Trade and Poverty

Stephen DeAngelis

September 10, 2008

Readers of this blog know that I am unabashedly pro-globalization. I believe globalization holds the key to helping millions of people climb out of poverty’s pit. It has already helped over two billion people do so. On the other hand, I’m not so myopic that I ignore the darker side of globalization. I have tried to be fair in discussing both the up and down sides of globalization. It’s just that I believe the up side holds many more benefits than the down side presents challenges. Globalization is complex; but when most people refer to globalization they are referring to the globalized economy — meaning international trade. There is, however, an ongoing discussion about how trade and aid interact in helping to eliminate poverty [“Trade not aid the answer to poverty economists say,” by Jonathan Lynn, Washington Post, 31 August 2008]. Lynn’s article begins by referencing a meeting of international ministers who were to meet to discuss the value of official development aid. Interestingly, the meeting was to be held in Ghana — a country that has been mired in poverty but with the discovery of oil is predicted to break those bonds and begin rapid development [see “Crude Realities,” by Matthew Green, Financial Times, 27 August 2008]. The real focus of Lynn’s article, as reflected in the headline, is the belief of most economists that trade not aid is the key to reducing poverty. He writes:

“As ministers from over 100 countries gather in Ghana to review how effective aid is in helping developing nations deal with poverty, many economists argue the answer is elsewhere — in freeing up trade.”

The meeting was held on the heels of the latest collapse of the Doha Round of trade talks [see my post The Collapse of the Doha Round]. Most countries, rich and poor alike, lament the collapse of the Doha Round because, inter alia, it could signal the rise of more protectionism. That would be disastrous, especially for impoverished populations waiting for a chance to improve their lives.

“Economists of all persuasions agree now that growth is the key to lifting people out of poverty — a view reinforced by a major World Bank report in May on growth and development. And the key to growth is trade, the WTO says. ‘Trade openness is believed to have been central to the remarkable growth of developed countries since the mid-20th century and an important factor behind the poverty alleviation experienced in most of the developing world since the early 1990s,’ it said in a [July] report. … Former New Zealand Prime Minister Mike Moore, who headed the WTO when the Doha round was launched, put the case for trade in a characteristically forceful manner. … ‘Seven years ago, we introduced at Doha what was to be a “development round.” All trade rounds are,’ he said. ‘President Kennedy, who introduced the Tokyo round, famously said: “This will lift all boats and help developing countries like Japan.” Case made, I would have thought.’ Since Japan’s rise to prosperity, many other countries, such as South Korea, Chile and India, have followed a similar path. Many developing-country leaders share the view that the solution to poverty lies in the increased economic capacity that trade can bring rather than in aid handouts.”

When one thinks about development, Africa figures prominently.

“‘Africa critically needs to realize development and get itself out of poverty through the establishment of fair trade rather than aid,’ Kenya’s Trade Minister Uhuru Kenyatta, who coordinates African countries at the WTO, said after the collapse of the WTO talks.”

Trade talks are aimed at opening up trade and tearing down barriers. Industries protected by tariffs are, of course, wary of eliminating the protections they enjoy. In the case of the Doha Round, those special interests are found in the agricultural sector.

“The Doha round, launched in Qatar capital in late 2001, was expressly intended to help developing countries export their way out of poverty, by tackling the unfinished business of previous trade rounds such as the distorted global food trading system. Many advocacy groups argue that trade negotiations are still skewed against the interests of poor countries. Forcing them to open up their markets to provide more export opportunities to Western businesses could threaten the livelihoods of millions of subsistence farmers and snuff out infant industries. The Manila-based Focus on the Global South said the collapse of the Doha talks was a welcome respite for poor countries. ‘The aggressive push by the rich countries led by the U.S. and the EU for more trade liberalization at a time of global crises of food and fuel (became) too blatant for developing countries to stomach,’ it said. But many changes sought by developing countries — such as cuts in the multi-billion-dollar U.S. and EU farm subsidies — have been on hold since the Doha talks collapsed. Developing countries also recognize that they benefit from the rules-based multilateral trading system the WTO represents, not least because of the power it gives small and weak members. African countries would much rather tackle U.S. cotton subsidies that squeeze them out of the market in a comprehensive WTO trade round rather than sit round the negotiating table with just with the United States.”

As I have repeatedly stressed, development and security must go hand-in-hand. Lynn reports that developing countries are well aware of this connection.

“For developing countries, many of which are in unstable areas, the security aspects of trade are also important. The prosperity and contacts promoted by trade foster peace, and when trade rules affect major economic sectors, such as West African banana growers, they must be negotiated carefully. ‘If goods cannot cross borders, armies will,’ said U.S. Franklin Roosevelt’s World War Two Secretary of State Cordell Hull who won the Nobel Peace Prize for his contribution towards the creation of the United Nations.”

Hull’s observation is as profound as it is timeless. Lynn asserts that trade and aid are also linked, even if that link is not as important as the link between development and security.

“Trade and aid are closely linked. The WTO coordinates the international Aid for Trade program, in which developing countries are helped to build trade capacity and infrastructure by ensuring that their trade projects are part of their aid and economic strategies. And one of the trickiest parts of the WTO Doha agenda covers food aid. The proposals would tighten rules on ‘monetization’ where rich countries send food surpluses to developing countries to be sold locally and the funds distributed. The aim is to prevent this being used as a disguised export subsidy which squeezes local farmers out of business.”

In the end, Lynn’s article provides support for but little new information about the importance of trade and no new recommended courses of action to get global trade back on track. People are beginning to realize that globalization can be a win-win situation; however, too many people still see it as a zero-sum situation where someone else’s gain is their loss. I can’t deny that there have been (and will continue to be) winners and losers as globalization carves out a new future. Change is never easy and is rarely really welcome (despite all the political hyperbole currently being tossed about in the U.S presidential race). We need to keep our best minds at work developing win-win strategies so that the benefits of globalization can continue to bring people out of poverty.