Trade Economic

American Economic Association

Trade Policy and Economic Development: How We Learn Author(s): Anne O. Krueger Source: The American Economic Review, Vol. 87, No. 1 (Mar., 1997), pp. 1-22 Published by: American Economic Association Stable URL: http://www.jstor.org/stable/2950851 Accessed: 11/07/2009 19:07
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Trade Policy and Economic Development: How We Learnt
By ANNE 0. KRUEGER*
The improvement in living standards, life expectancy, and economic growth prospects in developing countries ranks among the most important economic success stories since the Second World War. Growth in some has been dramatic,and while progress has been far from uniform, thereare grounds for optimism that future growth prospects can be even better than performance to date. One factor accounting for that success has been improved understandingand adoption of economic policies much more conducive to satisfactoryeconomic growth than was the case in the 1950's and 1960's. That better understanding, in turn, resulted from a combination and interactionof researchandexperience with development and developmentpolicy. Ideas with regard to trade policy and economic development are among those that have changed radically. Then and now, it was recognized thattradepolicy was centralto the overall design of policies for economic development. But in the early days, therewas a broadconsensus that trade policy for development should be based on "import substitution." By thiswas meant that domestic productionof importcompetinggoods shouldbe startedandincreased to satisfy the domestic marketunder incentives provided through whatever level of protection againstimports,or even importprohibition,was necessary to achieve it. It was thought that imin would be synport substitution manufactures which in turn onymous with industrialization, was seen as the key to development.The contrast with views today is striking. It is now widely accepted that growth prospects for developing countries are greatly enhanced through an outer-oriented trade regime and fairly uniform incentives (primarily through the exchange rate) for production across exporting and import-competing goods.' Some countries have achieved high rates of growth with outer-orientedtrade strategies. Policyreform efforts removing protection and shifting to an outer-oriented trade strategy are under way in a number of countries. It is generally believed that import substitutionat a minimum outlived its usefulness and that liberalization of trade and payments is crucial for both industrialization and economic development. While other policy changes also are necessary, changing trade policy is among...