NCPA - National Center for Policy Analysis

Free Trade Builds And Spreads Wealth

May 17, 2001

Advocates of free trade often point out that it provides nations with new markets for their goods and services. But President Bush justifies free trade on the grounds that open markets provide "new hope for the world's poor."

Economists Stephen L. Parente of the University of Illinois and Edward C. Prescott of the University of Minnesota explore in their book, "Barriers to Riches," published last year by MIT Press, the reasons why some countries remain poor, while others get rich.

  • While they credit the roles that savings and education play in helping countries advance economically, they search for another explanation -- some other factor that separates "have" from "have not" nations.
  • They show that factor to be free trade -- which forces local monopolies to compete, opening countries to the most productive technologies and practices.
  • In some countries, local interest groups block efficient techniques by using the law to perpetuate the status quo -- condemning workers there to perpetual poverty.
  • When countries open up to trade, multinational companies become the carriers of state-of-the-art production techniques.

For example, when Ford builds an auto plant in Mexico, it draws on the best practices developed all over the world. Mexicans don't have to reinvent auto-making from scratch. Trade does away with special interest groups dedicated to preserving the status quo.

Political power and influence are the greatest barriers to riches and the greatest source of poverty, the authors contend.

Source: Virginia Postrel (Reason magazine), "Economic Scene: The Wealth of Nations Depends on How Open They Are to International Trade," New York Times, May 17, 2001.


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