1 November 2014

Trade and Poverty: an Infinite Challenge (third and last part)

The aim of this essay is to analyse the links between openness to trade and the poverty level in developing countries. In particular, this survey takes into account liberalisation as the key role to produce two benefits: economic growth and poverty alleviation. However, market liberalisation (thanks to the invisible hand) not always pushes the economic system to way out of the vicious circle of poverty. There are evidence in which public policies led to a worst situation than the existing state before their applying. As a matter of fact, public policies depend on both the scenario in which they are implemented and on others inner mechanisms which rule the market (such as, welfare policies, monetary policies, inflation, price levels, democracy index). The main finding is that not all scholars agree that both poverty alleviation and openness to trade are related by the theme of growth. Specifically, empirical evidence is often incomplete because of deficiency in variables considered in econometric models as well as Gross Domestic Product is not an appropriate index to measure poverty. The conclusion is that the discussion on this topic is widely open and far from a final solution.

Keywords: Developing Countries, Economic Development, Economic Growth, International Trade.
JEL Classification: F43, F63, I30, O10, O40.

Table of contents
1. Introduction2. Trade and poverty: is there a way out?3. Trade and poverty: are they really connected?4. How openness to trade impacts on poverty? From the economic theories to the empirical evidence5. Conclusions6. References.

5. Conclusions
From the economic point of view it is generally true that openness to trade has a positive impact on developing countries because of comparative advantages. We also know that economic theories support this statement, whereas empirical models showed sometimes evidences in favour of theories and sometimes in contrast. So, how much are comparative advantages the keystone to push out developing countries from poverty? We saw how trade and poverty are related by the theme of growth, which may surely have a positive impact on poverty only if hand-in-hand with appropriate policies targeted to balance negative effects originated by inequalities. All of this requires, obviously, a robust and extended growth, developed within stable contexts. Assumed this assumptions as given, then the question became: is trade good for growth? Since 1990’s, when globalisation process began, several studies have been made on this topic. A large number of empirical evidences that, not always, produced results in harmony among themselves. Hence, over the time, a wide analogous literature was born in order to contradict every empirical evidences, heavily criticising both methods and techniques tested by researchers. DOLLAR and KRAY (2001) ascribed deficiency in econometric models to:
  1. measurement errors, in particular when models use variables to measure trade policies or the degree of openness to trade (e.g., trade policies do not seem to be an appropriate variable because closely linked to trade volumes);
  2. omitted variables, that is variables which are never took into account and may have a wider explanation capabilities of phenomena than those normally considered (e.g., public sector consumption, monetary policies, political stability);
  3. endogeneity, in the sense of starting to use exogenous variables (e.g., geographic position or geographic dimension that do not change over time).
For this reason STIGLITZ (2002) argued that economists, usually spend a lot of time to investigate analytically their models and always in a precisely way, but they ignore that, in the past, the most important scientific theories were verified only by either a single observation or a limited number of them. Today, most economist build empirical models, in order to justify robustly their assumptions about an economic question. Following this route, they consciously take the risks that some variables nullify the effects which they want to show. Furthermore, if a variable empirically connects trade and poverty, by growth, can we state that this variable is responsible to cause positive (or negative) impact on poverty? Sometimes these proofs can be true within a poor country and not in another one because of its peculiar features or its context. Following this idea, BHAGWATY and SRINIVASAN (1999) recognised the importance of empirical evidences, but invited economists to pay strong attention to use them as a scientific support. In conclusion, in order to evaluate if, within developing countries, international trade, besides of being the engine of growth, is contributing to relieve poverty, some econometric models should take into account growth rate of industrialized countries, which trade with least developed nations. One might discover that poverty alleviation in developing countries depends on increasing poverty in developed countries. It might be a striking result!

6. References
- George A. AKERLOF, “The Market for "Lemons": Quality Uncertainty and the Market Mechanism”, The Quarterly Journal of Economics, Vol. 84, n° 3, August 1970;
- Jagdish BHAGWATY and Thirukodikaval N. SRINIVASAN, “Outward-Orientation and Development. Are Revisionists Right?”, Economic Growth Center Yale University, Discussion Paper n° 806, September 1999; 
- Michael BRUNO, “Does Inflation Really Lower Growth?”, Finance & Development, September 1995; 
- Anis CHOWDHURY and Girijasankar MALLIK, “Inflation and Economic Growth: Evidence From Four South Asian Countries”, Asia-Pacific Development Journal, Vol. 8, n° 1, June 2001; 
- David DOLLAR and Aart KRAAY, Trade, Growth, and Poverty, Development Research Group, The World Bank, June 2001; 
- Robert C. FEENSTRA and Gordon H. HANSON, Foreign Investment, Outsourcing and Relative Wages”, National Bureau of Economical Research, Working Paper n° 5121, May 1995; 
- Jean-Paul FITOUSSI, Amartya SEN and Joseph E. STIGLITZ, “Mismeasuring Our Life: Why GDP doesn’t Add Up”, New Press, 2010; 
- Oussama KANAAN, “Tanzania’s Experience with Trade Liberalization”, Finance & Development, Vol. 37, n° 2, June 2000; 
- Anne O. KRUEGER, Trade and Employment in Developing Countries, University of Chicago Press, Vol. 3, 1983; 
- Ross LEVINE and David RENELT, “A Sensitivity Analysis of Cross-Country Growth Regression”, American Economic Review, September 1992; 
- Neil McCULLOCH, Andrew McKAY and Alan L. WINTERS, Trade Liberalizations and Poverty: The Evidence so Far, Journal of Economic Literature, Vol. 42, March 2004; 
- Robert POLLIN and Andong ZHU, “Inflation and Economic Growth: A Cross-Country Non-linear Analysis”, Political Economy Research Institute/University of Massachusetts-Amherst, Working Paper Series n° 109, October 2005.

AuthorEmanuele COSTA
Published byWorking Paper

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