LETTERS TO THE EDITOR

Spring 2007

by Iñigo Febrel Melgarejo

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Sir,

Donald Kaberuka was perfectly correct to point out that empirical evidence shows that countries with more liberal trading regimes enjoy higher rates of economic growth. Spain is a good example of this phenomenon. Spanish growth responded dramatically to two major events that freed up economic policy, our trading regime included − the economic stabilisation plan of 1959 and the radical liberalisation of our economy that accompanied our mid-1980s entry into the European Community. Gross Domestic Product per capita in Spain has in consequence risen from 58% of the European average in 1959 to 70.7% by 1985 to 97% today.

In the 1950s, protectionism and administrative controls on commerce had led to excess public deficits and balance of payments problems, as well as inflation and production bottlenecks. Economic remedies did more than reduce trade restrictions. Regulatory frameworks for foreign investments were also liberalised and the government reformed fiscal and monetary policies.

While European cohesion funds helped to develop the Spanish economy from the 1980s onwards, the most dramatic change was the result of economic liberalisation. EEC regulations and EU internal market rules created a legal framework in which enterprises flourished, with a spectacular increase in commercial exchanges and foreign direct investment.

Trade in goods and services went from 35% of GDP when we joined the EC to 55.4% at the present time. Meanwhile, agriculture dropped from 6.4% of GDP to just 3.3%, while the service sectors rose from 59% to 67%. Foreign direct investment went from 0.9% of GDP in 1985 to 3.6% twelve years later, contributing decisively to the transformation of our industry and services. Therefore I have good reason to concur with Donald Kaberuka’s conclusion that “it is trade and investment that create wealth”.

I nevertheless disagree with his negative opinion of bilateral trade agreements, particularly when he says “these would on the whole be detrimental to smaller and poorer countries, as these would find themselves forced to make many more concessions”.

Agreements that are concluded in accordance with Article XXIV of the General Agreement on Tariffs and Trade (GATT) and Article V of the General Agreement on Trade in Services (GATS) contribute to liberalisation and attract investment, and therefore can create wealth. I think that the real problem for poorer countries is the size of their markets, which are too small to attract potential bilateral trading partners in the first place.

While the Doha Development Round of multilateral trade talks is understandably a priority for less developed nations, efforts to increase regional integration to boost under-developed economies are also vital. In Africa especially, technical assistance provided by the African Development Bank is of the utmost importance in generating much-needed regional economic integration.