Open economies adjust more rapidly
JAKARTA (JP): Empirical results show that open economies tend to make the transition more rapidly from being primary-intensive to manufacture-intensive exporters than closed economies do, Professor Jeffrey D. Sachs, a noted economist from the United States said.
"While many countries adopted the model of import protection as export promotion of manufactures, it was the open economies that did best in promoting the export of manufactures," he said during his 1996 Panglaykim Memorial Lecture, organized by the Panglaykim Foundation in cooperation with the Center for Strategic and International Studies here yesterday evening.
Jeffrey Sachs opposes the view of Raul Prebisch and other economists, who worry that raw material exporters that maintained free trade would be unable to industrialize their economies.
The economists argued that import substitution would give time for domestic industry to improve productivity and to generate manufactured exports in the distant future.
But Sachs noted that the trend now is the open economy, which allows them to grow well.
"The open trade among developing countries has tended to be correlated with the features of a healthy economy, such as macroeconomic balance and a reliance on the private sector as the main engine of growth," he said.
In his lecture entitled "Economic Reform and the Process of Global Integration", Sachs said that opening the economy has helped to promote governmental responsibility in other areas.
"To that extent, trade policy should be viewed as the primary instrument of reform," he said.
The meeting was attended by economists, businessmen and analysts, including Soemitro, a retired general who is now active as a political and security analyst.
The foundation is named after the late Professor J. Panglaykim, a noted economist and businessman.
According to Sachs, closed economies are more likely than open ones to fall into a severe macroeconomic crisis for several related reasons.
"The outward orientation of the East Asian economies had saved them from the developing country debt crisis that ravaged Latin America," he said.
He pointed out that first and foremost, closed economies often borrowed heavily from foreign sources in order to overcome economic stagnation caused by the deeper problem of poor economic policies.
The reliance on debt, he said, was a temporary expedient and resulted in a debt crisis when creditors withdrew support from further lending.
He said that closed economies oriented investment toward nontraded goods, thereby causing a lack of foreign exchange earnings to service the debts.
The other shortcoming is that the closed economies tend to have higher levels of state involvement in their economies, including the ownership of state enterprises.
The loss-generating state enterprises added significantly to the overall fiscal burden of many governments, contributing to the onset of high inflation and foreign debt crises, Sachs added. (13)