Gunnar Myrdal's Asian Drama, written in the 1960s, painted a bleak picture of Asia then and its prospects. This was a continent hobbled by colonial exploitation, trapped in unequal commercial exchange with the West, and mired in myriad market failures. Only massive infusions of Western aid, Soviet-style planning and import-substituting protection could kick-start industrialisation, growth and development.

How different the Asian Drama looks now – the exact opposite of Myrdal's diagnosis and prognosis. Northeast and southeast-Asian Tigers have undergone fast-paced export-oriented industrialisation and catch-up growth. They have had stable macroeconomic policies and domestic competition, and opened to the world economy. They were followed by China, whose massive opening to the world economy was crowned by its accession to the WTO. Vietnam has followed a similar trajectory. India made a decisive break with the "licence raj" in 1991, and has since been opening gradually to the world economy.

Of course the story is more complicated. There were lots of factors at play, not least vast differences between countries in historical legacies, policies and institutions. To varying degrees, and with the exception of free-trade, laisser faire Hong Kong, government intervention, including industrial policies, import protection and capital controls, coexisted with domestic market-oriented policies and external liberalisation.

The global climate for further liberalisation is worse now compared with the heyday of the "Washington Consensus" in the 1980s and 90s. Reforms have not been reversed, but their forward momentum has slowed. This is true of the West, and of most developing-country regions. China is the conspicuous exception: liberalisation proceeded apace before and after WTO accession.

A variety of factors accounts for liberalisation-scepticism today. External liberalisation has not been seen to deliver sufficient growth, employment generation and poverty reduction in much of the developing world – outside east and south Asia. Caution has been the watchword after the Asian crisis. Not least, the climate of ideas has changed. Arguments against developing-country trade liberalisation and in favour of "policy space"for industrial policies, e.g. to promote infant industries, are more popular now than they were a decade ago.

It is important to confront the sceptics and interventionists head on. Protectionism and industrial-policy intervention has mostly failed across the developing world. East-Asian success is not primarily a result of effective industrial policies in "developmental states": that is quite the wrong lesson to draw. By and large, developing countries that have gone further with opening their economies to global competition are those that have grown faster and had more success with poverty reduction and improvements in human welfare. This is overwhelmingly an east-Asian phenomenon, but one can also point to examples from Latin America (notably Chile) and south Asia (first Sri Lanka, and now India). It is dramatically true of eastern Europe.

Let's take a closer look at trade-policy developments in Asia.

With the exception of China, east-Asian countries have been neglecting the Doha Round in favour of free trade agreements (FTAs). In addition to India's defensiveness and inflexibility, this has contributed to the collapse of the Doha Round and undermined the longer-term credibility of the WTO. That is extremely myopic. Asia needs an effective WTO. East Asia's integration with the world economy gives it a long-term stake in a liberal trading system underpinned by strong, non-discriminatory rules. A patchwork of overlapping and discriminatory FTAs is not enough; and, in the absence of a healthy multilateral system, will probably be damaging. This logic applies compellingly to south-Asian countries too, given their increasing integration into the world economy.

Japan, South Korea, Taiwan, Hong Kong, China, India and the more advanced ASEAN members are in an outer core of about 50 countries that need to be active to set the WTO on its legs again. That requires forging like-minded coalitions to advance market-access (i.e. liberalisation) and rules priorities. This group comprises the OECD plus about 20 developing countries which collectively account for close to 90 per cent of world trade and FDI. China, India and perhaps Japan are in an inner core (including the USA, EU and Brazil) that needs to exercise leadership. Most important will be a Chinese helping hand: it is vital that China move to the WTO foreground and play an active co-leadership role.

A crippled WTO has allowed FTAs to spread like wildfire across Asia-Pacific. As of 2005, there were 17 FTAs in force and about 60 more in the pipeline in China, India and southeast Asia alone. All the major regional powers – China, India and Japan – are involved, as are the USA, South Korea, Australia, New Zealand, Hong Kong, other south-Asian countries and the ASEAN countries. Bilateral (country-to-country) FTAs are most in evidence, but there are plurilateral negotiations too, especially those involving ASEAN collectively. An east-Asian FTA uniting southeast and northeast Asia has been proposed; and there is even talk of a pan-Asian FTA and an APEC FTA.

Government-led conventional wisdom holds that FTAs can take liberalisation and regulatory reform further than would be the case in the WTO. This can in turn stimulate multilateral liberalisation. But the emerging picture looks rather different. Nearly all negotiations in east and south Asia look like delivering weak, partial, trade-light agreements. Negotiations tend to be driven by vague, muddled and trivial foreign-policy goals and empty gesture politics, with little sense of economic strategy. They involve patchy, quick-fix sectoral deals while sensitive areas (especially in agriculture and services) are carved out. They hardly go beyond WTO commitments, deliver little, if any, net liberalisation and regulatory reform, and get tied up in knots of restrictive, overlapping rules of origin.

Hence there should be much more caution with FTAs. Existing FTAs should be cleaned up (i.e. with comprehensive coverage, stronger rules and liberal rules of origin), and new initiatives only launched with a credible economic strategy. FTAs are a reality; they cannot be wished away; but they can be improved; and they can fit better with trade policy on unilateral and multilateral tracks.

Given the limits of the WTO and FTAs, governments in Asia have to look elsewhere for meaningful trade-policy reform. The answer lies at home: the bulk of external liberalisation and associated "second-generation" domestic and institutional reforms will likely come from unilateral measures that spread through competitive emulation – outside trade negotiations.

This is especially true of east Asia, and now applies to south Asia too. Most recently, the bulk of China's massive external liberalisation was done unilaterally, not through international negotiations, and before WTO accession. China is in many ways today what Britain was in the second half of the nineteenth century: the unilateral engine of freer trade. It is probably spurring a pickup in trade-and-FDI liberalisation elsewhere in east and south Asia – notably in India. Would all this have happened, or happened as fast, if China had not concentrated minds? Probably not. Hence, for further liberalisation to occur in Asia and beyond, it is vital that this Chinese engine does not stall.

There is much unfinished business in terms of liberalising trade, capital flows and the cross-border movement of labour across the world. Reduction of what are still high barriers to international commerce holds out the promise of higher growth, and significant poverty reduction and improvements in human welfare. Stalled reforms and reform reversal threaten to deprive hundreds of millions of people of the life-chances they deserve. These are the stakes.