There was a time, culminating in the 1960s, when most mainstream economists and public institutions such as the World Bank believed that, although free trade might be good for developed countries, it was bad for underdeveloped ones. The governments of the latter were advised to go the route of import substitution, implementing protectionist measures to substitute domestic production for imported goods. The General Agreement on Tariffs and Trade, the treaty that would lead to the formation of the World Trade Organization, allowed underdeveloped countries to retain many protections. Trade was perhaps good for the rich but certainly exploitative and bad for the poor, it was reasoned.

Economists were not the only ones thinking along these lines. The intelligentsia generally believed that government planning and socialism were the wave of the future. Protectionism was part of that.

A cracking consensus / Fortunately, with their methodological individualism, understanding of spontaneous order, and penchant for data, trained economists make bad cult members. Starting in the 1960s and especially in the 1970s, they became more and more skeptical of this protectionist wisdom. The dazzling economic takeoff of ardently free-trade Hong Kong and other countries with some degree of liberalized trade—Taiwan, Singapore, South Korea—contrasted with the stagnation of autarkic countries such as India, which was pursuing democratic socialism, and China, where the government was busy launching the Great Leap Forward and the Cultural Revolution, and achieving economic stagnation and deadly famines.

While the future of democratic-socialist India was deemed rosy, more capitalistic South Korea was deemed hopeless. But exports of goods and services as a proportion of South Korean gross domestic product rose from only 4.6% in 1963 to 28.7% in 1973. Over the same period, it fell from 4.5% to 4.0% in India. The South Korean economy grew at an annual rate of more than 9.5% over those years, compared to 3.4% for the Indian economy, observes Columbia University economist Arvind Panagariya in his book Free Trade & Prosperity. In Taiwan, Singapore, and Hong Kong, growth was even more impressive.

Economists who had been protectionist or even socialist changed their minds. As late as 1970, Columbia University economist Jagdish Bhagwati and Harvard economist Padma Desai wrote in their book India: Planning for Industrialization that government planning was required in India and was compatible “with the basic objectives of a socialist society … which we fully share.” To their credit, they changed their minds.

That same year, economists Ian Little, Tibor Scitovsky, and Maurice Scott, the first two already well-known, published Industry and Trade in Some Developing Countries: A Comparative Study. They noted “a number of astonishingly successful exports achievements,” including Taiwan and Hong Kong. They suggested that

developing countries would benefit from adopting, in general, a more decentralized approach with greater use of the price mechanism; and, in particular, given that there are good prospects for exports, a more open approach to foreign trade with less protection and use of controls.

These economists did not embrace trade laissez-faire. Even in the less planned developing countries, many controls remained in place and would only be gradually reduced. But the genie was out of the bottle. A new consensus about open trade developed. By the end of the 1970s, even the World Bank had abandoned protectionism.

The basic argument / Besides chronicling all these events, Panagariya’s book provides “a unified, coherent, and full-scale defense of pro-free-trade policies with [developing] countries as its center.” The author exposes “the falsehood” of protectionist arguments. “Rapidly expanding trade,” he observes, “almost always accompanies sustained rapid growth.” The reasonable conclusion to be drawn from both theory and empirical evidence, he argues, is that low or declining barriers to trade are necessary, albeit not sufficient, conditions for sustained rapid growth.

Like radical free-trade economists, Panagariya explains that imports, not exports, are what benefit a country. The reader familiar with James Mill will find some of his spirit in Panagariya’s prose:

However intuitive the preference for exports over imports may seem, it is wholly illogical. … At a basic level, as Nobel laureate Milton Friedman once graphically pointed out in one of his public lectures, we can eat imports but not exports. … If other countries would give us imports for free, there would be no reason to export. … It is the revenue from sales to the country that the trading partners use to buy its products.

“While politicians commonly seek to achieve bilateral trade balance,” he adds, “there is no economic logic behind it.”

The positive case for trade openness starts with the law of comparative advantage, supplemented by the benefits of economies of scale, product variety, and technological diffusion. Panagariya provides a good and short explanation of comparative advantage, the theory that the vast majority of a country’s residents benefit from specializing in what they can do at a relative lower cost than producers in other countries, even if the latter are more efficient at everything. This way, the consumers in both countries get more of everything.

Panagariya reminds us of the story told by Nobel economist Paul Samuelson about mathematician Stanislaw Ulam asking him to name “one proposition in all of the social sciences which is both true and non-trivial.” Samuelson replied with the law of comparative advantage. “That the principle is logically true need not be argued before a mathematician,” he explained. “That it is not trivial is attested by the thousands of important and intelligent men who have never been able to grasp the doctrine for themselves or to believe it after it was explained to them.”

Protecting infant industries / Another remarkable discussion in Free Trade & Prosperity concerns “the mirage of infant industry protection,” the idea that new industries must be protected from foreign competition until they are large and efficient enough to compete with long-established foreign ones. The case for infant-industry protection, Panagariya persuasively argues, has no logical or historical basis.

An infant firm with a reasonable prospect of future profitability should have no problem obtaining private financing. Even if its production is to generate positive externalities through, say, worker training or knowledge-building, protection is still not effective or warranted. The protected firm will have no incentive to invest more than the strict minimum. It will instead keep as much as possible of the protection-generated profits and run with them before they are eliminated by new domestic competitors benefiting from the externalities it has produced. This, of course, is why protected infant industries remain infants forever.

Once infant-industry protection is implemented, it will be difficult and costly to remove later. The government has no capacity to determine who will survive future competition and change. Moreover, such policies open up the question of whether these firms should also be protected from domestic competition.

Advocates of the infant-industry idea usually borrow their arguments from Alexander Hamilton’s 1791 Report on Manufactures or from Frederic List, a 19th-century German-American economist. They are apparently “unaware of the post-Second World War critiques of the infant industry argument by trade economists” such as James Meade, Harry Johnson, Herbert Grubel, Robert Baldwin, and Douglas Irwin. As for American history, the country “grew not because of high tariffs but despite them.”

List’s dirigiste approach is illustrated by his asking how “can anyone undertake to prove that … the industry of a country must be left to the unaided and unsupported intelligence and enterprise of private individuals?” Not exactly a paean to free enterprise and economic freedom!

Growth, prosperity, and inequality / It is quite clear, as Panagariya argues, that trade openness is a necessary—even if not sufficient—condition for economic growth and reducing poverty. Just one example: an econometric study found that an increase in the trade-to-GDP ratio of 1 percentage point raises per-capita income by 2 percentage points on average. In comparison, protectionists have produced no proof that protectionism is a necessary condition for economic growth. They have often not even tried, for it is a mission impossible.

Trade benefits economic growth and economic growth reduces poverty. Panagariya reviews much empirical evidence that growth benefits the poorest in the same proportion, if not more, than it boosts average per-capita income. “In sum, while there is more than casual evidence that trade openness is conducive to poverty alleviation on average, there is absolutely no evidence showing otherwise.” The dramatic reduction in world poverty during the past four decades, as international trade grew, is an unprecedented event in world history. Only tenured professors and other wealthy residents of the First World can be blind to that.

By any meaningful measure, inequality has not grown with trade openness in developing countries. In labor-rich and capital-poor countries, laborers are the first beneficiaries of trade, according to comparative advantage. And when other policies of economic liberalization do increase economic inequality, the total package including free trade still reduces poverty, which should be the main goal. The author of Free Trade & Prosperity observes that, in virtually all developing countries in the 1960s, per-capita incomes “were below any reasonable poverty line, so an equal distribution would have raised the poverty ratio to 100 percent.”

Case studies / The second half of the book is devoted to detailed case studies of poor countries that, with the help of trade liberalization, became relatively rich after the 1960s. Total free trade à la Hong Kong is not required, but an “outward orientation” seems to be a must. As Panagariya argues, there are very few cases where a fast-growing country did not have freer trade; and there are very few cases where countries with negative growth in income per capita had significant or liberalized trade.

Hong Kong and Singapore are uncontroversial cases of countries that took off and grew through international trade. South Korea and Taiwan followed. Annual rates of growth of 8%–10% have been frequent. Poverty dropped and inequality decreased.

With the exception of Hong Kong, freer trade did not mean zero government intervention. On the contrary, elements of industrial policy can often be observed. But, Panagariya claims, the ideal of import substitution was abandoned and industrial policies were not inconsistent with the comparative advantage of labor-rich, capital-poor countries. They specialized in products like textile and light manufacturing. Governments followed the private sector more than it led.

Consider India. After attempts at autarky and central planning (licenses were required for nearly everything) were abandoned, the Indian economy grew rapidly and achieved large decreases in poverty, especially from the 1980s onward. Annual growth rates of GDP exceeded 8% in the 2000s thanks to trade and other forms of liberalization. The late-1980s collapse of the Soviet Union, “on which India had patterned its system of planning and controls,” helped Indians shed their addiction to democratic socialism. It is too bad that Panagariya’s story ends in the early 2010s; I would have liked to know what the Indian-American economist thinks of what’s happened more recently.

The case of China is also interesting. As the government’s visible hand (or “visible fist,” as Murray Rothbard called it) became lighter after the death of Mao Zedong in 1976, the country started opening to world trade. Annual rates of growth of per-capita GDP nearly reached 8% in the 1980s and moved close to 10% until 2013—compared to less than 1.6% from 1952 to 1979. It is difficult to argue that trade liberalization did not play a major role, despite much remaining interventionism. “The fact that continued liberalization was accompanied by some acceleration in the per capita income growth,” Panagariya writes, “suggests that the interventions were a hindrance rather than an aid to growth.”

The experience of the first Special Economic Zones (SEZ), established near Hong Kong and Taiwan in the late 1970s, shows that the Chinese government was acutely aware of the importance of international trade for escaping poverty.

Panagariya tells of more recent success stories of economies in Asia, Africa, and Latin America starting to grow at 5% or more, thanks partly—or mainly—to trade. Among these countries are Vietnam, Cambodia, Bangladesh, Botswana, Uganda, Mozambique, Peru, and the Dominican Republic. He points out that Mexico is an intriguing exception: despite growing international trade, economic growth has remained anemic, probably because of bad domestic policies.

Mild criticisms / It is a bit difficult for a classical-liberal or libertarian economist to find fault with Free Trade & Prosperity, especially after its author cites James Mill and quotes Frédéric Bastiat. He reminds us of Samuelson’s aphorism that fighting protectionism is like fighting a skin disease: no sooner do you cure it in one place then it appears in another. We might add that the U.S. government has caught the disease and it’s a public health emergency.

Yet, when he develops his arguments, Panagariya sometimes seems to forget that imports are ultimately more important than exports. He concedes a too wide role for the state. Sometimes, he writes more like an establishment economist than the radical economist who follows Mill and Bastiat. But then, more economists like Panagariya would be a welcome addition to the establishment.

Another quibble: because this book has been in the works for a decade, its empirical evidence does not extend past the early 2010s, which is a bit frustrating.

Free Trade & Prosperity is not a book for the beginner. But for the student of economics or the initiated reader willing to work at understanding its sophisticated analysis, it is enlightening.