South Korea versus Brazil
It doesn’t take a college professor to figure out that higher tariffs (which are an unproductive tax on the public) and greater levels of government corruption can hurt a nation’s economy.
But The Washington Post’s Wonkblog column nevertheless provided a valuable service by citing worldwide research that shows just how badly these two problems have affected some countries — while others that took different paths have thrived.
An excellent example is the comparison between South Korea and Brazil. In the 1960s, after adjusting for population differences, South Korea’s economy was one-third the size of Brazil’s. Today, South Korean output is twice as large as the biggest nation in South America.
Here are some of the factors. Though Brazil has more natural resources than South Korea, its trade policy protected domestic industries like steel and automobiles. Corruption, 1970s inflation and oil price swings wound up reversing the country’s economic growth, and Brazil still struggles to change its fortunes.
South Korea used to have similar protectionist policies. But it shifted to emphasize exports and trade, making big investments in global sectors like technology.
It is true that South Korea has the advantage of being in Asia, the fastest-growing region of the globe. But it also had to recover from the Korean War in the 1950s, while Brazil had no comparable shock to its system.
This trend involves a lot more countries than South Korea and Brazil. Two American economists and one from Hong Kong analyzed half a century’s worth of data from 10 high-growth countries and 10 whose economies are lagging. They found a bunch of reasons why.
Most of the high-growth countries have an open-trade policy that encourages exports. They provide incentives for foreign investment. They have developed a strong business infrastructure. They promote high-tech industries, and both their financial and labor institutions have market-oriented policies.
The low-growth countries are polar opposites. There is too much protectionism, which allows government to give too much help to favored industries. These nations have more corruption and more financial instability.
A separate study in 2016 analyzed 175 nations from 1960 to 2010. It stated that a key to high growth is a democratic government, which encourages investment, improves education and decreases social unrest.
Here are two things worth noting. One is that patience is required, because these improvements take decades. The other is that the United States, after many years of leading the world in free trade, is backing away from that philosophy.
President Trump’s tariff strategy against a number of countries appears to be more of a bargaining tool to lower trading barriers than an effort to keep all types of jobs in the U.S. But this does present a risk of hurting both the American and the global economies. The president must tread carefully.