Wider participation in trade has the potential to contribute to poverty reduction in developing countries. But only if enabling rules, policies and institutions are put in place.

At the heart of the key issues that member countries of the World Trade Organisation (WTO) are battling, is the true nature of the link between trade and development.

Will the free trade regime advocated by the WTO reduce poverty in developing and least developed countries? Or will it “help the big fish eat the small fish”, as one Thai woman put it during a research investigation?

There are extreme views on both sides. Champions of liberalised trade have a simple premise: trade promotes growth, and growth reduces poverty. The spectacular growth in the economies of Far Eastern countries such as Taiwan , South Korea , Hong Kong and China in the ’80s and ’90s is an oft-quoted example. India too has seen accelerated growth in the aftermath of trade liberalisation.

Trade does have enormous potential to lift millions of people out of poverty. According to an Oxfam study, an increase of 5% by developing countries in the share of world exports would generate US$ 350 billion. That’s seven times as much as developing countries receive in aid.

The impact of trade on poverty alleviation would be felt most keenly in South Asia . Around 21% of the world’s working population lives in this region. South Asia is also home to nearly 40% of the world’s poor living on less than $ 1 a day. The Millennium Development Goals (MDGs) of eradicating extreme poverty and hunger and developing a global partnership for development are not possible till the South Asian region grows and develops.

Effects of liberalisation

Some research shows that as countries have liberalised they have seen improvements in growth and in certain sectors of their economies. According to World Bank (2000) estimates, real GDP grew at an average annual rate of 10% in China and 6% in India during 1980-2000. According to Asian Development Bank (2000) estimates, the incidence of poverty declined from 28% in 1978 to 9% in 1998 in China , and from 51% in 1977-78 to 27% in 1997-98 in India .

Several studies document a significant decline in poverty during the reform period, of at least one percentage point per year in terms of population living below a dollar a day. According to a World Bank analysis, more rapid growth associated with a global reduction in trade protection could reduce the number of people living in poverty by as much as 13% in 2015 (or 300 million people).

However there is concern about the immediate effects of liberalisation, especially on the poor, and the unequal spread of benefits across sections of the population.

A 2005 econometric study commissioned by Christian Aid of 22 countries in sub-Saharan Africa (‘The economics of failure: The real cost of `free’ trade for poor countries”) concluded that the countries would be much richer today if they had not been forced to open up their markets.

In countries that liberalise, imports tend to rise faster than exports. This results in loss of jobs and income as local producers are priced out of the market by new, cheaper, better-marketed goods. Tomato growers in Senegal , cotton growers in Kenya and rice farmers in Ghana were all hit badly when their countries opened up their markets.

The unemployed farm labour could not be absorbed in manufacturing industries, which were also affected by liberalisation. An UNCTAD study (‘Least Developed Countries Report 2004’) found that, following trade liberalisation in less developed countries for which it had data, imports of food increased as a proportion of all imports, while imports of machinery declined. The increase in cheap food imports priced farmers out of local markets. The relative decline in imports of machinery showed that manufacturers were also suffering, importing less machinery to run their factories.

In a liberalised economy, exports also tend to grow, but not as much. Demand for the kind of things sub-Saharan African countries tend to export -- such as raw material -- doesn’t change much, so there isn’t a lot of scope for increasing exports. This means that, overall, local producers are selling less than they were before trade was liberalised.

How trade liberalisation helps

Theoretically, trade liberalisation results in increased productivity through increased competition, efficiency, innovation and the acquisition of new technology.

Trade policy works by inducing changes in the level and composition of exports and imports. This causes a re-allocation of resources from less efficient to more efficient uses. Trade reform also expands the set of economic opportunities by enlarging market size. As an UNCTAD study, ‘Trade liberalisation and poverty in India ’, states: “These are the key components of the effects of trade reform, which together induce growth of output and consequent poverty alleviation.”

However, it is generally agreed that trade on its own cannot result in poverty reduction. It needs to be rooted in an appropriate policy framework at international, regional and national levels to make a substantial dent on poverty.

Also, the experience can vary from country to country. For example, liberalisation has promoted mid-skill-level software exports in India but has not generated significant employment in export-oriented, labour-intensive manufacturing industries, barring textiles and clothing. In the Far Eastern economies that grew explosively in the 1980s and 1990s, however, labour-intensive manufacturing was a key growth area.

Unequal bargaining must end

Historically, trade has been an engine of growth and a creator of wealth. Wider participation in trade has the potential to contribute to poverty reduction in developing countries. But the benefits do not follow automatically. If the correct rules, policies and institutions are not in place, trade can create more poverty in poorer countries.

In November 2001, the Doha Development Agenda placed developmental issues and the interests of poor countries at the heart of the WTO’s work. Yet, four years on, there is little evidence that negotiations have brought any substantial gains to poorer countries, particularly in South Asia .

This is largely because trade rules are still rigged in favour of developed countries. Rich countries still practise high protectionism while demanding that poorer countries lower their tariffs and allow more imports. Oxfam estimates that developing countries are losing around $ 100 billion a year annually as a consequence of protectionism in Northern markets.

Whether it is textiles and clothing, or agricultural produce -- both of vital importance to developing countries -- the United States and European Union have made minimal concessions in real terms in phasing out quotas or lowering subsidies. Cotton exporters in Africa are losing $ 250 million annually because of US subsidies, according to the World Bank. Jamaican dairy farmers and corn farmers in Mexico have suffered badly from cheap imports.

The current US government is keen on extending subsidies to its steel, textile and agriculture industries, all of vital interest to developing countries. All three have been removed from WTO negotiations. Instead, the US and EU are trying to focus negotiations on liberalising investment services, competition policy, and procurement, where industrialised countries stand most to gain. The TRIPS agreement, too, does not go far enough in addressing the public health concerns of developing countries.

If trade is to help development, this unequal bargaining must end. Negotiations must lead to the further development of a truly equitable, rules-based, non-discriminatory trading system in order to deliver the Millennium Development Goals and their poverty reduction objectives.

The Oxfam report ‘Rigged Rules and Double Standards’ lists some areas where this process could begin:

• Market access: Accelerated tariff reduction for low-income countries, coupled with an accelerated phase-out of the Multi Fibre Agreement on textiles.
• Agricultural subsidies: An agreement to phase out all agricultural export subsidies, both visible and disguised.
• No new issues: Competition and procurement should be kept off the agenda, along with strategies to extend the rights of foreign investors.
• Services: Cast-iron safeguards to limit the liberalisation agenda and protect basic services.
• TRIPS: A review of the impact of the current regime allied to practical measures to remove restrictions on developing country exports of generic drugs.
• IMF-World Bank: An end to enforced liberalisation in developing countries through loan conditionality.