Growth and development: Why openness to trade is necessary but not sufficient

We are experiencing a battle of ideas regarding the state of the global economy and prospects for growth. Larry Summers has been leading the group of economists proclaiming that the world entered an era of secular stagnation since the global financial crisis. On the other end, Standard Chartered Bank and other players have been arguing that we are experiencing an economic super cycle—defined as average growth of around 3.5 percent from 2000-2030—due to strong growth in emerging markets and fueled by a global demographic dividend.

There is not even agreement on the factors that drive global growth and development. While parts of the Americas and Asia just concluded the Trans Pacific Partnership (TPP) and recent World Trade Organization (WTO) agreements on trade facilitation and information technology products show progress is possible, the Transatlantic Trade and Investment Partnership (TTIP) negotiations between the U.S. and the EU remain highly controversial and the upcoming WTO Ministerial in Nairobi will likely underwhelm. 

However, if you look at the facts, the situation is very clear:

Openness is an indispensable enabler of growth, job creation, and poverty reduction. Trade provides new market opportunities for domestic firms, stronger productivity, and innovation through competition. It contributes to poverty reduction, stronger wages, geopolitical benefits derived from deeper economic integration, and even on the personal level—increased individual choice and freedom. No country has developed successfully in modern times without harnessing economic openness—to international trade, investment, and the movement of people. This is especially relevant for smaller countries as rarely has any country with less than 10 million people reached high income status with less than 50 percent of exports in GDP.

The global trade landscape continues to evolve. The production of parts and components that previously took place in a single factory, or in a single country, is now dispersed internationally. These global value chains (GVCs) offer developing economies an avenue to engage in the global economy in ways not previously possible. Additionally, more players are joining the game—developing countries now make up close to 40 percent of world trade. These changes mean competition in global markets has intensified, which implies a greater need for countries to be more competitive, because openness alone is not enough.

This is where the competitiveness agenda kicks in. To fully reap the benefits of openness—through trade, investment, and movement of people—it is crucial to pursue a twin strategy of trade and competitiveness, argues a recent report by the World Economic Forum. Trade is fundamental for a country’s economic competitiveness, and competitiveness in turn boosts the success of firms and economics in global trade, in particular integration into GVCs. 

The competitiveness of an economy determines how well it can convert the potential that openness offers into opportunities. This entails three main components. First, policies and regulations that affect the business climate, many of which are captured in the World Bank Group’s annual Doing Business Report, but also stable macroeconomic conditions—a function of fiscal, monetary, financial, and exchange rate policies. Second, institutions, including all aspects of “good governance” such as efficient public administration, timely decision-making, and impartial enforcement of property rights and contracts. Third, infrastructure, both “hard” or core physical infrastructure in transport, communications, energy, and logistics, and “soft,” which includes education and skills—the social and knowledge capital that make investments in hard infrastructure and new technology more productive.

Many see competitiveness as a zero-sum game, where your economy is losing out if mine is advancing.  In reality, enhancing competitiveness is a “race to the top” where private enterprises become more productive, create jobs, and boost incomes. And, in an interconnected world of GVCs, improving competitiveness is as much a collective effort as an individual one. 

Whether we find ourselves in secular stagnation or a super-cycle, strengthening both openness in the global economy and domestic competitiveness has never been more important. The potential for gains to growth, innovation, job creation, and development through a twin approach of trade and competitiveness lay before us.