HITCH: Liberalisation is important for spurring growth in developing countries, but it does little to reduce poverty
By Stephanie Nieuwoudt
Even if trade openness boosts economic growth, such growth may not create jobs or alleviate poverty. Therefore the much-vaunted “aid for trade” concept should be redesigned so that “the major focus is shifted from simply creating more trade to the more important objectives of poverty reduction”, a Nairobi conference was told last week.
Mohammed Ali Rashid, economics professor at the School of Arts and Social Sciences at the North South University in Bangladesh, argued that there are many reasons to be sceptical about the existence of a “general, unambiguous relationship between trade openness and growth”.
The conference, titled “Linkages between Trade, Development and Poverty Reduction” was organised by the India-based non-governmental research organisation, Consumer Unity and Trust Society (CUTS).
Prof. Rashid added that, “Very few countries have grown over long periods of time without experiencing an increase in the share of foreign trade in their national product”. But trade liberalisation should not be seen in isolation, he contended.
If trade liberalisation boosts the demand for domestic labour-intensive products, the demand for labour will increase and either wages or employment or both will increase.
“However, if the poor are mostly unskilled and the demand for semi-skilled labour is increased, poverty will be unaffected, or may be worsened”, said Rashid. An example in this regard would be South Africa.
“Additional policies may be needed to lessen the effects that exacerbate poverty. In particular, there is an important role for complementary policies to accompany trade reform, both to bolster social protection for the losers in trade liberalisation and to enhance the ability of poorer households to exploit potentially beneficial changes”, Rashid emphasised.
He insisted that governments have to engage in pro-poor growth strategies to alleviate the plight of the poor. This means they have to develop national policies that ensure that the benefits of export-led growth reach the poor.
Rashid was also critical of “aid for trade”, an instrument with which richer countries propose to help poorer, developing countries to access world markets.
Said he: “The focus of the aid for trade initiative needs to be shifted from one of simply trade creation to that of overall development and poverty reduction”.
“And, more importantly, developed countries need to be convinced about the urgent need to redesign the aid for trade package to make it an effective instrument for poverty reduction”, he said.
The liberalisation of markets and the scrapping of import and export tariffs will lead to revenue losses for governments of poor countries, Christine Menca, CUTS programme officer for international trade, economics and environment, told the conference. Such tariffs frequently present a substantial revenue source for poor states.
“Many developing countries get up to 50 percent of their revenue from international trade taxes. If the markets are liberalised, they will lose this income. Some analysts say these losses have to be compensated for with alternative revenue systems like value added tax”, Menca said.
But value added tax has been criticised as an anti-poor measure because of its indiscriminate and catch-all application.
Another way to make up for the revenue loss is for governments to hike food, fuel and other commodities’ prices, a step which is also detrimental to the poor, Prof Rashid pointed out.
Governments have to engage in pro-poor growth strategies to alleviate the plight of the poor.
According to Brendan Vickers, senior researcher at a South African international relations think tank, the Institute for Global Dialogue, “No country has ever become industrialised by initiating free trade before it first ensured that its own interests were protected”.
Governments have to engage in pro-poor growth strategies to
alleviate the plight of the poor.
Countries with strong economies like the UK and the US only started opening their markets when their economies were rock solid. However, the WTO does not condone these protective measures.
“It is what the Cambridge-based economist Ha-Joon Chang calls ‘kicking away the ladder’. Developed countries became successful by climbing the ladder. But the ladder is no longer accessible to developing countries”.