Abstract
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.
Introduction
– 2.
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 evidence
– 5.
Conclusions
– 6.
References.
1.
Introduction
Trade
liberalisation is considered by many scholars one of the channels by
which least developing countries can achieve two objectives
simultaneously: economic
growth
and poverty
alleviation. However,
multiple studies have not explained yet, whether poverty reduction is
a natural consequence of economic development or poverty relieving
has to be considered the engine of economic growth (1). In any case, both phenomena are closely linked, even if, all over the
world, there are examples of less developed countries which continue
to have a high percentage of the population that keeps the status
of poverty, while they are undergoing a period of growth. In
addition, literature does not define in a sole way the status
of poverty, in other words its measurement is not an easy task and
can be referred either to a person or a country. One
of the easiest ways to measure poverty is to determine it in monetary
terms, that is a lack of economic means to meet the basic needs, but
there are alternative methods that assess poverty either in terms of
consumption
(e.g., poor are those who have a low level of consumption or do not
consume anything) or production
(e.g., poor are those who have a low level of production or do not
produce anything) (2). Moreover,
as above mentioned, poverty is a word that can be referred either to
a person or to a country. The method adopted is different. For
instance, if poverty is expressed in terms of income, for a person it
generally refers to the well-known “poverty
line”,
below which a human being is considered poor, whereas for a country
it usually takes into account the Gross
Domestic
Product
(henceforth GDP),
although this measure is not always widely recognised as the best
value to indicate wealth or well-being of a nation (3). Hence,
it is pretty hard to define poverty as well as it is difficult to
guess a suitable mechanism to measure it objectively. Generally, also
the “poverty
line”
is only helpful to have an idea of the magnitude of this phenomenon,
because it is not easy to state clearly what are the basic needs for
a person (goods, services, physical and healthy state), keeping in
mind that every human being is different from another one and it has
a various priorities to be met. In
this paper, I am going to analyse critically some empirical studies
which identified different channels through which openness to trade
in the developing countries might produce a positive impact on
welfare. In a nutshell, I will investigate whether international
trade can really create the conditions to push developing countries
out of the vicious circle of poverty in which they are.
2.
Trade
and poverty: is there a way out?
Since
1993, as a member of Clinton’s Council
of Economic
Advisers
(CEA),
STIGLITZ has criticized the international policies adopted to solve
the problems of less developed countries, leaving the market free to
self-regulate by the “invisible
hand”.
In other words, according to the American economist, both trade
liberalization and openness to trade for poor countries towards
richest ones, were not the right policies of alleviating poverty. Effectively,
the powerful position held by industrialized countries, together with
those held by the international financial institutions, such as the
International
Monetary
Fund
(IMF),
would led, in the long run, to worsen the economic situation within
developing countries. According
to STIGLITZ (2002), forcing poor countries to open up their markets
to industrialized ones was a sort of “moral
crime”
(the economist often speaking in his articles of “moral
deprivation”)
because it would have pushed poor countries to be exploited by the
richest ones, becoming over time poorer than before. Summing
up, as well as AKERLOF (1970) stated that asymmetry leads markets to
flop (4), then in STIGLITZ’s opinion the relationship between developing and
developed countries will follow the same route, because it exists
asymmetry information which will drive poor countries to failure. So
the main question becomes: is there a way out?
3.
Trade
and poverty: are they really connected?
Several
authors have investigated the existing connections between trade and
poverty within poor countries, passing through economic growth,
trying to find empirical evidence. Some
scholars have attempted to relate trade and growth by considering
some trade policy indicators (such as trade
openness,
macroeconomic
stability,
government
consumption
and rule
of law).
But all these models have been heavily criticized by others academics
(LEVINE and RENELT, 1992 - RODRIGUEZ and RODRIK, 1999) because they
took into account variables strictly connected among themselves,
making it difficult to separate the effects of a policy rather than
those produced by another one. Following
another route, WINTERS et
al.
(2004) studied this statement by considering four view points
(macroeconomic
aspects,
households
and markets,
wages
and employment,
government
revenue
and spending).
Without any doubts, all these headings are affected by international
trade and, at the same time, they influence poverty as well, through
income redistribution policies. Anyway, it is worth noting that not
all surveys turn in favour of this approach, so it is very hard
arguing that empirical results are really robust. In
addition, in the world of today, an increasingly important role is
also played by the international financial Institutions, which hold a
powerful position over all countries and, especially, over developing
ones. Therefore,
in their paper the authors did not take into account policies made by
these Institutions as fifth heading, omitting an important channel
that may involve both trade and poverty, though the importance of
these Institutions significantly increased after the financial crisis
of 2007, whereas the paper by WINTERS et
al.
(2004) was published before.
Footnotes
(1) WINTERS
et al.
(2004) stated that existing difficulties in measuring trade and
poverty, making it hard to find a convincing connection between the
two phenomena.
(2) SEN
(1981) argued that even if a country has a high level of production
can be considered a poor country at the same time. This happen when
its population do not have any means to access to basic goods and
services. For instance, during the famine in 1974, Bangladesh
recorded the maximum food production in the country.
(3) FITOUSSI
et al.
(2010) attempted to study alternative
methods to GDP
to measure the well-being or wealth of a country. In fact, for
instance, GDP
do no take into account important factors, such as health,
infant mortality,
suicide rates,
crime,
loss of leisure time,
income gap
and, especially, poverty.
(4) AKERLOF
(1970) showed that market collapses due to asymmetric information.
(to be continued)
Author: Emanuele COSTA
Published by: Working Paper
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