Does trade contribute to poverty alleviation?

Escrito el 19 Febrero 2012 por Mikel Aguirre en Economía Global

The fifth of the Ten Principles of Economy written by Gregory Mankiw indicates that “Trade can make everyone better off”.

On one way we may consider that trade contributes to economic growth – the most important factor for poverty alleviation, with examples as South Korea, which liberalized its trade policies in the 1960s and Chile, in the 1970s clearly showing that economies with more open trade policies perform better than those with more restrictive policies. In more recent history, openness has also served the BRIICS countries (Brazil, Russia, India, Indonesia, China, and South Africa) very well.

 The most open segments of the BRIICS economies have done the best, and overall the BRIICS countries have significantly reduced their border protection and expanded their exports much faster than the leading developed countries

On the other side if the developing countries do not protect their infant industries (as developed countries did before them), using high tariffs or import bans the could end up being used only as cheaper labor costs

Fully unrestricted access to the markets of the United States, European Union, Japan and Canada is estimated to benefit Sub-Saharan Africa considerably, leading to a 14% increase in non-oil exports and boosting real income by about one percent. Developing country gains are bigger if they commit to deeper cuts in their own tariffs.

 How do you think developing countries should face their opening to International Trade: Gradually or as fast as possible? Does Trade contribute to the elimination of poverty or the future gains of , e.g. oil trade, will end up in some few favoured hands?


Mathieu Menu 19 Febrero 2012 - 19:24

I really do think that trade contribute to the elimination of poverty, and history can proove it.

Since Ancient History, trade participated in the dvp of civilization. During Antiquity, Roman Empire was at its peak, not only because of its powerfull army, but thanks to its developed trade. It was a source of power and mainly contibuted to the greatness of the Empire.
More than making everyone better off by allowing each citizen to specialize its activities and then trading with others, Trade also allowed the Roman Empire to extend its “international” presence while developing trade and relation with foreign countries and neighbour empires. Even though they are not the first in the “international” trade they are pioneer because they improved it by trading all around Mediterranean Sea, up to Africa, Egypt Empire and Middle East.

Pablo MIR 20 Febrero 2012 - 09:58

We are all not only keynessians now but also ricardians.Trade betters off society at large.Developing countries need trade not aid as J.Sachs affirms.However,we cannot preach free trade with developing countries and subsidize a competitiveless agriculture through the CAP.

Regarding the infant industry tariff protection argument I believe it is a good idea to consolidate a competitive environment in a determined economic sector. Afterwards, in order to avoid self indulgence, tariffs and barriers have to be lifted so that the infant industry can compete globally.
Free trade requires democracy and rule of law.Otherwise there will be crony capitalism and the creation of wealth won´t be distributed but monopolised by oligarchs as happens in Russia or in Morocco(The Majzen).

Jonathan Mulligan MIR 27 Febrero 2012 - 23:51

Developing countries should precede cautiously when considering liberalizing their economy and fully embracing free trade. Mankiw’s principle does not state that trade will make everyone better off, only that it can. There are several success stories, particularly the Asian Tigers. However, the Asian Tigers did not fully embrace both free trade and the infant industry argument, but were somewhat in-between. They followed a theory called Outward Looking Industrialization in which they slowly opened their economy and gradually lowered tariffs and other barriers, which in essence gave their domestic industries an opportunity to flourish, but also did not discourage investors and possible trade partners. The ugly side of the free trade has been the forced, rapid openning of Latin America during the Washington Consensus era. In this case, Latin American economies have been submitted to what Naomi Klein wrote about in her book “The Shock Doctrine”–the economies do not have time to react to the forced opening and liberalization of their economies and suffer the consequence, while the developed countries take advantage of this and rewrite their less developed neighbor’s economic policy, like the Chicago Boys in Chile. To continue with Chile, it is important to note that they are a notable somewhat positive exception, but to label them as a true success and miracle of the age is misleading. Chile was not without severe economic hardship in the mid-eighties and the liberalization and much later, the boom of the economy came with the price of a harsh dictator, internationally known for human rights violations. Furthermore, a look at Chile’s current Gini coefficient points to the fact that free trade has not been a cure-all for the country. The final example I will use is the NAFTA agreement between the US, Canada and Mexico. NAFTA has clearly not benefitted Mexico as the economy and it’s exports cannot compete with its northern neighbors which has in turn caused mass immigration North (this is of course an oversimplification for purposes of space) and negatively affected the US employment market to an extent. Therefore, in conclusion, the general statement of free trade benefitting all cannot be completely supported, though in certain instances with careful liberalization, it can be quite beneficial to a large portion of the population.

Tomofumi Fukamiya 8 Marzo 2012 - 02:25

Gregory Mankiw says “Trade allows countries to specialize in what they do best” but doesn’t say “Trade makes countries specialize”. In the case of developing countries suffering from poverty, what they do best will be agriculture. However, developed countries have never specialized only in industries and keep exporting agriculture. Why are a number of poor cotton producers in India not better off but keep committing suicide? It’s because US exported too low-price cotton through large-scale production, genetic modification and huge agricultural subsidy. In the summer of 2008, I took part in WTO meeting in Geneva. Finally, its Doha round broke down on the brink of reaching agreement because US didn’t allow developing countries to use “special safeguard mechanism”, designed to protect farmers in the developing world against temporary surges in cut-price imports of cotton. Kamal Nath (India’s trade minister) said “Free trade is like missile. Developing countries are concerned about the livelihood of poor and subsistence farmers.” If each country specialized in different fields, they might be better off. However, if strong country and weak country fight in same field, it’s not surprising that the latter try to have some of weapons and it makes no sense that the former doesn’t allow the latter to have it. Whether trade contributes to the elimination of poverty depends on two country’s specializations and how to use such weapons.

Jaime de Azúa 12 Marzo 2012 - 09:30

Spain is the best example of the good consequences of free trade and liberalisation.In 1959 Spain abandoned their
traditional policy of Import substitution and autarchy adopting the Plan de Estabilización.It meant a great leap forward
because the economy grew above 8% for 12 years.The tecnocrats who concieved this economic plan not only consolidated
the rise of the middle class in Spain but also a peaceful transition when Franco died in 1975.In fact,one of the main issues of
the Spanish economy is low exports.the crisis should spur our companies to the quest of new markets in Asia and latin America.

Cynthia Bowles 16 Marzo 2012 - 00:09

I would argue that trade does alleviate poverty if done right. As JJ mentioned, when Latin American opened up their markets they went through a shock and only a few benefited. If trade is liberalized very quickly the industry needs to be protected so that developed economies do not take advantage of such. For example, in the case of Brazil Lula’s administration has gradually opened their markets and the more the country industrialized the more it released their economy. In order to get maximum benefits of trade, I think markets should be opened gradually specially if they are infant industries.

Pablo MIR 16 Marzo 2012 - 10:59

The case of Latin America is not accurate.Besides,the situation improved compared to the lost decade of the 80´s.I believe that Jaime made a point bringing the issue of the consequences of plan de estabilización in 1959 in Spain.Free trade makes everybody
better off and the state must ensure that those who are left behind have the oportunity to develop new projects with a comparative adventage vis avis its competitors.In Spain,we need more ICEX,more ICO funding for exporters and tied aid to enter new markets,mainly in Asia but also America or Angola in Africa.

Daniel Lavi 27 Septiembre 2012 - 21:40

I believe countries should gradually open to international trade. I don’t think protectionism is the answer, but I do understand why it is necessary in the early stages. The US was historically very protectionist in its early history (and still maybe considerably so of its corn and certain industries).

For countries like Brazil I think it is important to protect the interests of Brazilians first and slowly open the doors to international trade (as there is no rush and no where but up for Brazil). This allows Brazilians to catch up and even the playing field before every other country and company tries to cash in on Brazil.

I do believe that this ultimately allows Brazilians first crack at having what America likes to call the “American Dream”, it offers local Brazilians to move up in their classes structures (as as actually happened) and not be exploited by first world countries and companies.

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