is the norm in most of the trading nations is a contentious issue. Most economies  experience high level of unemployment not acceptable to the nation . For example, ILO ( International Labor Organization) points  that one-third of the worlds workforce  or underemployed. In developing world it is much worse. The ILO points that in developing world there are 1.3 billion people  or underemployed. Given this pattern of unemployment, there is no economic analysis which favours automatic tendency for full-employment.

Comparative advantage presumes that the trade imbalances  in a short-period of time is balanced due to changes in terms of trade. However, US mostly have  balance of payment or trade deficit and some countries have surpluses and imbalances are persistent. As well, there exists problems due to elasticity and its impact on trade imbalances among economists. That is trade imbalances adjust painlessly in a short-period of time is contentious on empirical and theoretical basis. In other words, comparative advantage and free trade benefits all countries irrespective of developed or developing is fallible.

Comparative advantage rests ona presumption of constant return to scale. This is also questionable as in practice other than constant return to scale exists and the theory do not explain why constant return to scale is a fair presumption. Based on theoretical grounds alone on this presumption comparative advantage and benefits of trade can argued that it is not the case. As mentioned above, it is reasonable to argue that comparative advantage and free trade benefits are not true and on theoretical grounds.



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