Book Review

David Greenaway and Chris Milner,  Trade and Industrial Policy in Developing Countries:  A Manual of Policy Analysis.  Ann Arbor:  The University of Michigan Press, 1993.  Pp. xviii + 265.  $49.50 cloth.

Myron J. Frankman, Economics, McGill University, Montreal
Published in :  Journal of Developing Societies, 12  (no. 2, 1995), 268-69.

    The subtitle of this book tells the tale:  "A Manual of Policy Analysis."  This is a primer for those who want to familiarize themselves with the techniques of economic analysis useful for evaluating trade policy, including analysis of effective protection, domestic resource cost, computable general equilibrium, and revealed comparative advantage.  Indeed, the main title of the book which refers to "Trade and Industrial Policy" (the latter is taken up only briefly) should properly have spoken  of "Trade Liberalization."  Liberalization is a topic to which Greenaway and Milner have been intimately involved through numerous country studies which they have done for World Bank Structural Adjustment Lending (SAL) negotiations.

    Trade liberalization is portrayed as the only viable option for developing countries. Doubt is effectively masked by the use of "may" in discussing causal links. While "may not" is implicit, no attempt is made to remind the reader that such is the case.  The authors, for example, say (p. 198) that in the preceding section we saw "how comparative advantage may systematically change with progress up the ladder of development." In fact, we were told that it is more likely that we may not see this at all.  Dirigiste policies are contrasted with the experience of "a number of NICs which apparently followed more outwardly-oriented policies."  (p. xvi).  "Apparently" is subsequently buried by an avalanche of certainty about the wisdom of liberalization, including the assertion that "the discounted value of the benefits of liberalization will typically exceed to a significant degree the discounted value of any adjustment costs" (p. 237). Alice Amsden and Robert Wade have written at length to challenge that "apparently,"  but neither rates a place in the bibliography. 

    Sherlock Holmes spoke of the dog that didn't bark in the night; there is an entire silent menagerie here:  no foreign aid, no concessional aid other than from the World Bank with strings attached, no redistribution, no globalization, no recognition that the fallacy of composition may negate the recommendations, and many more missing ingredients essential to understanding.  There is scarcely any attention to increasing returns to scale, a perspective which has revolutionized international trade theory, nor to strategic trade policy, which is its logical corollary.  Why is this absent?  One reason is that it doesn't yield a determinate solution:  ". . . it has to be recognised that a constant returns to scale assumption tends to make it easier to find an equilibrium concept upon which to base the analysis" (p. 144). 

    There are states, but no democracy and no politics.  Policies are "determined by bargaining" between the World Bank's experts and their national counterparts (p. 237). There are no entrepreneurs and labor is present almost only as a factor of production influencing comparative advantage, which is an autonomous force that needs no assistance from meddling, generally misguided policymakers.  "Picking winners" is consistently derided as an exercise in self-delusion.   Nonetheless,  costly externally-funded studies of implicit revealed comparative advantage are proposed as a way of establishing a distortion-free list of potential exports. A study of  Trinidad and Tobago, in which one of the authors participated,  listed textiles as a potential export.  Common sense led the authors to caution that Trinidad is unlikely to be able to compete against clothing exports from low-wage economies in Asia.  Three sentences later they contradict themselves in their reaffirmation of economics' unshakable "verity":  "The principle that relative rather than absolute costs largely determine trade patterns is a theoretically robust principle . . ." (p. 193).  And since they are committed to trade liberalization, they conclude the same paragraph by suggesting that there is no indicator that can be used with confidence to intervene on behalf of a potential export industry. 

    The rather substantial information requirements of the techniques discussed here makes this manual of limited applicability to cash-strapped Third World policy analysts.  Nonetheless, for those with the requisite background in economics, this does provide a concise statement of the main analytical approaches to trade liberalization. Paradoxically, the book may well be of greatest value to those who are critical of uncompensated sweeping trade liberalization.  Close attention to the contradictions in the discourse and sensitivity to missing elements could prove to be useful when the World's Bank's team comes to the door to negotiate.