Trade and development:

Trade policy has always been considered to be an important component of a country's development strategy. During the past half a century  there has been a sea change  in the view of analysts  regarding the nature of an appropriate  trade policy. Whereas fifty years ago there was a consensus among economists  and policy makers that an appropriate trade policy should protect infant industries in the country, today there is a consensus in favour of an export oriented trade policy' . We discuss  in this Unit, why a protectionist trade policy often called a policy of  import substitution industrialisation (ISI) was adopted and how it fell out of favour. We also discuss the current views of what an appropriate trade policy should be the debate  for much  of the late fifties and the sixties was centred around Prebisch's  thesis of declining relative prices for primary commodities: Some questioned Prebisch's  analysis of the historical data. Others like Cairncross argued that even if terms of trade for primary commodities  had declined  in the pre-Second World War period it was no longer  true  in  the  'post  'war period.

The arguments of these economists seemed to be bolstered by  the buoyant prices for  primary  commodities  in  the  fifties  and  sixties, actually  till the mid-seventies. In  the mid-sixties  the focus of the debate turned towards  the question as to what IS1  policy had achieved. Had it been a success  in fostering economic development? The conclusion both from cross country analysis and detailed country studies was that the IS1 strategy had been a failure. But there were  enough ambiguities in the results  that the conclusion was not always accepted. Also  the static inefficiencies identified by  this analysis were very small and  it was not very convincing that they could lead to large differences  in growth rates. We discuss the analyses, the conclusions  and the weaknesses in these studies.

Because of the weaknesses in the studies attention in cross country analysis shifted  towards finding a relation between trade policy and growth rather than the earlier attempt to find a relation between trade performance and growth. Also attention shifted from analysis of static inefficiencies to  looking at the dynamic effect of  trade policy.