Trade Openness and Poverty: The Missing Link

ByMiriam W O Omolo

Institute of Economic Affairs

Monday 22 June 2009,Country Inn, Jaipur, India

Definition of terms: trade openness, poverty

Linking trade openness and poverty African country experiences The Missing link(s) Conclusion and Way Forward

Moving from inward looking trade strategies to policies that facilitate integration to global economy◦ Tariffication of quantitative restrictions◦Removal of trade barriers such as tariff and non-tariff

barriers to trade◦Export promotion initiatives i.e. export processing

zones Free Market Access for foreign goods and

services◦Doha negotiations◦Economic partnership Agreement (ACP-EU)

The Key Objective is to increase overall and individual welfare of those involved in trade.

Inability to meet one’s daily food consumption requirement-food poverty

Inability to meet both food and non-food requirements- Absolute Poverty

In expenditure terms-spending less than 1USD per day

Poverty Indicators:◦Welfare-Income, expenditures◦Basic Needs-Clothing, education, nutrition , health

etc◦Capability: perception, dignity, civil liberty and

security

Source: UNCTAD 2004 LDC Report

Trade liberalization is expected to raise the level of income since resources are reallocated as explained by the theory of comparative advantage.

Trade liberalization affects the direct determinants of poverty i.e. income/wages, prices, government expenditure etc

TDP project: Kenya, South Africa, Tanzania, Uganda and Zambia

Phases of Trade Liberalization:◦ Import Substitution Industrialization◦Structural adjustment Programmes-unilateral

liberalization (IMF and World Bank)◦Reciprocal Liberalization (WTO, regional and

bilateral agreements) Trade Liberalization has resulted in different

gainers and losers, ◦ e.g. Kenya, the cotton sub-sector vs.

telecommunication

There is strong debate whether trade liberation has led to sustained economic growth

Most countries have not achieved international competitiveness –especially with agricultural products being the main exports-Kenya, Uganda, Tanzania, Zambia

There is no sufficient evidence to conclude that trade liberalization has resulted in poverty reduction

Wrong presumption◦Trade liberalization does not guarantee equitable

distribution of gains/losses to individuals, sectors, countries or regions.

Trade liberalization as a panacea for development-Trade is a component of development

Export Diversification and intensification◦Continued trade in primary products with little

progress in high value addition and movement into the global value chain

Concentration on export promotion with little focus on productivity growth through learning, knowledge accumulation and innovation through trade

Innovation –strong missing link? The TDP Project – Empirical research

establishing the impact of trade liberalization on poverty.

Examine trade liberalization as a component of development

There is a lot of ongoing debate on trade liberalization and poverty…..There is need for a ‘big push’◦Productivity growth through innovations ◦ Institutions and regulations to facilitate

innovations