Liberalising trade for economic growth

Trade liberalisation, economic development and growth are long debated issues in the developing world. Interestingly, impact from trade liberalisation is of different dimensions. There are also various dimensions of trade liberalisation policy reforms in different countries. The debate is gaining in strength everyday because both the dimensions of cause and effect are increasing gradually in the national and international economies. Bangladesh is no exception since the country has integrated itself with the global economy through multilateral trade links.
If trade liberalisation means untying the knots or relaxing the restrictions or reducing the barriers, countries that have set their targets for sustained growth and prosperity by liberalising  their trade have opened up their markets to trade and investment. By liberalising trade and capitalising on areas of comparative advantage, countries can flourish economically. Most economists consider that trade liberalisation leads to an increase in welfare derived from an improved allocation of domestic resources.  
Trade liberalisation has been remarkably successful in Bangladesh. Policy of openness in 1990 made way for new opportunities to enhance economic growth and foster overall development. Openness can have a positive effect on economic growth, exports, imports, FDI and remittance of a country. The removal of import bias through trade liberalisation will encourage a shift of resources from the production of import substitutes to export-oriented goods. This, in turn, will generate growth in the short to medium term as the country adjusts to a new allocation of resources more in keeping with its comparative advantage. The most compelling argument for greater liberalisation is economic efficiency generated by it, promoting private investment and economic growth. Higher growth in turn helps reduce poverty by increasing employment and real incomes of the poor. Trade liberalisation is good for growth in developing countries, firstly because developing countries have production patterns that are skewed towards labour-intensive sectors like, agriculture and manufacturing. People have low per capita incomes and markets in such countries are usually small.
The Bangladesh economy took off sharply from 1990 due mainly to trade openness and restoration of democracy. Several studies have revealed that our economy for the last two decades has been characterised by successful expansion of export-oriented RMG industries and a significant growth in agriculture resulting from introduction of high-yielding varieties of grains and use of pesticides in rice production. These two sectors enabled us to withstand the decline in our former principal and stable exports, that is, jute and jute goods and redeploy our resources in line with our comparative advantage.
Most economists consider that trade liberalisation leads to an increase in welfare derived from an improved allocation of domestic resources. Import restrictions of any kind create an anti-export bias by raising the price of importable goods compared to exportable ones. The bias can be removed through trade liberalisation which will encourage a shift of resources from production of import substitutes to the production of export-oriented goods. This will generate growth in the short to medium term as the country adjusts to a new allocation of resources more in keeping with its comparative advantage. The most compelling argument for greater liberalisation is economic efficiency generated by it, promoting private investment and economic growth. Higher growth in turn helps reduce poverty by increasing employment and real incomes of the poor.
Economic growth in developing countries is helped by trade liberalisation, firstly because these countries have production patterns that are skewed towards labour-intensive sectors such as agriculture and manufacturing. People have low per capita incomes and markets in such countries are usually small. A liberalised trade regime allows low-cost producers to expand their output well beyond the demand for their products in the domestic market. Secondly, industrialisation based on protection of domestic industries involves higher capital intensity of production and an open trade regime allows constant returns to scale over a much wider range and finally import substitution regimes normally give the governments considerable discretion either in determining which industries should be encouraged or in allocating scarce foreign exchange in a regime of quantitative restrictions leading to serious efficiency losses.
On the other hand, open trade regimes force greater reliance on the market. According to a study, one-third of the developing countries of the world, described as 'rapid globalisers', did extremely well in terms of income growth and poverty reduction over the past two decades or so. These countries, which include Bangladesh, India and Sri Lanka in South Asia, have experienced substantial growth in trade and significant reduction in tariff and non-tariff barriers. Bangladesh, for instance, saw its trade GDP-ratio almost double during the course of the 1990s decade. Other studies suggested that trade openness has a strong positive impact on economic growth and that greater trade openness is good for growth and poverty reduction over the longer term. There may be short term costs in terms of falling real wages of unskilled labour and initially declining employment as greater competition drives out inefficient firms from business. Although these transition costs do not represent a credible case against trade openness, as the longer-term benefit would invariably offset these short-term costs, they need to be tackled through proper compensatory policies aimed at mitigating such costs.
Trade liberalisation policies pursued by Bangladesh have passed through three phases. The first phase (1982-86) was undertaken as Bangladesh came under the purview of the policy-based lending of the World Bank; the second phase (1987-91) began with the initiation of the three-year IMF structural adjustment facility (SAF) in 1986; and finally, the third phase since 1992, was preceded by the IMF-sponsored Enhanced Structural Adjustment Facility (ESAF). These reform measures led to a significant decline in quantitative restrictions, opening up of trade in many restricted items, rationalisation and diminution of import tariffs, and liberalisation of foreign exchange regime.
Although Bangladesh is a trade-liberalised country, it still has one of the top ranked trade protection policies in the world. It was ranked at 8th out of 119 countries in the trade barrier rank and indices before the initiation of the WTO in1995. Unilateral tariff reduction was therefore the major policy reform options under its trade liberalisation process.
The consumers are naturally the ultimate beneficiaries of trade liberalisation. Liberalised trade can help bring prices down and broaden the range of quality goods and services. Liberalised trade diversifies risks and channels resources to where returns are the highest. Accompanied by appropriate domestic policies, trade liberalisation also facilitates competition and investment and augments productivity.
Trade reforms, although beneficial for a country, may negatively affect some industries or some jobs and many analysts worry about negative effects on environment. The solution to these problems is not to restrict trade. They should be tackled directly at source through well-devised relevant policies.
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