October 17-19, 2008, 116 million stood up against poverty in over 7000 events in 110 countries as part of the stand up and take Action event synchronized by the United Nations millennium campaign and the global call to action against poverty (GCAP) (OneWorld South Asia October 2008) This found it its way into the Guinness book of world record for being the single largest coordinated movement of people to stand against poverty in one week. People around the people, by participating in this event and organizing large scale protests, were urging leaders to meet the millennium development goals and to eradicate poverty for the ghastly face of poverty is known to all and the facts of poverty are haunting: Over 2.8 billion people are living on less than 2 dollars a day; even worse 1.2 billion live on less than a dollar. (World Bank annual report 2008) 967 million people in the world are hungry and each day 29,000 children die of hunger around the world. (OneWorld South Asia 2008)
Since Adam Smith and David Ricardo proposed freer trade, a contention has sparked up between the pro-traders and the protectionists. One of the arguments put forward by advocates of free trade is that trade reduces poverty. Does free trade have the inherent potentials to salvage a significant portion of the world's poor from poverty? The relationship between trade and poverty is both convoluted and ambiguous.
The opportunities that trade creates for human development and poverty reduction are dwarfed or simply overlooked by the protectionists. On the other hand, pro-traders are exaggerating the role of trade openness in reducing poverty. This paper will assess the role of freer trade in ending poverty. It will examine whether trade openness and trade liberalization are, if it all, a panacea for poverty reduction. If it is the case, is trade sufficient in rescuing a large number of poor people from impoverishment?
Abject poverty - living on under a dollar per day- is restricted to developing countries, so the paper will un-dividedly focus on them. Expanding national income is critical to increasing the wellbeing of the developing nations and it's a general consensus, that trade raises the overall income of the country. With trade, a country expands production of those goods in which it has a comparative advantage and moves away from the production of goods in which it has no comparative advantage. This reallocation of the factors of production from inefficient sectors to more efficient sectors increases the overall Gross national product (GNP). (Dean 2003)
Also trade spurs economic growth. With increased competition from foreign markets, access to new technology via trade, economies of large scale production as firms increase production to meet overseas demand to meet overseas demand and rising total factor productivity increase its growth rate. Economic growth increases incomes and standard of livings of a country.
Exports also bring increases in growth rates and multiplied increases in national income. Developing countries can benefit from potential increases in incomes if they can increase their world export's share. Watkins (2002) suggests that the benefits of trade even significantly outweigh the benefits of Aid from industrialized countries which is conducive to economic development in developing countries. Thus, if developing countries increase their share of world exports there will be more potential benefits relative to aid. (See Figure.1)
If Africa increased its share of exports by 1%, it would generate $70 billion, a sum that leaves the amount provided through debt relief and aid insignificant. (Watkins 2002) (See Figure.2)
Exports are the start of a series of events that cause economies to prosper. Increases in the demand for exports in East Asia induced investment, created employment and accelerated the overall rate of economic growth. Portions of incomes and profits were saved and these savings were used for further investment. The countries used investment to increase factor productivity and making the production process more knowledge-intensive. With increased investment, the countries were able to produce high value goods and penetrate markets. Thus initial export growths brought sustained increases in incomes and living standards.
Squires reflect that free trade tackles the problem of global poverty by lowering tariffs. Reduced tariffs lower the cost of imported products. The impoverished poor can consume these imported goods which are comparatively cheaper than the domestically produced goods. Cheaper imported products increase the purchasing power of the poor making it possible for them to consumer more goods and services. Cheaper basic necessities such as food and pharmaceutical goods benefit the poor. Cheaper food flowing into developing nations will mean that the hungry will have enough to eat. The African summit to roll back malaria in 2000 saw the African countries moves to reduce or waive tariffs on nets, pesticides and anti-malaria drugs to fight against the malaria epidemic which was considered to be even more devastating than AIDS.
Lower tariffs also have the effect of increasing government revenue. This potentially results in three ways. (1) Lowered tariffs will increase the demand for exports, so although the tariffs will be lower, it will be charge more times resulting in increased government revenue. (2) Reduced tariffs will mean less corruption and smuggling and more goods will be declared at custom resulting in more government revenue. (3) With lower tariffs people will increase consumption of imported goods and the government will receive more taxes (4) Lower tariffs will simplify tax procedures and tax procedures thereby reducing government spending. The increased government revenue will be spent on social benefits and other programs that specifically target the poor and will help alleviate poverty. (Bannister, cited in El-Squires, 2004, p-3)
Fewer tariffs will also mean the inflow of cheaper improved technologies, such as fertilizers, mechanical breeders and threshers for the agricultural workers and livestock farmers. Manufacturing industries will also benefit from cheaper imported technologies. Improved and efficient technologies increase speed of the production process thereby increasing output. The goods produced will also be of better quality leading to an increase in demand. The end result of this will be large increases in incomes.
Reduction of protectionist measures such as tariffs also result in greater profits for producers as the demand for their exports increases. Reduced trade barriers also give domestic producers access to more profitable markets.
Free trade also helps reduce poverty by increasing investment. With reduced trade barriers, foreign firms are more likely to invest and set up in low income countries. The investment will bring in new and efficient technologies and new corporate practices. Domestic firms will be forced to adopt better technologies and compete with these foreign firms. Such an investment can be advantageous to the poor. An example is the setting up of Nike Factories in Vietnam. The workers who worked endless hours on agricultural fields are now paid three times the minimum wage. This provided workers with an opportunity to work their way out of poverty and to ensure better futures for their children. The workers at Nike factories receive health and education benefits and subsidized meals. Domestic firms in Vietnam are also imitating the practices of these foreign factories which are making their businesses a success. Evidently, the investment that free trade attracts to the poor countries brings benefits to the poor in both the short run and the considerably long run. (Bannister; Norberg cited in El-Squires, 2004, pp. 43-46).
Thus, more trade openness as proposed by some will lift people out of poverty by increasing incomes and living standards and responsible for tripling incomes in developing countries for the past 50 years. For centuries, trade has been a crucial part of economic development in poor countries. It has spurred economic growth, generated employment opportunities, induced investment, increased government revenue, increased the variety of goods available to consumers, and helped countries obtain better and efficient technologies.
In 2000 we saw Bush emphasizing upon trade openness and not just aid and public investment as a tool to eradicate poverty. (McConnell 2006) In the same year A WTO study revealed that trade liberalization would cause faster economic growth which would help alleviate poverty. (Americas program 2007) Classical studies published by the World Bank also purported to the link between trade, growth and poverty.
Economists however are not satisfied by the methodologies used by the World Bank to arrive at the conclusion. They have also found flaws in the various studies that purport any such relationship. Overtime, trade liberalization has neither acted as an instrument for higher growth rates nor poverty reduction.
The World Bank estimated that a persistent 7 percent growth rate in African countries was necessary to halve the poverty rate in 15 years. Today, Africa's growth rate stands at 3.5 percent. (World Bank 2006) However, trade liberalization alone is unlikely to guarantee such a remarkable sustained growth rate which would alleviate poverty in Africa. Trade liberalization as a panacea for world poverty is often the subject of much exaggeration. Simply removing protectionist measures on imports would not rescue people in the developing countries from the poverty trap. This is primarily because Sub Saharan Africa and other developing countries suffer from internal problems such as political instability and lack of policies and institutions which contribute to impoverishment in these nations. (Tupy 2005)
However, Watkins (2002) suggests that trade reform policies alone cannot bring automatic or definite increases in potential benefits and reduce poverty. Devising proper macroeconomic policies matched by micro policies and other strategic development policies are more suitable to empowering people who themselves will then work to rise out of poverty.
Developing nations like Zambia are pressurized to adopt trade openness. Removing protection for poor farmers and firms in developing countries is devastating and makes it difficult for them to make their way out of poverty. Developing countries need policies that will prevent unfair competition from cheaper imports, driving out local firms. Appropriate protectionist policies will help countries develop creating jobs and increasing incomes. (Banda 2006) Farmers will work their way out of poverty and so will manufacturers. If the poor countries like Zambia are exposed to foreign competition, they will become dumping grounds for cheap imports. U.S subsidies to cotton farmers push down world cotton prices and drive out cotton producers around the world. Cotton is only one of the commodities that developed countries subsidize and dump at prices below the cost of production. Artificially cheap crops and dairy products from the United States, Europe and Japan make way into the developing countries and make it difficult for producers to even compete in domestic markets. (Bage 2004) When Europe dumped the fairly subsidized powdered milk into Jamaica, the domestic dairy industry was kaput. The same happened when Haiti found itself to be a dumping ground for subsidized rice from the United States. It cost jobs of the rice farmers who were plunged into deep impoverishment and malnutrition became a problem in Haiti's rice growing areas. According to a world trade review (2003), the Human Development Report by the UN development program reveals that developed countries give in over $300 billion dollars in subsidies as an aid to domestic producers. Developed countries spend 6 times more on subsidies to domestic consumers than aid. For trade to be beneficial to the poor countries, developed countries must end such subsidies and open their markets to goods from the low income countries.
The countries of East Asia have experienced rapid rates of poverty reduction. The number of people below the poverty line has considerably decreased and substantial improvements in welfare are visible through human development indicators. However it is doubtful that these realizations are the result of export-led growth. Whereas in the mid 1970s 6 out of every 10 people were below poverty line, today, only 2 out of 10 are living in extreme poverty.(World bank 2001 cited in El-Watkins) Rapid and broad based income growth caused a decline in poverty.
Some economists were attributing this to rapid integration into the world economy through import liberalization. However, dropping protectionist measures against imports was not the impetus of this economic growth. In China, domestic reforms kick-started economic growth and exports then helped accelerate it. Taiwan and Korea also operated in a dynamic export sector to boost economic growth before liberalizing imports. Free trade therefore was not an important feature of East Asia's success, but exports did play a crucial role in sustaining economic growth and poverty reduction.
Exports create demand for domestic agricultural and manufactured goods which in turn creates demand for labour and leads to increased wages. The foreign exchange earnings from exports can then be used to obtain imports such as inputs and technologies necessary to sustain economic growth. China started boosting its exports in the 1980s to finance the imports of improved fertilizers and machinery which was necessary to drive sustainable economic growth. These imports helped producers become efficient and enabled them to compete in global markets. Because export growth was also linked to investment in education, sustaining productivity and improving welfare indicators became a real possibility. (Watkins, 2004)
The case of East Asia demonstrates that trade liberalization and openness can fetch enormous benefits provided freer trade is well managed and is accompanied by domestic reforms and public investment.
Poverty, issue 2008 (July 2005) mentioned Harvard professor, Dani Rorik's empirical studies which demonstrated that trade liberalization does not lead to economic growth. He understands the relationship between trade and growth to be very casual and instead proposes that the relationship is the other way round. Countries first and then integrate into the global economy. The case of China and India are examples where government protection for industries was maintained until they opened their economies to imports.
While it is true that trade liberalization has a positive effect on economic growth, there is a stage of development at which a country should attempt to open its markets. Developing countries can lift trade barriers from certain industries while implementing protectionist policies on agricultural products and textiles in which they have a comparative advantage. (Spanu 2003)
Poverty reduction requires a comprehensive partnership between trade and national policies. While Asian economies have been a success, Africa has only meagrely benefited from liberal trade reforms. Africa has achieved little in terms of economic growth from trade and the growth rates have not been conducive in helping Africa break out of poverty. Trade does have the potential to liberate millions from deprivation and poverty, but for uplifting the poor out of impoverishment will require more than just the pursuit of free trade.
Thus, the opportunities that result are not an automatic catch of trade but when effective national policies empower poor people in poor countries to participate in global markets on fair terms, trade acts as an engine for potent change. (Lipsey & Chrystall 2004)
The trade policies of the successful economies of East and South East Asia were both holistic and focused. They did not see trade as an inexplicable cure but liberalized trade cautiously. A mishmash of controlled openness and restrictions at different times was what lifted these countries out of poverty. A more controlled openness and at the same time avoiding the protectionist policies that hamper competitiveness can draw Africa out of poverty. With cautious liberalization of trade, trade policies must be complemented with internal development policies. The development policies should cater to ending civil conflict and diseases such as malaria and HIV/AIDS, investing in education, overcoming supply constraints etc. (United Nations 2004) National development strategies should have objectives such as modernizing the economy, bringing technological change and developing rural areas. To combat poverty in Africa, it is imperative to stimulate private and public investment in infrastructure like electricity, telecommunication networks, and transportation and sanitation facilities. (Clover 2000)
Free trade reforms are rather unsuccessful in decreasing poverty from rural areas. Since over 900 million poor of the 1.2 billion poor people in the world reside in the rural areas (Lennart 2004), it can be concluded that free trade is not a remedy for poverty.
Poverty in poor countries hovers greater in rural areas relative to urban areas. In Bangladesh, for example, poverty is estimated to be around 37 percent compared to only 19 percent in urban areas. Rural poverty stands at 40 percent in Cambodia and 20 percent in Indonesia as opposed to urban poverty which is 21 percent and 15 percent respectively. The widest difference is however observed in Philippines where rural poverty is 48 percent compared to the urban counterparts where it is only 18 percent. (Ensor, 2002)
The rural poor do not gain from the opportunities that trade brings because they do not have access to markets and they do not have the resources such as capital, infrastructure and technology. Lack of political representation and technical knowhow also makes them unable to trade in global markets. (Bage 2004) These poor countries need to build their trade capacity before they open up their economies through development strategies. These countries need to invest resources into education program and overcome supply constraints. Education will help the people combat poverty and will make them flexible to adapt to changing demands. (Larson, n.d) Flexibility is important since dependence on agricultural goods expose countries to fluctuations in international markets.
The potentials of international trade to reduce poverty are weakened because the regulations that govern trade are more in favour of the developed nations. Whereas the United States and the European Union preach the benefits of free trade to developing countries are not practicing it themselves. The United States recently imposed tariffs of up to 30 percent on Australian steel causing unemployment in the steel industry in Australia. (Irwin 2005) Further, Australia's agricultural exports have been slashed by the cheaper imports flowing in from the U.S and Europe.
If the true potential of trade, as an engine for economic development and as an instrument for poverty reduction is to be realised, (1) poor countries must engage in controlled market openness; protectionist measures must be used to protect strategic industries which have a comparative advantage. (2) Trade reforms must be harmonized with national development policies (3) Poor countries first build capacity and increase growth through exports and development policies and then allow wider access to imports. (4) For developing countries to grow, they must have greater access to markets in developed countries. (5) The IMF, the World Bank and the WTO should not pressurize the poor countries to open their markets at hasty speed because it is accompanied by damaging consequences as in the case of Latin countries who embraced market openness as proposed by WTO and found themselves deep rooted in a crisis with lagging growth.
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