Trade and poverty in developing countries

Trade and Poverty in the Poor Countries

Trade and Poverty in Poor Countries"

By Jagdish Bhagwati and T.N. Srinivasan

Written by two highly competent and skilled university professors, "Trade and Poverty in Poor Countries" is the result of extensive research on both empirical as well as practical materials. The article commences by stating the latest trends in economic thought, which state that regardless of the previous statements forwarded by the advocates of globalization and market liberalization, the phenomena increase the relative poverty in the meaning that they deepen the income gap between the wealthy and the poor in all developed, developing and less developed countries, unlike having the opposite effect, initially mentioned.

The debate in the article revolves around the relationship between growth and poverty in the context of international trade and encompasses declarations made by specialized economists along the years. Two major theories have been as such promoted. For once, there is the theory that trade generates growth, which then reduces poverty. Secondly, there is the theory according to which globalization and market liberalization are in the detriment of the poor population.

The arguments discussed have been categorized as theoretical and empirical and can be summarized as follows:

Theoretical Issues:

Open trade only affects the efficiency of the business operations, increasing the productivity and quality of the labour force, the managerial act and the allocation of resources (Harrod-Domar Model) - This is partially true as the liberalization of markets has eased the trade of all commodities and resources, including capital and technologies. Then, these new and easily accessible resources are used in the manufacturing process and increase its efficiency. But then, the result is a better product or a better service, which will serve the needs of a more pretentious customer base. As such, it is rather simple to state that trade only affects the efficiency of business operations. It would be more correct to say that the effects of trade commence with the business process and then generate a series of chain reactions.

The growth of the state is independent and cannot be influenced by its economy (Solow, 1956) - This could not be further from the truth. For after all, what does the growth of a country mean if not better products, superior services, wider and more accessible financing opportunities and increased living standards? And how else could these be achieved if not through economic growth?

Trade should affect growth in the meaning that it increases accumulation of capital and commodity and also adds numerous elements of novelty which improve the business processes. But accumulation and innovation are rarely affected in the same way by trade - This is also true since trade does indeed stimulate improvements and innovation, but to achieve this, the national organizations have to increase their investments and ensure a continual circulation of their capital - therefore, accumulation is rather limited. On the other hand, were a country to focus on accumulation, they would have reduced amounts of funds for investments, and growth would be achieved at slow rates.

If the labour force is perfectly elastic to the growing areas, than the poor will be engaged in productive activities, registering as such superior incomes and reducing poverty (Arthur Lewis Model)

If growth is concentrated in highly industrialized and central regions, and does not encompass the underdeveloped parts of the region, then growth will avoid the poor and will even further deepen the income inequality. Furthermore, in this sort of situations, the poor will be even more disadvantaged, as their products resulting from working the land will be unable to compete with the products manufactured in the industrialized centers - This is a true statement and can easily be supported by basic economics notions. Say for instance that the central region of a large city is subjected to increased industrialization and major investments from foreign partners. This will increase the value of that particular region, will capture the interest of other investors and will increase the living standards of the workers and the population located in the vicinity of the new business venture. However, the marginal regions of the city, where the poorer population lives and works will remain unaffected by the central developments. The situation will as such generate relative poverty and will even further increase the income inequality.

Empirical Evidence

The empirical evidence is based on numerous features and state that no general rule can be established, but that the results depend upon numerous features such as "the choice of period, of the sample, and of proxies" (Bhagwati and Srinivasan). As such, the results are once again contradictory, with findings to support both theories. They can be summarized as follows:

The link between trade and growth is given by the evidence that no self sufficient economy has managed to register growth - This observed fact can also be explained with the aid of basic economics concepts. Starting with Adam Smith and later on David Ricardo, it has been suggested that countries could register growth through the manufacturing and exporting of those items for which they possess a comparative advantage. And since autarkic countries fail to engage in such operations, it is only natural for their economies to stagnate.

Measured in the GDP of the globalizing and non-globalizing countries, studies between 1977-1997 reveal superior growth of the non-globalizing countries, implying as such that an economy can grow and expand without basis of international trade - to better explain this statement: countries not engaged in globalizing activities have managed to register superior levels of growth than the countries engaged in globalizing activities. This conclusion seems rather unrealistic and it was probably retrieved based on numerous particularities of the studied regions, which do not give the audience the possibility to generalize the results. "The choice of period, of the sample, and of proxies, will often imply many effective degrees of freedom where one might almost get what one wants if one tries hard enough!" (Bhagwati and Srinivasan)