for growth with a sufficient time lag, if there is sufficient infrastructure, if trade
liberalization is considered credible, and if trade liberalization does not lead to
a serious squeeze on government finances. These contingent factors are
discussed here in turn.
Trade liberalization and resource re-allocation
The theory underlying the expectations of a positive link between trade liber-
alization and higher income (the model outlined very briefly at the outset of
this chapter) assumes perfect markets (Stiglitz, 2007:28). Markets must work
efficiently to ensure that resources displaced from one sector as a result of
trade liberalization are quickly re-allocated to other sectors. Labour, for exam-
ple, is assumed to migrate easily into other jobs without facing lingering unem-
ployment. The inevitable time delay in such adjustment could account for the
failure of empirical studies (which tend to focus on the contemporaneous
impact) to reveal a strong link from trade liberalization to higher incomes or
higher growth. However, it is not easy to measure the lagged benefits of trade
liberalization.
Tr ade liberalization and geography
Trade liberalization is not enough. Countries need infrastructure to take advan-
tage of trade liberalization; these include the roads,ports and warehouses
necessary for producers to send goods overseas at low cost. Chapter 11 shows
that being landlocked and hence isolated from international markets has a
significant impact on levels and growth of GDP in developing countries.
Trade liberalization and policy credibility
The link from trade policy to growth may be difficult to discern unless the
‘credibility’of trade policy reform is properly accounted for. Trade-policy
reform will only work to the extent that it motivates entrepreneurs and work-
ers to shift factors of production (land, capital and labour) away from less
productive import substitution/non-traded sectors to more productive export
oriented/traded sectors. In the process there are various adjustment costs such
as re-training workers or the physical loss of machinery that is not suitable for
producing in new sectors. The willingness of entrepreneurs and workers to
bear these costs depends on their shared expectations as to the likely staying
power of reforms (this is discussed in relation to investment in Chapter 3).
Trade liberalization may not be considered credible if it is accompanied by an
import surge (as import tariffs are reduced), resulting in an unsustainable
balance-of-payments deficit; if the cuts in tariffs generate an unsustainable
government budget deficit; if liberalization causes redistribution of income in
the domestic economy that is not politically sustainable (if those benefiting
from import controls are politically influential); or if government is not really
committed to the liberalization (because it has been imposed by the
IMF/World Bank in return for emergency lending). If individuals don’t
believe in the credibility of trade reform or even just wait to gauge whether the
282 Patterns and Determinants of Economic Growth