As a critic of Prof Panagariya’s free trade theory for development, I will present the opposing case here. My critique has 3 parts:
- a) debt driven trade is not free trade
- b) technology & production know-how are not tradable
- c) cross-border migration
Lets start with debt. The present regime of “free trade” is more accurately described as “trade that causes extreme debt imbalances due to infinitely stretchable monetary instruments”. In no sane monetary regime would Sri Lanka have been able to accumulate over $50 billion of net foreign debt.(5) Sri Lanka’s debt is totally out of proportion to its annual exports of about $1.1 B, which means prospects of repayment are very bleak. The question is how did Sri Lanka get into such a deep hole in the first place? Our regime of debt-driven trade dressed up as “free trade”.
Now my second issue and this is a much deeper critique: essentially all the critical technologies involved in the production of goods we depend on require a long effort to master and more importantly they are not tradable.(4) Semiconductor technology would be the big example. Without a strong, strategic and focused national effort, most countries will never acquire the technological know-how and therefore they get trapped in the middle-income trap. Mexico and Malaysia are in that trap and South Korea and Taiwan escaped that trap, and soon China.(5) The economic models of free trade models do not explain how Sri Lanka got into such extreme debt, do not explain the difference between South Korea and Malaysia.
Finally let us come to cross-border migration. Free trade requires labour mobility to achieve balance.(5) Developing countries have vast surplus labour and they export labour to earn foreign exchange to pay for imported goods. Remittances by migratory labour plays a crucial role in achieving balance. Free trade theorists either don’t see any issues with it or consider it good. Extreme migration results in talent erosion for the sending countries and absorption challenges and demographic balance consequences for receiving countries, with ghost villages in the former and growing anti-immigrant sentiment in the latter. Brain drain also acts as a trap. Excessive brain drain degrades the capability of a poor nation to ever catch up in terms of technological know-how because the talented people needed for the catch up are gone. The receiving nations face a surplus of talent and often waste it by employing them sub-optimally.(5)