Trade and the MDGs: How Trade Can Help Developing Countries Eradicate Poverty

"When countries open up to trade, they generally benefit because they can sell more, then they can buy more. And trade has a two-way gain." -- Jeffrey Sachs, Special Advisor to the UN Secretary-General and former Director of the UN Millennium Project

Developing countries depend on national and global economic growth to achieve the Millennium Development Goals (MDGs) by 2015. In this regard, international trade is recognized as a powerful instrument to stimulate economic progress and alleviate poverty. Trade contributes to eradicating extreme hunger and poverty (MDG 1), by reducing by half the proportion of people suffering from hunger and those living on less than one dollar a day, and to developing a global partnership for development (MDG 8), which includes addressing the least developed countries' needs, by reducing trade barriers, improving debt relief and increasing official development assistance from developed countries.
Poverty is the most crucial plague of our times. It is commonly agreed that in order to reduce the proportion of people living on less than $1 a day, developing countries need to substantially accelerate their economic growth by carefully opening their markets. The standard rationale is that trade liberalization improves efficiency in the allocation of scarce resources, enhances economic welfare and contributes to long-term economic growth. However, while there might well be long-term gains from opening their markets, liberalizing economies are likely to face some short-term adjustment costs. This is because, as economies open up, a country's imports use existing channels, while its new exports opportunities often come from different sectors that have yet to sufficiently develop production capacity.

The international community recognizes the importance of trade for development through initiatives, such as Aid for Trade, Financing for Development and, most importantly, the World Trade Organization (WTO) Doha Round of trade negotiations. It is estimated that the global annual welfare gains from trade liberalization would be in the order of $90 billion to $200 billion, of which two thirds would accrue to developing countries.1 This could help lift 140 million people out of poverty by 2015.2

Trade and economic growth. In the last decade, trade has helped trigger strong growth in developing countries, whose share in the global trade has increased from 29 per cent in 1996 to 37 per cent in 2006 and whose exports have consistently been growing at a faster rate than those of developed countries. This has stimulated growth in export revenues of developing countries. At the same time, gross domestic product (GDP) per capita, one of the most relevant indicators of MDG progress, has increased by more than 16 per cent over the past five years in Africa, West Asia and Latin America (see table above). This has led to significant increases in employment and investment levels. The strong growth in exports from developing countries has, to a large extent, been due to the steady reduction of global tariffs as barriers to trade. On average, world tariffs have declined from 11 per cent in 2000 to 7 per cent in 2006 (see Figure 1). However, there is still evidence that developing countries face disproportionately high tariffs and trade barriers on products of export interest for them (see Figure 2). For example, in 2005, developing countries' agricultural exports faced, on average, a tariff of 8.9 per cent. Developed countries still impose tariffs on imports from developing countries that are twice as high as those from developed countries.1

In Africa, Mauritius -- one of the most open economies in sub-Saharan Africa -- exemplifies how trade can be a strong instrument for achieving the MDGs. Its traditional exports, such as sugar and textiles, have been sustained by trade policies that have allowed the country to adapt to international competition and develop value-added services. Mauritius' GDP growth reached an impressive average of 6 per cent per year after implementing an export-oriented strategy in 1996. Other successful initiatives have been initiated in Rwanda, where coffee exports have fuelled economic development, and also in Kenya, where cut-flower exports have seen a growth rate of 35 per cent annually over the last 15 years, sustained by trade incentives.
Coping with trade liberalization. Considering these success stories, should developing countries confidently rush towards liberalizing their economies? The answer is that they must be more cautious towards dashing to trade competition. Economic research today recognizes that the relationship between trade openness and growth is more complex than a simple causation. Trade liberalization does not automatically increase trade, let alone growth. The impact of trade openness depends on national context, rather than on the application of a theoretical demonstration.3 The reality is that trade liberalization has different effects on poverty in different countries, depending on a wide range of factors, including macroeconomic stability, infrastructure and the financial sector. It is quite clear that trade alone will not help the developing world reach the MDGs and that the international community must significantly increase its efforts to cope with trade liberalization and establish certain conditions for growth to take place in all countries. Developing countries have to be better prepared before entering the global market.
Developing countries should develop or expand their supply capacity before opening up to global competition. They will need technical and financial assistance to benefit from the opportunities that trade opening provides. For this reason, the international community has launched the Aid for Trade initiative, which has been designed to help developing countries build their supply capacity by developing infrastructure investments, productive capacity investments and transition assistance. This will, for example, help Haitian rice producers or Kenyan flower producers to export their products to international markets.
To minimize unemployment distress from the open markets transition, developing countries also need to develop social safety nets. As developing countries liberalize, workers in sectors without competitive advantage will face unemployment. There is thus a need to reallocate workers to the newly growing sectors, which implies education, training policies and unemployment benefit programmes. In the short term, trade reform will also decrease government tariff revenues, reducing social spending particularly needed to face the rise in unemployment. The international community should therefore assist developing countries in addressing these adjustment costs, one of the reasons why the United Nations system insists on integrating all development policies into the National Development Strategy of each developing country. To conclude, in the words of Bono, co-founder of the "One" campaign against poverty, trade reform is not about charity, but about providing developing countries the necessary tools to achieve the MDGs. Trade is an important instrument to accelerate economic growth and reduce poverty. However, trade openness has to come with comprehensive reforms in line with each country's specificity and degree of development. The international community has acknowledged these issues in the last few years. United Nations action in social development is therefore crucial in helping developing countries profit from the growth opportunities provided by trade.
Notes

  1. United Nations Conference on Trade and Development (UNCTAD). Coping with Trade Reforms, Sam Laird and Santiago Fernández de Córdoba, eds. UNCTAD, Palgrave-McMillan, 2006.
  2. World Bank. Global Economic Prospects 2004: Realizing the Development Promise of the Doha Agenda. World Bank, September 2003.
  3. Francisco Rodríguez and Dani Rodrik write: "We are in fact skeptical that there is a general, unambiguous relationship between trade openness and growth waiting to be discovered. We suspect that the relationship is a contingent one, dependent on a host of country and external characteristics", in Trade Policy and Economic Growth: A Skeptic's Guide To The Cross-National Evidence (Cambridge, May 2000).