BEAUTY IS TRUTH, TRUTH BEAUTY10

The Stolper-Samuelson theorem (as this result is now widely known in economics, after Samuelson and his co-author, Stolper) is beautiful, at least as much as any theoretical result in economics is beautiful.

China and India are often portrayed as the poster children for trade-fueled growth in GNP. China opened up its markets to trade in 1978, after thirty years of communism. For most of those thirty years, China barely acknowledged the world market. Forty years later, it is the world’s exporting powerhouse, about to seize the position of the world’s biggest economy from the United States.

India’s story is less dramatic, but perhaps a better example. For about forty years, until 1991, its government controlled what it called the “commanding heights of the economy.” Imports required licenses that were at best grudgingly granted and in addition required the importer to pay import duties that could quadruple the price of the imports.

Among the things essentially impossible to import were cars. Foreign visitors to India would write about the “cute” Ambassador, a barely updated replica of the 1956 model of the Morris Oxford, a British sedan of no particular distinction, that was still the most popular car on Indian roads. Seat belts and crumple zones were entirely unknown. Abhijit can still remember his one ride in a 1936 Mercedes-Benz (this must have been in 1975 or thereabouts), and the sense of exhilaration from being in a car with a genuinely powerful engine.

Nineteen ninety-one was the year after Saddam Hussein’s invasion of Kuwait that eventually led to the First Gulf War. This resulted in the interruption of oil flows out of Iraq and the Gulf, and sent oil prices through the ceiling. It delivered a huge shock to India’s oil import bill. Coming at the same time as the war-driven exodus of Indian emigres from the Middle East, who therefore ceased sending money to their loved ones at home, the country experienced a massive foreign exchange shortage.

India was forced to seek help from the International Monetary Fund (IMF), an opportunity the IMF was waiting for. China, the USSR, Eastern Europe, Mexico, and Brazil, among others, had begun to take serious steps toward letting markets decide who should produce what. India at the time was the last of the big holdouts, an economy that continued to adhere to the anti-market ideology fashionable in the 1940s and 1950s.

The deal the IMF offered would change all that. India could have the funds it needed, but only if it opened its economy to trade. The government had no choice. The import and export licensing regime was abolished, and import duties came down very quickly from an average of nearly 90 percent to something closer to 35 percent, in part because many of the leading figures in the economic ministries had long desired a chance to do something like this, and they were not going to let the opportunity pass.¹¹

There were, unsurprisingly, many who predicted this would lead to disaster. Indian industry, raised behind high tariff walls, was too inefficient to compete with the rest of the world’s powerhouses. The Indian consumer, starved of imports, would go on a binge and bankrupt the economy. And so on.

Remarkably, the dog hardly barked. After a sharp drop in 1991, by 1992 GDP growth was back at its 1985–1990 trend of about 5.9 percent per year.¹² The economy did not collapse, nor did it dramatically take off. Overall, during the period 1992–2004, growth inched up to 6 percent and then jumped to 7.5 percent in the mid-2000s, where it has remained, more or less, ever since.

So should India be counted as a shining example of the wisdom of trade theory, or something closer to the opposite? On the one hand, that growth weathered the transition smoothly, echoing the predictions of trade optimists. On the other hand, that growth took more than a decade to accelerate after 1991 seems disappointing.¹³