Manuel García Ruiz. 20/01/2019
Trade as a path to prosperity
Trade as a proportion of global GDP has approximately
doubled since 1975. Markets for goods and services have become increasingly
integrated through a fall in trade barriers. But trade is not an end in itself.
People measure the value of trade by the extent to which it delivers better
livelihoods, through higher incomes, greater choice, and a more sustainable
future, among other benefits. For the extreme poor living on less than $1.25 a
day, the central value of trade is its potential to help transform their lives
and those of their families. In this way, there is no doubt that the
integration of global markets through trade openness has made a contribution to
poverty reduction[1]. The number of people living in extreme poverty
around the world has fallen by around one billion since 1990.
In 2011, around one billion people remained in extreme
poverty (just under 15 percent of the world’s population). The World Bank Group[2] has always considered trade as a key activity in
Development Cooperation[3] and has adopted the goal of reducing this figure to
less than 3 percent by 2030.
The relationship between trade openness and poverty
reduction[4] is more complex than that. There are a number of
channels through which trade openness affects poverty: economic growth and
macroeconomic stability, impacts on households and markets, changes in
employment and impact on government revenues. In each of these, trade can be a
key driver of poverty reduction, although potential risks exist and need to be
taken into account.
Opening up to trade affects the return to investment.
Countries that have pursued growth based upon the domestic market alone have
typically been unable to sustain growth for long. The integration of developing
countries into the global economy has also generated new sources of demand for
other developing countries, with South-South[5] trade between developing countries increasing from 8
percent of world trade to around 25 percent today. Trade also supports growth
by giving firms access to inputs that can help boost productivity, but are not
available domestically.
The World Bank’s goal is to increase the income growth
of the poorest population in each country (according to the countries where
people suffering extreme poverty are a large part of its population) to ensure
that economic gains benefit the near-poor and lower-middle income groups. Of
course, in many countries, and in particular in the poorest countries, 40% or
more of the population live on incomes that are below the extreme poverty line[6].
Figure 1. Population shares and total numbers of people in extreme
poverty.
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| Source: Figure 1 from: https://www.wto.org/english/res_e/booksp_e/worldbankandwto15_e.pdf (data from 2015) |
To the extent that increased trade is associated with
economic growth, it is likely to be associated with improvements in the standard
of living for the bottom 40%. While a rise in average income does not
necessarily result in a rise in income in the disadvantaged population, it is
well-established that economic growth often leads to poverty reduction. Since
the bottom 40% are in most countries more similar to people at the average
income than to the extreme poor, the link between economic growth and outcomes
of the bottom 40% is likely to be even stronger than the link between growth
and reduced poverty.
The benefits of greater trade cooperation[7] to the bottom 40% depend, in part, on the skill
intensity of the products favoured by trade. If a country’s comparative
advantage lies in goods that are relatively intensive in less-skilled labor,
increased trade is likely to benefit the bottom 40% relatively more. If a
country specializes in technology or high-skill intensive products, then trade
can in principle place downward pressure on the wages of the bottom 40%.
[1] ClassReading1:
Hearn and Strew (2015): http://cic.nyu.edu/sites/default/files/publication_hearn_strew_dev_goals_april2015.pdf
[2] World Bank Group and World
Trade Organization, 2015. The Role of
Trade in Ending Poverty. World Trade Organization: Geneva.
[3] ClassReading2:
Alonso and Glennie (2015): http://archive.ipu.org/splz-e/nairobi16/policy-brief.pdf
[6] World Bank Group and World
Trade Organization, 2015. The Role of
Trade in Ending Poverty. World Trade Organization: Geneva.
[7] ClassReading3:
Bilal (2012): https://www.vvob.be/files/publicaties/20120530_ontwikkelingsdebat_bilal_05-12_south-south_partnership.pdf
Manuel: this is an interesting reflection on the role of trade in development. I have no doubt that it is key to the prosperity of countries as your title suggests, but I remain unconvinced that trade really helps the extreme poor. You yourself point this out but in the end I am not really sure what you think. In the penultime paragraph you say a rise in income does not necessarily help the poorest but you also say economic growth often leads to poverty reduction. So, what are we to believe, the first part or the second part of this phrase? Please explain briefly. Prof. C. Freres
ResponderEliminarWhen thinking about the role of trade in development, it is appropiate to qualify the different outcomes that can be derived from one type of trade or another.
ResponderEliminarOn the one hand, when I say that a rise in income (resulting from an increase in trade) does not necessarily help the poorest I am referring to these cases where a country specializes its exports in high-skill technology prodcuts. To this extent, it is obvious that the poorest people of these countries will not be able to benefit from trade inasmuch as their academic background will not allow them to participate in the economic cycle.
On the other hand, economic growth leads to poverty reduction as long as the exports are based on goods that are relatively intensive in less-skilled labor. This way, trade is likely to benefit the poorest part of the population.
It is crucial for rulers to adapt trade according to the objectives that these countries want to achieve and to the kind of population living in those states.