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)”:http://www.worldbank.org/prospects/gep2004/ 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”>http://web.worldbank.org/WBSITE/EXTERNAL/NEWS/0,,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)”:http://www.newschool.edu/cepa/papers/workshop/reddy_030419.pdf 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)”:http://www.imf.org/external/pubs/ft/fandd/2001/09/dollar.htm 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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