5 Decolonization
Farooqi
Decolonization allowed a hundred newly independent countries to pursue their own trade policies. Modernizing elite coalitions in most postcolonial nations tried to achieve industrialization through import substitution behind protective tariff walls. None succeeded. Not one. Zero. The ones that did manage to industrialize invariably did so out in the open, on the backs of export-oriented industries. In the cross-section of 163 countries, a 10 percentage point greater exposure to the world market is associated with 0.36 percent faster growth in per capita income. The reasons for this strong pattern are not hard to discern.
In the Heckscher-Ohlin model, cross-country variation in the opportunity cost of production is the source of comparative advantage and gains from trade. All countries gain from the resulting international division of labor and the economies of scale that attend specialization. Even countries that specialize in industries where prospects for productivity growth are meager stand to gain from improving terms of trade arising precisely from differential productivity growth across global industries. The dependency theory argument against Ricardian comparative advantage goes as follows. Yes, countries can gain from trade by specializing in activities where they have a static comparative advantage. But this may come at a dynamic cost because specialization in some activities, in the presence of externalities such as regional and intersectoral spillover effects, may be more conducive to future aggregate productivity growth. This argument hardly applies to highly diversified economies like the US, but it does apply with some force to countries that have a comparative advantage in commodity extraction.
At any rate, following the logic of path dependence takes us back to the very same place because the dynamically advantageous economic activities are precisely those in the tradable sector. In the United States, value-added per worker in the tradable sector has grown at 3 percent per annum over the past two decades. In the non-tradable sector, it has grown at just 0.6 percent per annum. In the cross-section of US states, a 10 percent higher share of tradables in value-added is associated with 0.7 percent higher productivity growth.
Regions and countries with a higher share of economic activity in tradable sectors innovate more, are more productive, have higher wages and narrow the “productivity gap” faster.
Not only is exposure to the world market strongly associated with dynamism at the level of industries, administrative regions and countries, it is also associated with dynamism at the level of firms within any given industry. It is a well-known empirical law that exporting firms are more productive than non-exporting firms. And it is not just that high productivity firms self-select into competing on the world market, although it is known that such sorting takes place systematically. Scholars have documented what’s called “learning by exporting”: productivity grows faster in exporting firms, even after controlling for prior levels of productivity. This is because exposure to the world market is not only a source of disciplinary competitive pressures on the firms but also provide[s] them with valuable ideas and information that is not available in their domestic markets, thus enabling them to boost their subsequent innovation output and firm productivity.
The Heckscher-Ohlin class of Ricardian models explained inter-industry between countries; they could not be modified to explain the dominant pattern of trade in the core of the world economy: trade within the same industry between countries with similar factor endowments. New trade theory, beginning with the pioneering work of Krugman and Helpman, highlighted the importance of product differentiation and increasing returns to scale to explain why intra-industry trade was dominant and why most trade takes place between countries with very similar factor endowments.