Trade Openness and Poverty: The Missing Link By Miriam W O Omolo Institute of Economic Affairs Monday 22 June 2009, Country Inn, Jaipur, India
Presentation Outline • Definition of terms: trade openness, poverty • Linking trade openness and poverty • African country experiences • The Missing link(s) • Conclusion and Way Forward
The Concept of Trade openness • Moving from inward looking trade strategies to policies that facilitate integration to global economy • Tariffication of quantitative restrictions • Removal of trade barriers such as tariff and non-tariff barriers to trade • Export promotion initiatives i.e. export processing zones • Free Market Access for foreign goods and services • Doha negotiations • Economic partnership Agreement (ACP-EU) • The Key Objective is to increase overall and individual welfare of those involved in trade.
The Concept of Poverty • Inability to meet one’s daily food consumption requirement-food poverty • Inability to meet both food and non-food requirements- Absolute Poverty • In expenditure terms-spending less than 1USD per day • Poverty Indicators: • Welfare-Income, expenditures • Basic Needs-Clothing, education, nutrition , health etc • Capability: perception, dignity, civil liberty and security
Linking Trade and Poverty Source: UNCTAD 2004 LDC Report
Linking Trade Openness and Poverty • Trade liberalization is expected to raise the level of income since resources are reallocated as explained by the theory of comparative advantage. • Trade liberalization affects the direct determinants of poverty i.e. income/wages, prices, government expenditure etc
Country Experiences in SSA • TDP project: Kenya, South Africa, Tanzania, Uganda and Zambia • Phases of Trade Liberalization: • Import Substitution Industrialization • Structural adjustment Programmes-unilateral liberalization (IMF and World Bank) • Reciprocal Liberalization (WTO, regional and bilateral agreements) • Trade Liberalization has resulted in different gainers and losers, • e.g. Kenya, the cotton sub-sector vs. telecommunication
Country Experiences in SSA • There is strong debate whether trade liberation has led to sustained economic growth • Most countries have not achieved international competitiveness –especially with agricultural products being the main exports-Kenya, Uganda, Tanzania, Zambia • There is no sufficient evidence to conclude that trade liberalization has resulted in poverty reduction
The Missing Link(s) • Wrong presumption • Trade liberalization does not guarantee equitable distribution of gains/losses to individuals, sectors, countries or regions. • Trade liberalization as a panacea for development-Trade is a component of development • Export Diversification and intensification • Continued trade in primary products with little progress in high value addition and movement into the global value chain
The Missing Link(s) • Concentration on export promotion with little focus on productivity growth through learning, knowledge accumulation and innovation through trade • Innovation –strong missing link? • The TDP Project – Empirical research establishing the impact of trade liberalization on poverty.
The Way Forward • Examine trade liberalization as a component of development • There is a lot of ongoing debate on trade liberalization and poverty…..There is need for a ‘big push’ • Productivity growth through innovations • Institutions and regulations to facilitate innovations