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?

Joel Trachtman on the WTO, Legitimacy and Development

The WTO has often been criticised in terms of its legitimacy and democratic deficit - legitimacy in terms of it being equitable and representational of diverse interests. Critics argue that the multilateral system favours the developed world as well as powerful trading countries and is to the detriment of the least developed countries. They also argue that the WTO structure that permits only formal participation of the States is not entirely representational and thus suffers from a "democratic deficit". Further, it is said that decision making on vital policies affecting a country is transferred from "democratically" elected national representatives to "non-elected", international technocrats.

Joel Trachtman has provided a brilliant understanding of this debate in a Special editorial titled "The WTO, Legitimacy and Development" in the Trade, Law and Development Journal where he has argued that the criticism must move beyond the "generic" legitimacy debate into specifics of what the actual problems are. Arguing that criticism should be backed by strong empirical tools of data analysis, he avers:

"There is no doubt that the WTO has many faults. The problem is that different observers claim different faults, and one observer’s fault is another’s merit. So, instead of claiming illegitimacy, we should explain with greater precision what the problem is. In this context, actionable problems must be of one of two main related types, known in the literature as output legitimacy and input legitimacy, but I believe that calling them legitimacy only clouds the issue. Let’s call them instead “inadequate welfare” and “inadequate accountability”.   

Public policy, including rules of the WTO, can be attacked for failing to maximize welfare. It is easy to see that the claim of inadequate welfare requires a great deal more analysis than a claim  of illegitimacy. It will often require a comparison, using theoretical and/or empirical tools, of the effects of different proposed legal rules or institutions. Professional grade knowledge about what increases welfare and what does not, will  increasingly be viewed as essential to public policy discourse. Those who criticize professionalism and expertise as fundamentally illegitimate have selected ignorance as their guide to public policy formulation."

It is also often argued that the role of multiple interests, especially of civil society and non-State actors must be increased in decision making at the WTO, both at the time of negotiations and dispute resolution. The States "legitimacy" to represent all its citizens is the common refrain. How representative is the Government is the provocative question. Representational democracy is often dismissed as an adequate response.

Questioning the "representational character" of non-State actors, Joel Trachtman is cautious about the argument that non-State actors increase accountability and transparency and hence is more legitimate.

"Given this framework, it cannot simply be assumed that WTO dispute settlement should be more transparent than it is, or should allow greater participation by NGOs or other private actors. From a welfare standpoint, there are costs and benefits to transparency, and there may be circumstances in which the costs outweigh the benefits. We might establish a presumption that transparency in the strict sense – greater knowledge of governmental processes – is often welfare-enhancing, simply because it allows those interested to know, about decision-making and to express their preferences.   

But can we presume that allowing greater participation by NGOs promotes either welfare or accountability? Indeed, arguments for transparency that include NGO voice or control often pit representative democracy in the form of the state against a proposed discursive democracy, empowering organizations that may pejoratively be referred to as “special interests”. The argument for special NGO voice or control, like the argument for legitimacy, attacks agreed methods of doing procedural justice, assuming that there  is something deficient in representational terms about our agreed governmental processes. It would take a good deal of very specific analysis in order to determine whether the special interests add to the welfare analysis or to the quality of participation.  Presumably, they would add to the welfare analysis through expertise. At the WTO, developing countries have often argued that greater roles for NGOs may impair welfare from their standpoint."

Commenting on the efficacy of the "Special and Differential Treatment" (S&DT) provisions in the WTO, he concludes by proposing that though it is difficult to provide redistributive justice in a consent based multilateral system, international trade could provide some answers:

" If there were more consensus regarding the problem of what to do, it would be politically easier to do it. The problem of how to do it is, in part, dependent on the problem of what to do. But the problem of how to do it – politically – is crucial. As suggested above, it is difficult to find in a consent-based international legal system the possibility for strong redistributive action. However, in a consent based legal system, it is possible to find ways to share in the benefits of liberalization in such a way as to promote liberalization in favour of exports of goods, services and labour of the poor. This liberalization is a way to allow the poor to compete side-by-side with the wealthy, and is the key to wage convergence.  

Not every action urged in the name of development is beneficial to poor people, just as not every action urged in the name of legitimacy promotes either welfare or participatory values. On the other hand, measures that increase welfare, that enhance participation in a way that increases welfare, and that narrow distributive differences, will be attractive. Critics of the WTO, and others interested in public policy, would do well to focus on these parameters, and to develop analytical skills that will allow  them to frame their arguments in these terms, rather than in terms of legitimacy, or in terms of unverified assumptions about development or poverty reduction, like many of those involved with S&DT." 

A thought provoking editorial indeed! Throws open myriad questions about the criticism of the WTO, the high moral ground that "developmental" theorists take regarding their theories of poverty alleviation and role of international institutions, role of the WTO in an inequitable world order, globalisation and equitable growth as well as looking at addressing inequity in a refreshingly innovative way. When stereotypes are questioned and cliches are broken, there is always a lot of food for thought.