Reprint No. 1 NT A *i S 7. 1.. INTERNATIONAL i ECONOMICCENTER,, GROWTH FOR The International Center for Economic Growth is a non-profit research institute founded in 1985 to stimulate international discussions on economic policy, economic growth, and human welfare. The Center sponsors research publications, and conferences in cooperation with an international network of correspondent insti­ tutes, which distribute publications of both the Center and other network members to policy audiences around the world. The Center's research and publications program is organized around five series: Sector Studies; Country Studies; Studies in Human Development and Social Welfare; Occasional Papers; and a Reprint Series. The Center is affiliated with the Institute for Contemporary Studies, and has headquarters in Panama and a home office in San Francisco, C'l ifi)rnia. Publication signifies that the Center believes a work to be a competent treatment worthy of public consideration. 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Development, Kuwait Inverlat S.A., Mexico Roy Ash Sol Linowitz Ash CapitalPartnership, USA Coudert Bros., LISA Nicolis Ardito-Barletta, Chairman Jorge Mejia Salazar Panama Colombia Raymond Barre Saburo Okita France Institutefor Domestic and International Roberto Campos PoliciesStudies, Japan National Senator, Brazil Tomas Pastcriza Carlos Manuel Castillo Banco de DesarrolloDominicano, S.A., Costa Rica Dominican Republic A. Lawrence Chickering John Petty International Center for Economic Marine Midland Bank, USA Growth, USA (ex-officio) Stephen Schmidheiny Gustavo Cisneros EternitA.G., Switzerland Organizacion Diego Cisneros, Anthony M. Solomon Venezuela S.G. Warburg (USA), Inc., USA Roberto Civita J.J.Vallarino Edi'tora Abril, Brazil InterAmerican Councilof Commerce A.W. Clausen and Production, Panama BankAmerica Corporation, USA Paul. A. Volcker Edmund B.Fitzgerald USA Northern Telecom, USA Ivan Head InternationalDevelopment Research Center (IDRC), Canada International Trade and Economic Development Gottfried Haberler International Center for Economic Growth Affiliated with the Institute for Contemporary Studies InternationalTrade and Economic Development Copyright © 1988 by Gottfried Haberler Printed in the United States of America. U rights reserved. No part of this book may be reproduced in any manner without written permission except in the, case of brief quotations in critical articles and reviews. Inquiries, book orders, and catalog requests should be addressed to International Center for Economic Growth, 243 Kearney St., San Francisco, CA 94108. Telephone: (415) 981-5353 ISBN: 1-55815-022-6 GOTTFRIED HABERLER CONTENTS Preface v About the Author vii Introduction 1 The Cairo Lectures: International Trade and Economic Development 17 The Pioneer Lecture: Liberal and Illiberal Development Policy 55 Comment - W. Max Corden 89 Comment - Ronald Findlay 99 Notes 111 PREFACE This monograph, by Gottfried Haberler, is the first in the Center's Reprint Series. The series will reissue out of print or limited edition articles or books of significant merit for policy makers, thus refo­ cusing attention on important development issues and their policy implications. We are extremely pleased to inaugurate this new series with lectures by Gottfried Hab. rler. In his career of more than half a century, he has made important contributions advancing the discipline of economics, especially in international trade and devel­ opment. His work in the areas of' comparative advantage and the welihre implications of free trade and protection ha, had a major influence on trade policy, and in turn has affected the course of de­ velopment economics. He has thus contributed to the advancement ofeconomic theory and the improvement of policy formulation. He has been widely recognized by the economics profession with honors such as the Fresidency of the American Economic Associa­ tion in 1963. The lectures are presented by an introduction, written for this publication, that clarifies certain issues of import to Professor Haberler. Spanning over thirty years, the lectures-the Cairn lectures of 1959 and the 1987 Pioneers lecture with comments by W. Max Corden and Ronald Findlay-demonstrate the timeless nature of Professor Haberler's analysis and policy recommenda­ tions. We are confident that these recommendations remain valu­ able for both economists and policymakers. Nicolds Ardito-Barletta General Director International Center for Economic Growth Panama City, Panama July, 1988 ABOUT THE AUTHOR Gottfried Haberler is Galen L. Stone Professor of International Trade, emeritus, Harvard University. Over the course ofhis career, he has made )utstanding contributions in the field of economics, through his work in such areas as international trade, terms of trade, and foreign exchange. Professor Haberler is a former presi­ dent (1950-51) and honorary president (since 1953) of the Interna­ tional Economic Association, former president of the National Bureau of Economic Research (1955), and former president of the American Economic Association (1963). He has been awarded honora.y degrees from several Earopean universities. Among his many publications are his classic work The Theory of International Trade, with its Application to ConmerciailPolicy(1936), Prosperity and Depression (1937), and Selected Essays of GottfriedHaberler (1985). Professor Haberler is currently a resident scholar at the American Enterprise Institute, in Washington, DC. Introduction More than thirty years have elapsed since I first wrote on economic development. More than a half century has passed since my first published paper on international trade and trade policy,1 and a quarter century lies between the lectures reprinted in this volume. 2 Much has changed during this time. The general posture of economic policy in many countries has changed. Our perceptions of the past have shifted. Methods of theoretical analysis have been refined-often to the point of zero marginal returns-and torrents of statistical data, often of questionable value, have surged from national governments and international agencies. I must confess that despite all these changes, I still maintain my early beliefs in the validity of classical or neoclassical theory"1 and the superiority of liberal economic policies-defining the term "economic liberalism" in the original, classical sense of relying largely on competitive markets and private enterprise. I do realize however, that by making unrealistic assumptions about inelasticities, rigidities, externalities, and the alleged irrational 2 GOTTFRIED HABERLER behavior of market, participants, especially lowly farmers in less developed countries (LDCs), it is possible to use the tools of neoclassical trade theory for developing logically valid arguments for pernicious interventionist and protectionist policies. The Decline and Resurgence of Economic Liberalism In my Pioneers lecture I noted that after World War II, when the problem o 'growth and development in the Third World was thrust upon the West by the breakup of the colonial empires, faith in capitalism and free markets was at an all-time low, especially among economists and intellectuals. I mentioned two reasons for the low level of confidence. First, the legacy ofthe Great Depression of the 1930s which was misinterpreted both by Marxists and by Keynes and his numerous followers as being due to a basic flaw in capitalism. Second, the apparent immunity ofStalin's Russia to the catastrophic depression that engulfed the West and the great early economic successes of Hitler's Germany strongly affected the Wes and persuaded many of Keynes' followers of the superiority of central planning over private enterprise and free markets. The lack of faith in the efficacy of the price mechanism was strikingly illustrated by the popularity of the theory of the permanent dollar shortage which was embraced not only by some radical followers of Keynes, such as Thomas (Lord) Balogh and Joan Robinson, but also by The Economist, and in a more sophisticated form by two ex­ tremely influential economists, J. R. Hicks and D. H. Robertson. In view of all this, it is not surprising that economic policy in most Third World countries has been, and in many countries still is, anything but liberal in the classical sense. In the Western democracies, the demise of economic liberalism did not last long. In Western Europe the change came dramatically in 1948 with the famous currency and economic reform in Ger­ many. The large monetary overhang inherited from the wvar was slashed, and the tight web ofprice and wage controls and consumer rationing that prevented the huge stock of money from driving up prices was abolished overnight. Many economists, especially fol­ lowers of Keynes such as Balogh and J. K. Galbraith, predicted dire consequences: the lifting of controls would create chaos, and the InternationalTradeand Economic Development 3 Soviet Zone of Germany would outproduce the