How to help the desperately poor

It should be pos­si­ble to decide this: the num­ber of ‘win­ners’ is so much larg­er than the num­ber of losers that com­pen­sa­tion if nec­es­sary would be easy. But there’s lit­tle chance that there will be a wide­spread out­break of polit­i­cal ‘courage’ among Min­is­ters at Can­cún. The World Bank’s Glob­al Eco­nom­ic Prospects “report(link to World Bank Site)”: for 2004 esti­mates the val­ue of achiev­ing a sig­nif­i­cant but fea­si­ble reduc­tion in bar­ri­ers to trade. * Rich coun­tries cut tar­iff peaks to 10 per­cent in agri­cul­ture, and to five per­cent in man­u­fac­tur­ing;
* Devel­op­ing coun­tries rec­i­p­ro­cate with cuts in tar­iff peaks to 15 per­cent and 10 per­cent in agri­cul­ture and man­u­fac­tur­ing, respec­tive­ly;
* All coun­tries elim­i­nate agri­cul­tur­al export sub­si­dies, stop requir­ing farm­ers to pro­duce crops in order to ben­e­fit from income sup­port pay­ments and elim­i­nate spe­cif­ic tar­iffs, quo­tas, and anti-dump­ing duties.

” This for­mu­la gen­er­ates gains which amount to about three quar­ters of those that might be pos­si­ble through full trade lib­er­al­iza­tion. If the reforms out­lined above were imple­ment­ed pro­gres­sive­ly over five years to 2010, and accom­pa­nied by a real­is­tic pro­duc­tiv­i­ty response, *devel­op­ing coun­tries would gain near­ly $350 bil­lion* in addi­tion­al income by 2015. *Rich coun­tries would ben­e­fit too*, with gains in the order of $170 bil­lion. All of this would mean that *there would be 144 mil­lion few­er peo­ple liv­ing below $2 per day by 2015*. ” _from_ the World”>„contentMDK:20126037~menuPK:34463~pagePK:64003015~piPK:64003012~theSitePK:4607,00.html”>World Bank

But wait” you say, “is it real­ly cred­i­ble that an increase in trade will help the poor?”
One of the most inter­est­ing devel­op­ments in trade analy­sis in recent years has been the grow­ing avail­abil­i­ty of data to answer this ques­tion. There is still a lot of con­tro­ver­sy about the link­ages between trade and income dis­tri­b­u­tion. What is now less con­tro­ver­sial is that the poor­est peo­ple in devel­op­ing coun­tries that lib­er­al­ize mar­kets and expand their trade share about equal­ly in the result­ing nation­al income gains. In oth­er words, trade-relat­ed growth does not adverse­ly affect income dis­tri­b­u­tion (it may not improve income dis­tri­b­u­tion in the short term, how­ev­er). The lead­ing con­tri­bu­tions in this area have come from two econ­o­mists in the World Bank (David Dol­lar and Aart Kraay). Their work has been the sub­ject of the sort of bit­ter attacks for which the World Bank has become famous (“here’s(link to pdf file, about 80k)”: one of the more sober cri­tiques by Nye, Red­dy and Watkins). The con­clu­sions of the Dol­lar-Kraay work seem to me, how­ev­er, to stand up both in sub­stance and on plau­si­bil­i­ty grounds. “Here’s(link to IMF web site)”: their own illus­trat­ed short sum­ma­ry of their work. The lat­est Bank report (quot­ed above) con­tin­ues to draw direct­ly on their data. Here’s the con­clu­sion of their 2001 Paper enti­tled “Trade, Growth and Pover­ty” (World Bank Pol­i­cy Work­ing Paper No. 165). I think it mer­its quot­ing, almost in full. bq. We have iden­ti­fied a group of devel­op­ing coun­tries that have had large cuts in tar­iffs and large increas­es in actu­al trade vol­umes since 1980. Since Chi­na, India, and sev­er­al oth­er large coun­tries are part of this group, well over half of the pop­u­la­tion of the devel­op­ing world lives in these glob­al­iz­ing economies. bq. The post-1980 glob­al­iz­ers are dif­fer­ent from the rest of the devel­op­ing world in terms of the extent of tar­iff cut­ting (22 point reduc­tion com­pared to 10 points) and in terms of the increase in trade vol­ume over the past 20 years (an increase from 16% to 32% of GDP, ver­sus a decline from 60% of GDP to 49% of GDP). bq. While rich coun­try growth rates have slowed down over the past sev­er­al decades, the growth rates of the glob­al­iz­ers have shown exact­ly the oppo­site pat­tern, accel­er­at­ing from the 1970s to the 1980s to the 1990s. The rest of the devel­op­ing world, on the oth­er hand, has fol­lowed the same pat­tern as the rich coun­tries: growth decel­er­at­ing from the 1970s to the 1980s to the 1990s. In the 1990s the glob­al­iz­ing devel­op­ing coun­tries grew at 5.0% per capi­ta; rich coun­tries at 2.2% per capi­ta; and non­glob­al­iz­ing devel­op­ing coun­tries at only 1.4% per capi­ta. Thus, the glob­al­iz­ers are catch­ing up with rich coun­tries while the non-glob­al­iz­ers fall fur­ther and fur­ther behind. bq. … We then looked at how gen­er­al these pat­terns are, through cross-coun­try regres­sions. We focused on with­in coun­try vari­a­tion and showed that changes in trade vol­umes have a strong pos­i­tive rela­tion­ship to changes in growth rates. … There is no sys­tem­at­ic rela­tion­ship between changes in trade vol­umes and changes in house­hold income inequal­i­ty. The increase in growth rates that accom­pa­nies expand­ed trade there­fore on aver­age trans­lates into pro­por­tion­ate increas­es in income of the poor. Thus, absolute pover­ty in the glob­al­iz­ing devel­op­ing economies has fall­en sharply in the past 20 years. The evi­dence from indi­vid­ual cas­es and from cross-coun­try analy­sis sup­ports the view that open trade regimes lead to faster growth and pover­ty reduc­tion in poor countries.

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