Trade Liberalization and Poverty: The Evidence So Far

Abstract

This paper assesses the current state of evidence on the impact of trade policy reform on poverty in developing countries. There is little empirical evidence addressing this question directly, but a lot of related evidence on specific aspects. We summarize this evidence using an analytic framework addressing four key areas: economic growth and stability; households and markets; wages and employment and government revenue. Twelve key questions are identified and empirical studies and results are discussed. We argue that there is no simple generalizable conclusion about the relationship between trade liberalization and poverty, and the picture is much less negative than is often suggested. In the long run and on average, trade liberalization is likely to be strongly poverty alleviating, and there is no convincing evidence that it will generally increase overall poverty or vulnerability. But there is evidence that the poor may be less well placed in the short run to protect themselves against adverse effects and take advantage of favorable opportunities.

Growth, human development, and trade: The Asian experience

“…increase in openness is associated with about a 0.1 improvement in the level of the human development index -almost 20 percent of the mean. The explanation here is that trade reforms in Asian economies have created new markets with diversified commodities and better access to products, and thus improved consumer welfare (Winters et al, 2004).…”

Trade, Infrastructure and Income Inequality in Selected Asian Countries: An Empirical Analysis

“…He argued that urban poverty in India had declined and income inequality had increased significantly during the 1990s, when some policy changes with regard to trade and exchange rates had been implemented. Winters, McCulloch and McKay (2004) summarized a number of studies that discussed the role of trade liberalization in poverty reduction. Their survey indicated that although trade liberalization might work through many channels, the outcome depended on a number of factors, including the starting point of reform, the precise trade reform undertaken, the characterization of the poor and the way they sustained it.…”

The long-run determinants of inequality: What can we learn from top income data?

“…Mookherjee and Ray (2006) give a useful overview of the literature on development and endogenous inequality based on such a division. Winters et al (2004) give an overview of evidence on the relation between trade and inequality, Cline (1997) summarizes different theoretical effects of trade on income distribution, while Claessens and Perotti (2005) provide references for the links between finance and inequality, presenting theories which suggest both equalizing effects as well as the opposite. We will discuss some of the suggested mechanisms in more detail in Section 2 below.…”