Economics: Poverty Trade-offs

Advocates of trade liberalisation welcomed Oxfam’s report on trade and poverty reduction, “Rigged Rules and Double Standards: Trade, Globalisation, and the Fight Against Poverty”.

Perhaps they were relieved that Oxfam hasn’t opted to promote protectionist prescription for helping impoverished countries.

To the contrary, the report agreed world trade has the potential to act as powerful motor for reducing poverty, as well as for economic growth. Trouble is, the potential is being lost and trade protectionism is keeping hundreds of millions of people poor.

There were compelling data in support of this proposition:
* If Africa, East Asia and Latin America were each to increase their share of world exports by just one percent, the income gains could lift 128 million people out of poverty. Reduced poverty would lead to improvements in other areas, like child health and education.
* Developing countries exporting to rich-country markets face tariff barriers four times higher than those encountered by rich countries. These barriers cost them US$100 billion year, twice as much as they receive in aid. Lifting developing countries’ share of world exports by just five percent would generate US$350 billion, seven times as much as they receive in aid.

The problem for developing countries was not that international trade is inherently opposed to the needs and interests of the poor, Oxfam said, but that global trade rules are rigged in favour of the rich. Oxfam therefore committed itself to campaigning for better rules.

Trade Negotiations Minister Jim Sutton said the Government agreed with and supported the key message in the report, that trade is one of the best ways to reduce poverty. He agreed, too, that there were double standards among many rich countries, which professed commitment to poverty reduction while denying poorer countries meaningful access to their markets. Those countries also provided massive subsidies, particularly in agriculture, which distorted trade and reduced international prices. This directly affects poorer countries’ ability to trade themselves out of poverty.

Developed countries needed to start delivering on their promises and get on with creating export opportunities for developing countries, Sutton said.

Because of the nature of his ministerial duties, of course, he has good cause to liken New Zealand’s trading experience to the problems of developing nations. Our exporters face the same barriers and market distortions for many of our agriculture exports and our sheepmeat and steel exporters have run into trade barriers erected by the Americans, most blatantly, while their leaders bray their belief in free trade.

But Dani Rodrik, professor of international political economy at the John F Kennedy School of Government at Harvard University, challenges advocates of global economic integration who hold out what he says are utopian visions of the prosperity that developing countries will reap, if they open their borders to commerce and capital.

Rodrik’s complaint essentially is that for all practical purposes, global integration has become substitute for development strategy, but he says the agenda of global integration rests on shaky empirical ground and it seriously distorts policy-makers’ priorities. By focusing on international integration, governments in poor nations divert human resources, administrative capabilities and political capital away from more urgent development priorities, such as education, public health, industrial capacity and social cohesion.

He contrasts the experiences of countries which bought into the integration orthodoxy and countries that didn’t. Scores of countries in Latin America and Africa, which sharply lowered their barriers to trade and investment in the 1980s are now stagnating or developing less rapidly than in the heyday of import substitutions during the 1960s and ’70s. On the other hand, policy-makers in the fast-growing countries of China, India and others in East and Southeast Asia were keen on trade and investment liberalisation, too, but have done so gradually, sequentially and only after an initial period of high growth and as part of broad policy package with many unconventional features.

World Bank economists David Dollar and Aart Kraay see things differently. They analysed 80 countries over four decades, while researching popular views about the poverty-growth relationship, and found the effect of growth on incomes of the poor is no different in poor countries than rich ones. They also found openness to foreign trade benefits the poor to the same extent that it benefits the whole economy; growth spurred by open trade or other macro policies (good rule of law, low government consumption, macro stability) benefited the poor as much as it did the typical household.

Economists keep themselves in work with this sort of debate, and the World Bank paper concluded: “This does not imply that growth is all that is needed to improve the lives of the poor. Rather, these findings leave plenty of room for further work…”

Maybe if all poor people could be trained in economics, unemployment could be eliminated. M

Bob Edlin is regular contributor to Management magazine.

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