Imports can be as useful to developing countries as exports are inputs as before, but at a lower cost. They could also open up new ways of producing existing goods, and even allow entirely new goods to be made. All this seemed to hold in India. For example, its prolific film industry had continued to make some black-and- white films into the 1970s, in part because of the difficulty of im- porting enough supplies of colour film. But proving whether the theory applies in practice requires more detailed data, not just about how much firms produced but what they produced, and how all this changed over time. Most attempts at addressing these questions have foundered because such information is not available. But with India, the re- searchers were helped, perversely enough, by highly restrictive industrial policies that the country had introduced in the 19505. These included rules that required companies to report to the au- thorities every little tweak to their product mix-a burden for firms, but a gold mine for researchers. Happily, the economists found that the data backed up the theory: lower import tariffs did lead to an expansion in product variety through access to new in- puts. They found that about 66% of the growth in India's imports of intermediate goods after liberalisation came from goods the country had simply not bought when its trade regime was more PAUL KRUGMAN, who won last year's Nobel prize in econom- restrictive. These new inputs caused the price of intermediate ics for his work on trade, wrote in 1993: "What a country really goods to fall by 4.7% per year after 1989. And detailed data linking gains from trade is the ability to import things it wants. Exports inputs to final goods showed that the imports led to an explosion are not an objective in and of themselves; the need to export is a in the variety of products made by Indian manufacturers; the av- burden that a country must bear because its import suppliers are erage firm made 14 products before liberalisation, but by 2003, crass enough to demand payment." this had increased to 2.3. The increases in variety were largest for This view does not dominate the public debate. Most are industries where the input tariffs were cut most, and these indus- thrilled by the idea of export growth, but cower at the prospect of tries also saw increased spending on research and development. more imports. Such prejudice certainly prevailed in India in 1991, Overall, the new products that Indian companies introduced when the IMF foisted tariff cuts on the economy as one of the were responsible for 25% of the growth in the country's manufac conditions attached to a $2.5 billion bail-out package. Pessimists turing output between 1991 and 1997. fretted that a flood of imports would destroy Indian industry.For a group of American economists*, however, that sudden Slash and churn trade liberalisation has provided an unusually clear lens through But one aspect of India's experience after trade liberalisation did which to study the way that commerce affects the economy. This not conform to what the researchers had expected. Normally, as is precisely because it was externally imposed. That the govern- new products are introduced, some older ones stop being made. ment had to hew to the IMF's diktats and slash tariffs across the This "churn" in the market is part of what makes people uncom- board gave industries little scope to jockey for exemptions. This fortable about lower trade barriers, because it may cause difficult made the researchers confident that tariff cuts, and not differ- adjustments for some workers or companies. But the Indian var- ences in industries' ability to lobby the government, were re- iant of creative destruction seemed unusually benign. The re- sponsible for changes in India's trade patterns after liberalisation. searchers found that firms rarely dropped products. One reason As part of those reforms, India slashed tariffs on imports from for this may be the diversity of India's economy: there is always a an average of 90% in 1991 to 30% in 1997. Not surprisingly, imports segment lower down the economic pecking order which is hap- doubled in value over this period. But the effects on Indian py to buy products that richer consumers scoff at. manufacturing were not what the prophets of doom had predict- This may be unique to countries like India where many levels ed: output grew by over 50% in that time. And by looking careful- of development co-exist. But Penny Goldberg, one of the authors, ly at what was imported and what it was used to make, the re- thinks that the methods used in the studies on India can be ap- searchers found that cheaper and more accessible imports gave a plied to many other countries where trade has been similarly lib- big boost to India's domestic industrial growth in the 1990s. eralised and which have good data on firms, such as Colombia This was because the tariff cuts meant more than Indian con- and Indonesia. She notes that one of her co-authors, Amit Khan- sumers being able to satisfy their cravings for imported chocolate delwal, visited a Coca-cola bottling plant in China, and noticed (though they did that, too). It gave Indian manufacturers access to that all the machinery was either Japanese or German. China, of a variety of intermediate and capital goods which had earlier course, is known as a big exporter. But it may never have been too expensive. The rise in imports of intermediate goods achieved this success without access to a range of imports. was much higher, at 227%, than the 90% growth in consumer- goods imports in the 13 years to 2000. Theory suggests several ways in which greater access to im- *"Multi-product firms and Product Turnover in the Developing World: Evidence from ports can improve domestic manufacturing. First, cheaper im- India", by Penny Goldberg, Amit Khandebval, Nina Pavenik and Petia Topalova. (Forthcoming in the Review of Economics and Statistics.) Other papers available at ports may allow firms to produce existing goods using the same http://www.princeton.edu/-pennykg/