NATIONAL LAW UNIVERSITY ODISHA

(Allotted Project for the International Trade Law)

ADVANTAGES AND CHALLENGES OF LIBERAL TRADE

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 TABLE OF CONTENTS

1. INTRODUCTION ...................................................................................................................... 3

1.1. Terms of Trade Liberalisation ............................................................................................... 4

1.2. What is Reciprocal Liberalization? ....................................................................................... 5

2. ADVANTAGES .......................................................................................................................... 6

Advantage 1: Does Trade liberalization result in Globalisation? ............................................. 6

Advantage 2: Does Trade Liberalization offer Contingent Protection? ................................... 6

Advantage 3: Do liberal trade policies promote openness? ...................................................... 7

Advantage 4: Does trade liberalisation promote efficiency and competitiveness? .................. 9

Advantage 5: Does trade liberalisation result in macroeconomic stability of nations? .......... 10

Other advantages ..................................................................................................................... 11

3. IMPACT OF TRADE POLICY ON GROWTH IN INDIA ................................................. 12

4. CHALLENGES......................................................................................................................... 13

CONCLUSION................................................................................................................................. 16

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 1. INTRODUCTION

With the passing decade, ‘Trade liberalisation’ has become an indispensable part of international
policies of the developing nations. With an aim to spring their economic growth, nations have given
due acknowledgement to adoption of such liberal methods of trade policy implementation. However,
like every second face of a coin, several disagreements have been raised time and again with respect
to the effectiveness of such liberal policies, with the most plausible conclusion being arrived is that
such liberal trade policies induces a small yet long-lived boost to the economic growth of a nation. A
major component of this is an increase in productivity.1

The “underlying reason of liberal trade is that the relationship of countries formed into a framework
where the free-progression of products is an important quality for the smooth working of the world
economy. Fundamentally, the less the limitations on exchange, the better the working of the
multilateral trading system and consequently the better working of the world economy.”

The method by which free-trade is accomplished is through the harmonization and containment of
the domestic barriers to the free-flow of goods. In essence, the GATT was created to “facilitate
economic integration to further the ultimate goal of convergence by adopting rules of international
behaviour and . . . imposing those rules on member states.”

The GATT's Articles I and III obligate a Contracting Party to treat imports no less favourably than
other imports (the “Most Favoured Nation” or “MFN” clause) and no less favourably than similar
domestic goods after border duties (the "National Treatment" clause). Article XX, however, provides
some general exceptions to these obligations. A measure invoking an Article XX exception must still
avoid “arbitrary or unjustifiable discrimination between countries and must not be a "disguised
restriction on international trade.”

The WTO is the supreme body overseeing the rules and regulations related to trade at international
level. At the core of WTO Agreements lies the legal backing of rules guiding the overall mechanism
of international commerce and for trade policy. The said agreements hold the following main
objectives: “to help trade flow as freely as possible, to achieve further liberalization gradually

1
Trade Liberalisation and Economic Performance: An Overview, Alan Winters, The Economic Journal , Feb., 2004,
Vol. 114, No. 493, Features (Feb., 2004), pp. F4-F21

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through negotiation, and to set up an impartial means of settling disputes.” The WTO agreements
strike on the principles of liberalization, and the permitted exceptions. They are inclusive of the every
nations commitments individually in relation to tariffs and other trade barriers.”

It also seems safe to say that most economists think that the GATT has been at least moderately
successful in liberalizing trade. For instance, Bagwell and Staiger (1999) write “the central role
played by the GATT in shaping post-war trade policy is widely accepted”. Krueger (1998) writes: “.
. . the growth and liberalization of the international trading system has been the most prominent
success of the post-war period . . . the great liberalization of tariffs and trade in the post-war period
was achieved under the auspices of the GATT . . .”

1.1.TERMS OF TRADE LIBERALISATION

Liberalization of trade as exchange of market access is predictable with the political economy
premises of a public decision perspective on strategy assurance, due to the attention on income
circulation and political intentions in policy decisions and choices. An elective view underlines the
impacts of terms of trade changes on social welfare. After governments have proportionally applied
duties with the expectation of improving the terms of trade exchange, there are in everyday
complementary incentives to liberalise exchange.

There are several indicators of a liberal trade policy:

1. Openness;

2. Trade flows adjusted for country-characteristics;

3. Tariffs;

4. Informal or qualitative measures;

5. Composite indices, and;

6. Measures based on price outcomes.

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Harrison (1996) 2 describes a number of trade policy measures for developing countries, 3 of these
are composites. They include:
(1) an index “derived using country-specific information on exchange rate and commercial
policies taken from Papageorgiuo et al. (where higher values indicate more liberal policy; this
is denoted ‘‘index from FX and commercial policy”);
(2) an index “calculated using country sources on tariffs and NTBs’’ derived by the World Bank
(again, higher values indicate more liberal policy; this composite is denoted ‘‘Index from
Tariffs and NTBs”); and
(3) A “measure of indirect bias against agriculture resulting from industrial protection and
exchange rate overvaluation (where higher means lower protection)”.

1.2.WHAT IS RECIPROCAL LIBERALIZATION?

Through equal progression, two liberalizing governments can move ahead without charging taxes to
transfer income to their own exporters, while proportional advancement keeps part of that income
from being caught by foreign exporters. The corresponding advancement through trade liberalisation
that happens is likewise useful for society everywhere in every country, by drawing nations nearer to
deregulation and free trade. The social advantages of more liberal exchange strategies have come to
fruition, be that as it may, in light of the political interest in opening foreign business sectors to export
enterprises.3

Policy makers managing the trade and exchange advancement are, imperatively worried about such
thoughts of market access, for example, permitted quantities according to the import quotas and
imposition of import tariffs. By trading market access for one another's exporters, governments desire
to be viewed as equally giving advantages to one another's export areas with an adequacy, or a
perceivability, that may not be conceivable through unilateral liberalisation. Every administration
benefits politically from the market access accommodated for its export ventures by the other
responding government.4

2
Harrison, A., 1996. Openness and growth: a time-series, cross-country analysis for developing countries. Journal of
Development Economics 48, 419– 447.
3
Hillman et al. 1995; Hillman and Moser 1996
4
Trade Liberalization and Globalisation, Arye Hillman, The Encyclopaedia of Public Choice edited by Charles K. Rowley
and Friedrich Schneider and published in 2004 by Kluwer Academic Publishers, Volume I, 312–320.

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 2. ADVANTAGES

Now, in the succeeding portion of the project, we shall discover the advantages of implementing
liberal trade measures by answering some questions and therefore concluding the advantages
of liberal trade.

• ADVANTAGE 1: DOES TRADE LIBERALIZATION RESULT IN GLOBALISATION?

The term globalization alludes to the integration of national markets into worldwide business sectors.
Globalization happened as liberalisation of multilateral trade exchange and the regional arrangements
decreased the trade barriers among the richer nations, and as limitations on worldwide capital market
exchanges were lifted. Globalization was additionally mainstreamed by the new ease of worldwide
correspondences. Trade patterns, which had recently been founded on the more extravagant/rich
nations trading among themselves and importing the crude materials and low-esteemed products from
more unfortunate nations, changed significantly.

Trade liberalisation can be regarded as the opposite process of protectionism.“After past protectionist
choices, trade liberalisation happens when governments choose to move back toward deregulation.
Trade liberalisation may occur unilaterally. Extensive trade liberalisation that happened among the
more extravagant nations in the later portions of the 20th century was anyway proportional and
multilateral. Numerous legislatures responded each other's liberalisation choices, and this progression
was non-oppressive in applying to all liberalised trade accomplices. The movement of liberal trade
was joined by advancement of worldwide capital markets and by considerable global movement, both
legitimate and unlawful. International agreements and conventions likewise brought together
principles of conduct concerning protection of property rights, including licensed innovation rights
identified with proprietary information. The result of these changing and coordinating cycles is
known as globalization, wherein any globalised economy in today’s time experiences continuous
boost to its trade profits.”

• ADVANTAGE 2: DOES TRADE LIBERALIZATION OFFER CONTINGENT PROTECTION?

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Contingent Protection empowers the governments to protect their selective endangered industries and
IP industries even after the nations have approved the policy of liberal international trade with other
nations. Contingent protection allows “ex-ante agreements” on trade liberalization, since the scope
of liberal trade does not have to include the future contingencies and possibilities given the fastly
evolving time and growth of immense competition in the market.

Contingent Protection therefore can be regarded as a “form of political insurance” when the policy of
liberal trade is being negotiated between different nations. Future outcomes that are politically non-
tenable can be addressed if the need arises through the provisions of contingent protection

• ADVANTAGE 3: DO LIBERAL TRADE POLICIES PROMOTE OPENNESS?

“Whether trade openness and/or the promotion of exports leads to superior economic performance?
Whether trade openness is necessarily associated with trade-liberalization5 and a reduction in the
role of the state?”

Trade liberalisation is regularly seen as a definitive method for advancement of global trade. A few
contentions have been raised concerning why trade liberalisation advances economic growth. Among
the most well-known are expanding specialization and proficient resource allocation, greater
competition, an expansion in the progression of information and investment, technological
advancement, a quicker pace of capital aggregation, and a decrease in exchange expenses.6

Openness to trade has been a focal component of effective growth and development strategies. In all
nations that have supported development the portion of trade in gross domestic product (GDP) has
expanded, and trade barriers have been diminished.

The economic freedom index uses 38 different components to rate 120 countries on a zero-to-ten
basis. The index ranks countries under five general headings: “size of government, legal structure and

5
Trade liberalization in this study is defined as the removal of barriers to free trade such as tariffs, quotas and exchange
controls. This definition should be separated from the ‘neutrality of incentives’ or ‘reduction in the degree of anti-export
bias’ which does not require a reduction in protectionist policies.
6
Turan Subasat (2008) Do liberal trade policies promote trade openness? International Review of Applied Economics,
22:1, 45-61.

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security of property rights, access to sound money, freedom to trade internationally, and regulation
of credit, labour and business.”

The ‘Freedom to Trade Internationally’ section is divided into a further five categories: “taxes on
international trade (revenue from taxes on international trade as a percentage of exports plus
imports, mean tariff rate and standard deviation of tariff rates); regulatory trade barriers (hidden
import barriers, costs of importing); actual size of trade sector compared to expected size; difference
between the official exchange rate and the parallel-market rate; international capital market controls
(access to foreign capital markets and foreign access to domestic capital markets, restrictions on the
freedom of citizens to engage in capital market exchange with foreigners).

A profitable trade graph may offer more opportunities for liberalisation, whereas an economy with
difficult trade performance may tend to impose more restrictive policies adopting a protectionist
approach. There are several econometric and empirical research work done in this field which
provides some evidence for this interpretation. Primarily, there exists a very strong correlation
between per capita GDP and relatively more liberal trade policies, and secondly per capita GDP is
positively correlated with export intensity and negatively correlated with import intensity. This
relation between GDP and trade policies suggests that as a country gains more impetus in their trade
graphs, they tend to export more, implying their growing strength in economic value. On the other
hand, low wage nations face more external shocks and problems as they largely produce primary and
agricultural commodities.7

Conclusively, adoption of liberal trade policies and measures will increase exports by gaining
comparative advantage. Such a trend suggests that trade liberalisation and export-promotions are
synonymous terms. Additionally, trade liberalisation is an indispensable organ of trade openness and
liberalisation ultimately results in trade openness. Several developing and under developed nations
live under the notion that such liberalisation would encroach on their nation’s sovereignty and pose
a threat to the existence of domestic industries. “However, just as there are vastly different levels of
development among Third World countries, especially in India there are also differing views on the
costs and the magnitude of these costs of freeing-up the trade in services.”

7
Turan Subasat (2008) Do liberal trade policies promote trade openness? International Review of Applied Economics,
22:1, 45-61.

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 • ADVANTAGE 4: DOES TRADE LIBERALISATION PROMOTE EFFICIENCY AND
COMPETITIVENESS?

In larger perspective, nations across the globe experience trade benefits arising as result of trade
liberalisation in terms of competitiveness and efficiency, irrespective of their economic status. Nations
reliant on industrial produce would accumulate greater trade benefits from liberal policies, as
industrial services constitute major portion of their total exports.

Customary neoclassical hypothesis on trade and competition is clear about the impact of more trade:
it expands competition and thus efficiency. Increased competition, or import discipline, is significant
in pushing makers from inefficient situations toward possible productivity. Additionally,
specialization in universally competitive and aggressive goods takes into consideration more
noteworthy economies of scale. Furthermore, specialization in addition to promising opportunities
for trade development adds to more prominent capacity utilization. These impacts result, eventually,
in greater efficiency at the firm level and more development in the economy in general.”

Levels v. growth rates: for instance, if greater competition or exposure to a larger set of ideas or
technologies increased the rate of technical progress, it would permanently raise growth rates.

Trade policy and Productivity Gains: “the Bhagwati-Krueger studies of Trade Regimes investigated
the direct link between productivity and trade policy. Reduction in trade barriers is followed by
significant increases in productivity, generally because of increased import competition.

Consequently, such liberal trade measures are likely to blaze the income in most circumstances, since
they expand the window of opportunities, and provides a long term subtle effect on growth which
requires combination with other good policies as well.”

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 • ADVANTAGE 5: DOES TRADE LIBERALISATION RESULT IN MACROECONOMIC STABILITY OF
NATIONS?

It is constantly recommended that since real depreciation is all the more expensive in open
economies, such economies will be more mindful so as to keep away from it. That thus makes them
more averse to run the dangers of inordinate cash creation and inflation. Inflation is, for sure, lower
for open economies.8 Macroeconomic steadiness is a significant component in successful results
from trade reforms.9 Macroeconomic security involves low degrees of inflation and a steady and
cutthroat conversion scale. Exchange rate instability establishes a hazardous business climate
wherein future benefits and instalments are unsure, and these dangers are higher in the many
developing nations that have not created financial instruments for supporting against unfamiliar
trade hazard.

FDI (foreign direct investment)

Further, the nations that pull in more foreign direct investment will in general be more open as far
as trading is concerned for two reasons. Right off the bat, multinational companies (MNCs) may
import their sources of info and fare their items. Furthermore, MNCs may lean toward more open
nations to import and export all the more in unrestricted manner.

India has not been supplied commonly with similar profitable facilities. There are contrasts in
climatic conditions, natural resources, work and capital. Because of these distinctions, it shall be
beneficial for the nation to specialise in the creation of some particular commodities. Such
specialization would not be economically practical, however for the chance of trade of surplus
creation through global business. It may happen when purchasers discover foreign markets business
sectors less expensive to purchase and sellers discover them more beneficial to market their items.
Along these lines, a more powerful utilization of the world's resources is made conceivable through
global trade.

8
Romer, D. (1993). 'Openness and inflation: theory and evidence', Quarterly Journal of Economics, vol. 108 (4),
(November), pp. 870-903.
9
Thematic Think Piece, ‘Macroeconomic Stability, Inclusive Growth and employment’, United Nations, May 2012.

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 Further, the investment climate in India has improved considerably since the opening up of economy
in 1991.10 FDI in India had grown up to 30% in 2015-16 and rose up to 12.6% in the fiscal year
2019-2020.

• OTHER ADVANTAGES

At national level, trade policy can also help in fighting against corruption. The most important
aspects are the simplest: “trade policy, the lower are the incentives for corruption transparent and
non-discretionary policies reduce the tariffs or other barriers exist there are important stable, and
widely published.” Uniformity over sources important as uniformity over types of import, for the
easier to falsify than its nature. The rules of origin trading arrangements, are burdensome to the honest
opportunity for less honest ones.

There are other arenas as well where the positive impact of trade liberalisation can be witnessed, such
as: “improved resource allocation in the static sense; access to better inputs and intermediate goods;
an economy better able to take advantage of economies of scale and scope; greater domestic
competition; availability of favourable growth externalities like the transfer of knowhow; and a
shakeup of industry that may create a Schumpeterian environment especially conducive to growth.”

10
Invest India, ‘FDI Policy’, Govt. of India, https://www.investindia.gov.in/foreign-direct-investment accessed on April
7, 2021.

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 3. IMPACT OF LIBERAL TRADE POLICY ON GROWTH IN INDIA

It was just during the 1980s that the growing pattern of development reached up to about 5 - 6 % per
annum. Industrial and export growth likewise witnessed a significant increase. Complete factor
efficiency execution was additionally much better. This may be attributed partly to the partial
liberalisation of the Indian economy during the said period. This appeared as more adaptable
conversion scale strategy and liberalisation in the import and modern licensing arrangements. The
policies, however during the said period of 1980s were unreasonable on the grounds that they
included huge large scale financial imbalances.

In 1991 India set out upon a far reaching set of reforms including structural adjustment of which trade
liberalisation was a significant part. From that point forward numerous sweeping changes have been
done in the nation’s trade and exchange standard arrangements. The rupee has been made completely
convertible on the current account. India is step by step getting liberated from the oppression of
quantitative limitations on trade. The peak of tax has been radically decreased and legitimization of
the duty structure has been completed. Rules overseeing foreign direct and portfolio ventures have
been liberalised. Because of these approaches, India leaped to a higher development way of 6-7% per
annum.

Apparently India's financial performance is firmly connected to its trade orientation and direction. In
the initial thirty years of planning and preparation, India followed an incredibly internal oriented
methodology, because of which India's development rate was dull. During the 1980s, and all the more
so during the 1990s, when liberal policies were followed, India's development rate got impressively
picked up.

The business regime at international platform poses a lively discussion on the benefits of trade
liberalisation and its correlation with trade openness and the rising GDP of a nation. Scholars like
Smith eulogize the appreciable features of liberalisation and globalisation. The essential sources of a
economic growth can be summarised as “growth in inputs, improvements in efficiency and innovation
and productivity”. Trade openness results in better number of investments. While the potential
benefits of the perspective of growth and global welfare have been obvious for a long time,
appreciation of their potential in full measure has been slow in coming.

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 4. CHALLENGES

Trade at international level regulates competition significantly, in terms of technology, quality of

goods, prices and features such as institutional and administrative regulation of a nation in the longer
run. The exact outcome of trade liberalization for different individuals is therefore uncertain.

Irrespective of the largely acknowledged notion that liberal policies are more open to changing
situations and are more outward-oriented, therefore are superior to the policies that more restrictions
and inward-oriented approach, there still remains hesitance in incorporating liberal trade policies in
a nation’s international policies, as it poses a threat to a country’s own existence such as intellectual
labour, unskilled workforce, income disparity, child labour, etc. The advocated of liberalisation also
support not an absolute liberal trade policy enforcement, rather an open outward-oriented approach
that strikes a balance between maintaining international relations alongside protecting the survival of
industries and its people in one’s own nation.

• It may be odd to assume that liberalization of a country’s own imports , “that is, reducing its
protectionist policies, will increase its exports. A crucial assumption of this theory is the full
employment of all resources which implies that exports and import-substituting production
compete over limited resources. Therefore it would be impossible to increase exports without
reducing the import-substituting production. Resources must be removed from relatively
unproductive sectors and be employed in sectors where comparative advantage exists. As
trade liberalization and international competition eliminates uncompetitive sectors, price
adjustments ensure that sectors with comparative advantage prevail. In this view import-
substitution is an inward looking policy with state intervention whereas export-promotion is
an outward looking policy requiring liberal trade policies. These two policies are mutually
exclusive and conflicting policies that policy makers must choose between and, liberal and
outward looking policies are superior to interventionist and inward looking policies.

• The transport costs involved in trading are an important determinant of a country’s export
orientation. In structural terms, long distances to export markets and poor physical
infrastructure restrain the ability to trade. Landlocked countries with zero coastline are
expected to have higher transport cost.”

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 • Alterations in the nature of Transactions: such Alterations are significant on the grounds that
the hypothesis and strategy estimates fitting to a world regulated by arms'- length transactions
may not be suitable in a world in which a generous portion of the movement of global goods
is represented by transactions of an alternate nature. This is clearly valid for parastatal firms
or other public organizations seeking targets other than private monetary gains.11

As trade liberalisation continues, homegrown changes are specifically anticipated to happen

in distribution of income to the detriment of the unskilled low-human resources laborers in
the more extravagant human-resources plentiful nations of the world. The evening out
propensities in genuine wages become more articulated when generous relocation from more
unfortunate to more extravagant nations happens, legitimately and unlawfully. At the point
when income distribution becomes globalized, individual livelihoods will in general rely more
upon people's very own capacities and education instead of on where they reside.
Subsequently, in the last piece of the 20th century, genuine livelihoods of incompetent
laborers in more extravagant nations declined totally, and furthermore comparative with
skilled workers' wages.

The unskilled workers were distraught by impetuses for the inclusion of the new innovations
related with trade liberalisation. Through the new advances, makers in high labour cost nations
looked for approaches to compete with low labour cost foreign products by replacing domestic
unskilled labour work with domestic skilled labour work. Since the local unskilled work
couldn't contend with the less expensive foreign unskilled work used to deliver lower-quality
imports, a change to better quality production occurred.

Interest for low-ability work additionally declined in more extravagant nations as makers
reacted to trade liberalisation through outsourcing. Imports from foreign cheap labour work
sources accordingly replaced domestic creation of goods using low skilled labour work, and
the contracting business options and wages of domestic unskilled workers at that point
declined.

11
A Liberal Trade Order? The Long-Run Pattern of Imports to the Advanced Capitalist States Timothy J. McKeown,
International Studies Quarterly, Vol. 35, No. 2 (Jun., 1991), pp. 151-171

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 • The opponents of globalization have highlighted the adverse impacts of trade liberalisation in
the poor nations through labour standards and the climate. Where child labour is a social
practice, trade liberalisation heightens the demand of putting a minor to work in view of
improved foreign market access for products. The resistance to child labour as an issue of
social conscience at that point becomes resistance to globalization (or trade liberalisation).

• For liberal trade policies to have a “long - lived effect on growth almost certainly requires
their combination with other good policies such as those that encourage investment, allow
effective conflict resolution and promote human capital accumulation. The importance of
these policies, however, can be found in exercises identifying the structural relationships
through which openness effects growth. For example, Taylor (1998) and Wacziarg (2001)
both find that and thus imply that poor investment policies could hinder trade liberalisation.

• Credibility problems may arise because the government is engaged in following inconsistent
policies. For example, if the exchange rate is sizeably overvalued the private sector can soon
figure out that the resulting current account deficits are unsustainable. Therefore, trade
liberalisation that is not accompanied by a sufficiently large devaluation will be perceived as
unsustainable. Credibility problems may also arise due to dynamic inconsistency of policies.
The government may be tempted to revert to the previous policies after the private sector
responds to reforms. Trade reforms may also run into problems because of distributional
implications: factors of production specific to export production may gain and those specific
to import-competing activities may lose out.”

• Unsettled macroeconomic environment is the perhaps the greatest enemy of trade reforms.
High inflation, low growth and high real interest rates may all distort relative prices and may
diminish the ability of the private sector to adjust to the changes in relative prices

It is essential to take note that trade liberalisation isn't the sole policy alternative for nations that aim
at expanding their trade statistics. A practical combination of import-substitute, export advancement
and trade liberalisation arrangements can be considered to boost trade exchange. Most nations built
up their competitiveness behind defensive barriers, and have in this way either advanced exports or
allowed free trade deregulations. This suggests that no single trade policy will be useful to all nations
working under distinct conditions.

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 CONCLUSION

In the event that the international trade regime is comprised of all the standard rules, guidelines and
agreements that oversee trade and exchange, then at this point is has become evident that a wide
assortment of activities including contracts among private enterprises, role of national governments
as active economic participants in exchanges through practices, for example, countertrade and
parastatal ventures should be considered alongside the GATT as significant bases for the trade system.

Hence, in spite of the fact that liberalisation expanded competition and pushed down the benefit rate,
proceeded with imposing monopolisation of import appropriation channels and, on balance, profit
rates hiked. The project concludes that liberalization is still preferable, since consumer welfare rises.
Their positive understanding is upheld by a connected report that shows that increase in efficiency
and productivity are identified with level of import competition.

Trade liberalization is not the sole reason for decline in incomes and employment of unskilled workers
in the richer countries. Technological advancement has significantly affected the demand of workers.
Technological revolution was brought into action in parallel to developments in international trade.
The new age of industrial technologies required new group of skilled workers. “There were also new
standards of employee responsibility, since capricious or inept employee behaviour became
extremely costly for employers. The changes in income distribution are a consequence of influences
of both trade liberalization and technology. An approach to identifying the contribution of trade
liberalization is to look for possible relative price changes that would have given rise to the income
changes. Yet reciprocal and multilateral liberalization through exchange of market access also
neutralizes or dampens any terms of trade changes that would be associated with unilateral
liberalization.”

In developing countries that successfully integrated into the global economy in the 1990s, a variety
of factors reinforced each other: “a stable investment climate, greater market access, complementary
macroeconomic policies, and unilateral or multilateral trade reforms.”

The importance of creating an institutional architecture that resists the pull of special interests, and
the importance of political leadership from the top. “Whatever institutions are employed to support
new activities, they must be transparent and accountable, or selective support is likely to evolve into

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a new mechanism for supporting private interests in the name of public gain. The promotion of new
activities should conform to a set of design principles that include the following: (1) incentives should
be provided only for new, ‘sunrise’ activities, not sunset ones; (2) there should be clear benchmarks
for success or failure; (3) support must have a predetermined end (a so-called sunset clause); (4)
public support should target activities such as worker training or infrastructure investment, rather than
sectors such as electronics; (5) subsidized activities should provide clear potential for externalities;
and (6) agencies involved in these activities should be autonomous enough to avoid capture by private
interests, but should maintain links with the private sector to maximize economy wide gains. This is
not a prescription for creating new state enterprises, promoting existing activities, or giving
governments authority to expand their bureaucratic reach. Clearly, the institutional and administrative
requirements for success are formidable.

The conclusion, therefore, is that if liberalisation comes in conflict with the requirements of
sustainability then it may have to take a back seat, at least for the time being. The debate today is not
about whether to liberalise trade policy or not, but how much to liberalise, in what sequence and how
to tackle the problems of transition.”

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