mechanics of trade policy been clear, Friedrich Hayek argued that it was a
‘fatal conceit’ that the economy can be brought under central direction and
control and that the state could plan for infant industries or dynamic external-
ities. Planners cannot find out what needs to be done to co-ordinate the
production of a modern economy. It is impossible for planners to know what
hundreds of millions of different people would choose or desire. The avail-
ability of skilled manpower is limited in developing countries and there are
real opportunity costs to employing the skilled/educated in the public sector.
Focusing policy-making on areas such as manufacturing, foreign exchange
markets, regulating credit and investment licensing diverts government
resources away from those activities where they might be better advised to
intervene, such as the enforcement of contracts, provision of public services
like primary school and basic public goods such as roads and communications
(Krueger, 1997).
The third step was a closer examination of the assumption that governments
are well-intentioned. The early development economists had focused on
market failures as an argument against free trade but had not given equivalent
consideration to the government. They seem to have suggested the state was
some sort of selfless guardian that could costlessly intervene to give a big push
to investment or to correct externalities. They assumed a combination of self-
interest in the private sector and public interest in the public sector. An impor-
tant question they ignored was whether government failure could be worse
than market failure. Decisions regarding economic policy are made by politi-
cians who respond to political pressures. The creation of a new industrial
sector automatically creates an interest group keen for more subsidies and
unlikely to want any exposure to the perils of foreign competition. This means
there will be a tendency for an increasing proliferation of policy instruments as
various groups assert competing and conflicting claims (Krueger, 1990). There
is general agreement that the measureable benefits from re-allocating
resources as a consequence of trade liberalization are no more than 2–3 per
cent of GDP. To the direct costs of government controls or intervention we then
need to add all the resources expended in acquiring, protecting and expanding
the benefits from government intervention (subsidies and protection against
imports). Resources will also have been wasted by individuals who lobbied for
but failed to acquire rents (Krueger, 1974).
The fourth step was the development of more positive arguments in favour
of trade liberalization. Trade liberalization, according to its proponents, is
likely to be good for growth for a variety of reasons. Trade liberalization will
divert entrepreneurial energies away from trying to boost profits by securing
more trade protection from the government and towards efforts to introduce
new products and processes to compete with imports. Competition from
foreign imports and for foreign markets will force firms to reduce inefficiency,
reduce costs and improve quality. Trade liberalization will give firms access to
better-quality imported capital goods which will increase the efficiency and
productivity of domestic production. Openness to world markets will give
276 Patterns and Determinants of Economic Growth