The wisdom preached by the International Monetary Fund (IMF), the World Bank and nearly all mainstream economists during the past quarter-century of what has been (mistakenly) called 'neo-liberalism' has been that economies open to trade, capital and investment flows from around the world – in obedience to the laws of the putatively 'free' market – grow and develop faster and, hence, can bring about a quicker reduction in poverty, via the famous 'trickle-down effect', than can other economic approaches. This has been the essence of what is called globalisation. Textbook theory, it has been argued, shows very convincingly that both sides to a trading contract (both within and across countries) gain from it. Such 'efficiency' gains constitute the necessary incentive for spurring investment and growth within economies.
Theory is one thing, however, while reality quite another. The above wisdom today lies shattered as the 'great financial crisis of 2008' threatens to throw economies around the world into a serious depression – one that could last for years, such as took place during the 1930s. Trade, as an engine of growth and poverty reduction, now has to be questioned.
First consider some facts and critical admissions. Here is a comparative picture of the collapse of world trade, with the blue line representing the 1930s, the red line for the present crisis, and the horizontal axis showing the number of months from the base:
League of Nations Monthly Bulletin of Statistics
In January 2009, world trade was 17 percent lower compared to January 2008. Monthly data can be volatile, so one may want to consider the average of three months at a time. Even so, world trade during November 2008 to January 2009 was 40 percent lower than during the previous three months, calling forth (as compensation for serious shortfalls in demand) enormous, historically unprecedented 'stimulus packages' – fiscal, monetary and financial – from governments everywhere.