Open economies adjust more rapidly

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.
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