CAMBRIDGE: Southeast Asia's financial crisis -- leapfrogging from Thailand to Malaysia to the Philippines and Indonesia -- is far more than a serious regional difficulty, as stock market sell-offs from Hong Kong to Frankfurt to New York demonstrate. Populist doubts about the wisdom of globalization are now rumbling across the Pacific and around the globe. After all, the opponents of free trade ask, if Asia's tigers can be brought to their knees by international financial markets, is any developing country safe?

In the face of such doubts, it is necessary to review what liberalization achieved in recent decades. Over the last 25 years, and especially since the collapse of communism, the world witnessed astounding economic integration, perhaps the greatest in human history. It was this process, indeed, that allowed Southeast Asians to begin dreaming of riches in the first place. Assisted by international organizations such as the International Monetary Fund and the new World Trade Organization, an unprecedented number of governments in postcommunist and developing countries alike chose to integrate their peoples into the world system by opening their economies to international trade.

Opening a once closed economy, however, is no easy option for governments. Trade liberalization exposes often ill-prepared businesses to the intense pressures of international competition, and requires a wide array of often painful reforms and risky politically decisions. And yet, even very poor countries are beginning to believe that open trade may be their ticket to prosperity. But as trade liberalization spreads to every corner of the globe vital questions arise. Will trade boost economic growth? If so, what can trade liberalization do for the cause of income equality across the world?

To answer these questions I recently completed a study with Andrew Warner of Harvard University covering 111 countries from 1970 to 1989. It revealed that, on average, open economies can be expected to grow 2.45% faster than closed economies. Investment-to-income ratios were higher as well for open economies, by an average of 5.4% compared to closed economies, thereby boosting growth indirectly. These findings confirm a basic truth of economics, one dating back two centuries to Adam Smith: open trade promotes growth.

The benefits of open trade, however, affect more than growth. Open trade policies seem to have a positive effect on other macroeconomic variables crucial to the overall health of economies, acting as a sort of economic immune system booster.

Open countries are less prone to macroeconomic problems, such as financial crises or rates of inflation in excess of 100%. (Although, as Thailand demonstrated, open trade policies are not foolproof in the face of other shortsighted government policies.) Within the developing economies, more than four fifths of those that had closed trading regimes in the 1970s experienced serious economic crises a decade later. But only 6%of the open developing economies experienced similar misfortunes.

While the effects of trade liberalization on growth are well established on both theoretical and empirical grounds, the question of what open trade can do for the cause of global income equality is less well understood. Traditional economic growth theory suggests that poor countries should tend to grow more rapidly than rich countries. Thus the large income gaps which now exist should tend to narrow over time, that is, incomes of poor and rich countries should tend to converge.

The rationale for this convergence hypothesis is that poor countries can import capital and technologies from wealthy countries and reap the advantages of such investments. These benefits arise because capital and technology are so scarce in developing countries that they yield a higher return than in developed economies. Yet, contrary to this theory, there has been no overall tendency for the poorest countries to catch up , or converge, with the richer ones in recent decades.

So, drop the idea of convergence? No. A closer look at the data reveals that only closed economies failed to begin to catch up with developed countries, while open economies benefit from growth rates above those of the advanced economies.

When we examined the subset of closed economies, growth in income per person was, indeed, the same in both developing and developed economies (about 0.7%). This suggests that poor countries are not catching up. In the group of open economies, however, income growth in developing countries was almost twice that of developed countries(4.5% versus 2.3%) Such sustained differences in growth rates work as powerful engines to diminish, over time, the existing gaps in income across countries. The key, it seems, is to adopt and stick with open trade policies.

Other factors, in addition to trade policy, also matter, of course. Protection of property rights, civil and political liberties, protection from random violence are among other significant factors in promoting economic growth. Fiscal restraint as reflected by low government consumption relative to income growth is also important. Geographical location is also important, as such things as distance from markets, bad climates and poor soil hinder economic growth in developing countries. But this makes implementing open trade policies all the more crucial, because they are the best tools available to compensate for the bad cards which nature sometimes deals out.

Today's global integration thus gives rise to unprecedented opportunities. For the first time in history, more than a privileged few societies have a chance to ease the material wants of their citizens. Despite the recent stock market jitters, the constellation of institutional and political factors for this giant experiment to succeed has never been so favorable, as exemplified by the spread of democracy and the rule of law in this decade. But without wisdom, leadership, and a constant holding to the liberalizing policies now underway, there remains a risk that these rewards will neither be extended nor consolidated.

Read more