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The Elixir of Growth

CAMBRIDGE: Southeast Asia's financial crisis -- leapfrogging from Thailand to Malaysia to the Philippines and Indonesia -- is far more than a serious regional difficulty, as stock market sell-offs from Hong Kong to Frankfurt to New York demonstrate. Populist doubts about the wisdom of globalization are now rumbling across the Pacific and around the globe. After all, the opponents of free trade ask, if Asia's tigers can be brought to their knees by international financial markets, is any developing country safe?

In the face of such doubts, it is necessary to review what liberalization achieved in recent decades. Over the last 25 years, and especially since the collapse of communism, the world witnessed astounding economic integration, perhaps the greatest in human history. It was this process, indeed, that allowed Southeast Asians to begin dreaming of riches in the first place. Assisted by international organizations such as the International Monetary Fund and the new World Trade Organization, an unprecedented number of governments in postcommunist and developing countries alike chose to integrate their peoples into the world system by opening their economies to international trade.

Opening a once closed economy, however, is no easy option for governments. Trade liberalization exposes often ill-prepared businesses to the intense pressures of international competition, and requires a wide array of often painful reforms and risky politically decisions. And yet, even very poor countries are beginning to believe that open trade may be their ticket to prosperity. But as trade liberalization spreads to every corner of the globe vital questions arise. Will trade boost economic growth? If so, what can trade liberalization do for the cause of income equality across the world?

To answer these questions I recently completed a study with Andrew Warner of Harvard University covering 111 countries from 1970 to 1989. It revealed that, on average, open economies can be expected to grow 2.45% faster than closed economies. Investment-to-income ratios were higher as well for open economies, by an average of 5.4% compared to closed economies, thereby boosting growth indirectly. These findings confirm a basic truth of economics, one dating back two centuries to Adam Smith: open trade promotes growth.