Globalization, reduction of poverty and the role of the State

This blog, apart from dwelling on the legal aspects of the multilateral trading regime, also ponders over larger questions of globalization, equitable growth and development. Does international trade lead to equitable growth? Is everyone equally participating in the globalized economy and taking the benefit of open markets, competition and lower prices? Is the market restricted to a few while the rest are negatively impacted by the consequences of growing disparities? These questions, I guess will remain, and there are opinions on both sides of the divide.

YaleGlobal Online recently had an interesting piece by Laurence Chandy and Geoffrey Gertz titled With Little Notice, Globalization reduced Poverty which essentially argued that over the years globalization has led to a reduction of global poverty and large segments of population, especially in China, have risen out of deprivation. 

Articulating their thoughts on the reasons for this decline they state:

"These factors are manifestations of a set of broader trends – the rise of globalization, the spread of capitalism and the improving quality of economic governance – which together have enabled the developing world to begin converging on advanced economy incomes after centuries of divergence. The poor countries that display the greatest success today are those that are engaging with the global economy, allowing market prices to balance supply and demand and to allocate scarce resources, and pursuing sensible and strategic economic policies to spur investment, trade and job creation. It’s this potent combination that sets the current period apart from a history of insipid growth and intractable poverty."

Looking at a very optimistic future where millions would rise out of poverty into being "middle class" they point out that globalization has had a positive impact on improving lives. 

 "Taking a long view of history, the dramatic fall in poverty witnessed over the preceding six years represents a precursor to a new era. We’re on the cusp of an age of mass development, which will see the world transformed from being mostly poor to mostly middle class. The implications of such a change will be far-reaching, touching everything from global business opportunities to environmental and resource pressures to our institutions of global governance. Yet fundamentally it’s a story about billions of people around the world finally having the chance to build better lives for themselves and their children. We should consider ourselves fortunate to be alive at such a remarkable moment."

Where does the truth lie? Critics of globalization vehemently argue that globalization has led to marginalization, increase n poverty and destitution. Large populations are unable to participate in the national economy leave alone the global economy. Are both positions rhetorical? Countries exist in an interconnected world where multilateral trade rules continuously impact domestic policy. This domestic policy may be designed to address issues of poverty, development and equity as the countries see it. How does one negotiate this delicate situation? Can the role of States be completely ignored? WHat form the role of the State will take is a complicated issue. However, the abandoning of the State in a globalized world to usher in equitable development may not be the answer. While countries perhaps need to engage more with the global economy to partake of its benefits, a strong set of policies to enable millions to participate in the interconnectedness is crucial. What these sets of policies are and how they should be implemented is another debate altogether.The need for them however should not be disputed.

International Trade and development - Nexus?

One is often confronted with the question as to the relationship of trade and development. Does international trade lead to a country's economic growth? Does it reduce inequality and poverty? Does the liberlisation of trade and reduction of barriers to trade impact a country's economic growth? Does international trade have a bearing on providing access to a majority of people within countries to growth and opportunity? There is an abundance of economic literature on this subject. Does increasing exports and restricting imports have a bearing on inequality? Liberalisation of trade is not an end in itself. It is a means to growth and development. 

Recently, the OECD released a detailed report titled "Policy Priorities for International Trade and Jobs" on international trade and growth which has various articles on the impact of international trade on employment, growth, poverty reduction and inequality. The conclusions of the Report as summarised by the press release was as follows:

The report, a product of the International Collaborative Initiative on Trade and Employment (ICITE)*, analyses the complex interactions between globalisation, trade and labour markets. Drawing on numerous studies covering different parts of the globe and countries at very different levels of development, the report highlights the powerful role trade can play in driving growth and improving employment. 

• Of the 14 main studies undertaken since 2000 reviewed in the report, all 14 have concluded that trade plays an independent and positive role in raising incomes. 

• Through its impact on productivity, trade also raises average wages. Over the  1970-2000 period, manufacturing workers in open economies benefitted from pay rates that were between 3 and 9 times greater than those in closed economies, depending on the region. In Chile, workers in the most open sectors  earned on average 25% more in 2008 than those in low-openness sectors.

• Fears of the impact of offshoring may be exaggerated. Studies for the United Kingdom, United States, Germany and Italy  demonstrate that off-shoring of intermediate goods has either no impact or, if any, a  positive effect on both employment and wages.

The report also shows, however, that openness to trade is not enough. Complementary policies – such  as sound macroeconomic policies, a positive investment climate, flexible labour markets and adequate social safety nets – are needed to realise the full benefits of trade."

The piece on Latin America was particularly interesting. Titled "An Updated Assessment of the Trade and Poverty nexus in Latin America" it analyses the possible links between liberalisation of trade, poverty reduction and growth. Dwelling on the complexity of analysing the relationship between international trade and poverty reduction, the article concludes:

"Despite the complexity of finding a clear connection between trade liberalisation and poverty reduction in both theoretical and empirical studies, there is a nearly general consensus among academics that protectionism is not a suitable policy tool for eradicating inequality and poverty. It is also widely acknowledged that trade liberalisation is a means to achieve growth with poverty reduction and not an end in itself. Trade integration alone is in fact not sufficient to generate sustained growth, even less to promote development with equity and poverty reduction. Indeed, the literature reviewed so far very often  emphasises the fact that the distributive outcome of trade integration is inextricably intertwined with a wide array of structural and policy determinants. 

          ...

Trade openness, inequality and poverty are wide multidimensional concepts. Measuring and attributing causal relations among these variables without carefully qualifying the specific dimensions explored or the particular transmission mechanisms at play may be misleading. It is important to disentangle the specific dimension of the trade and poverty nexus from the wider debate on globalisation and financial integration, the competing concepts of relative and absolute inequality and the objective and subjective dimension of poverty and deprivation.

Despite the impossibility to rigorously and unambiguously assert that trade openness is conducive to growth and poverty reduction, the preponderance of evidence supports this conclusion. However, the majority of empirical macro studies also show that the impact of trade on growth and poverty is also generally small and that the causes of indigence are to be found elsewhere. But it is in fact extremely arduous to find evidence that supports the notion that trade protection is good for the poor. The question is therefore how to make trade and growth more pro-poor and not how to devise improbable alternatives to trade integration aiming at improving the livelihood of the poor.

          ...

Finally, considering that the trade and poverty nexus depends on a number of interconnected factors a consensus is emerging on the need to flank trade integration initiatives with a wide array of complementary policies. There is in fact increasing evidence that the outcome of trade opening may be regressive in the presence of distortions in complementary areas such macroeconomic policies, infrastructure, regulations, financial depth, labour markets, governance and human capital. 

It is therefore of the utmost importance to mainstream trade into the development agenda of Latin American countries and to align consensus, policy priorities and financial resources with the objective of making trade work for the poor. "

Can we generalise that international trade either negatively impacts poverty reduction or has a positive bearing on it? Is it a complex relationship that is far removed from sweeping generalisations? Can trade work for the poor? Can more people access opportunity by being part of the liberalised global economy? Is a liberalised trade regime only benefitting a few who can make use of the opportunities of open markets? Is protectionism the answer to the inequities of a liberalised system? What other national policies need to be in place to ensure that the benefits of international trade reach a large number of people? Is there a consensus on this? Do WTO rules facilitate the adoption of varied, multiple national strategies or do they restrict countries from adopting such policies? Is the relationship between trade and growth much more complex? While protectionism and inward looking policies may not necessarily bring about equitable growth, is there justification in having an uncritical endorsement of free trade and growth? Is there a middle path? Does the WTO rules allow, restrict or agnostic to countries taking this middle path?