Neo-Classical Approach and Keynesian Approach Which Is Better for International Trade and Porverty Reduction And

Introduction

With the process of economic integration around the world and the trend of globalization, international trade plays more and more important role in economic and affect the economic growth more significant. To increase productivity, reduce poverty and get sustainable development, all countries seek for best trade and development policies. There are two main perspectives of trade and development, one is the neo-classical view which is in favor of trade liberalization and against protection, and the other is Keynesian view which believes government regulation is important in trade. In the article, I will first discuss the similarities and differences between these two perspectives and then state which approach I think is better to achieving successful trade related development outcomes and the reasons of my view.

Similarities and Differences

In general, in the neo-classical view, trade to mutual advantage generates benefit for all parties, so that the market should be left free and unfettered trickle down theory. Also, things good for economy will be good for all in long run. However, in Keynesian view, market should not be left totally free and it should be with fairer multilateral rules and government intervention. Therefore, their have different view in many aspects.

First, their view of relationship between trade openness and growth is different. Neo-classical approach advocates trade liberalization as it believes there are strong links between trade openness, economic growth and poverty reduction. It states that developing countries which less barriers to trade and investment usually grow faster than which less ‘open’. As an example of India, since it liberalized trade and investment in the mid-1980s, it has experienced significant growth in its national income per person, especially when compared with the three decades of high degree of government planning after 1947. The output per person increased a lot as the liberalizing import and industrial controls lead its agricultural performance improved (Centre for International Economics and AusAID, 2001). However, in Keynesian view, there is no compelling evidence that trade liberalization is automatically lead a economic growth, reduce poverty and improve human development. An example against neo-classical view is the UNCTAD’s 2002 LDC Report. It indicates that in the least developed countries, the most open and the most closed trade countries, poverty increased unambiguously (Kamal, 2004). Moreover, in the countries which have liberalized trade more, poverty also increased. Hence, it believes there is little correlation between openness and growth.

Second, their view of protection is different. In neo-classical view protection is a barrier to trade and specialization. Because protection cause economy inefficiency, decrease productivity, make the price of imports, domestic