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AS I SEE THINGS: Impact of trade on economic growth


AS I SEE THINGS: Impact of trade on  economic growth

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THE LINK between trade and economic growth is one of those subject matters that have received a tremendous amount of attention in both the theoretical and empirical economics literature, and rightly so. While most theories dating back to the days of absolute and comparative advantage are pretty clear in their manifestations and policy prescriptions, the empirical literature is filled with controversy, creating doubts in relation to the question of whether trade causes growth or vice versa.

Irrespective of the controversies pertaining to things such as what is being measured and the kinds of quantitative techniques used to investigate the trade-growth nexus, no one can deny that a country such as China has enjoyed a pretty long period of massive economic growth that has been linked to impressive performances by the country’s exports. Hence, in the absence of any formal empirical analysis, one may easily conclude that China’s growth experience was primarily export based. Certainly, the anecdotal evidence backs up that inference.

Recent dynamics in the global economy, vis-a-vis the sluggish growth performances, have brought into direct focus the role of international trade in stimulating economic growth. In relation to that issue, a recent article carried by The Economist alluded to the following statement by one Bernard Hoekman: “There are different potential explanations of a ‘structural’ nature (that is non macroeconomic) that can result in a decline in the income elasticity trade. One is that it reflects a change in the composition of global trade towards products that have a lower elasticity. Another is that the slowdown simply reflects the end of the integration processes of China and central/eastern Europe – that is, the high trade growth was largely a transitional phenomenon.

“A third is that it reflects the limits having been reached on the ability of [incentives for] firms to engage in the international fragmentation of production that is part and parcel of [Global Value Chains]. A fourth potential explanation is a rise in government support for domestic industries, reducing the incentives for firms and households to buy goods and services from foreign suppliers.”

All of the reasons cited are indeed potential explanations for the declining impact of trade on economic growth in the global economy. But, from a practical perspective these issues imply or should I say remind us of the dynamic nature of economic relationships. Not only do economic environments change rapidly but so too does the nexus between one key economic variable and another.

These changes should signal to policymakers that they ought to be constantly thinking about the peculiar circumstances facing their economies and make the necessary adjustments in policies in order to sustain growth levels. China, for example, has recognised this very point and is now moving ahead with a new emphasis on personal consumption expenditure to drive the economy rather than continue to rely on trade in general and exports in particular.

Do we in the Caribbean approach economic strategies in that manner? Do we even care? Do we still embrace the idea that trade is good for growth and are therefore prepared to position our economies along lines which suggest that trade is our engine of economic growth? Going forward, we ought to think strategically when it comes to the conceptualisation of economic policies and strategies that are supposed to make us more prosperous. If we fail do so, then, our economic woes will simply exacerbate!

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