[Publisher:] Institut für Weltwirtschaft (IfW) [Place:] Kiel [Year:] 1976
Kiel Working Paper 49
Economist's thinking about the role of international trade in the process of economic development exhibits a cyclical behaviour. The classical thinking, which held sway until the 1930s, emphasized the crucial role of trade in promoting growth through the optimal allocation of resources made possible by the exploitation of international comparative advantage. By the 1950s, after years of frustration and disappointment in attempting to foster development on the basis of primary commodity exports, many economists, particularly those associated with the Latin American experience, rejected the logic of the classical argument, maintaining instead that underdevelopment is a fundamental problem of transforming the structure of an economy and not of merely achieving marginal optimality in the allocation of resources. Furthermore, imperfections of the international trading framework, such as increasing oligopolistic competition, discriminatory pricing on world markets and product differentiation, discredited deeply the idea of an export-led growth for developing countries. The economic consequence of the new viewpoint was a fundamental rejection of the market mechanism in favour of direct intervention and control of economic decision-making. The main tactic of this strategy was to force the substitution of imports with domestic production by controlling investment decisions and protecting the domestic market from international competition. By the mid-1960s, however, this strategy, or at least the tactics employed to pursue it, had proved unsuccessful (in terms of sustained growth, adequate expansion of industrial employment and removal of severe balance of payments constraints), in many instances only exacerbating problems they were designed to cure.