Does trade make poor people poorer?

鮑玥

Introduction

International trade refers to the transfer of goods and services which include capital goods from one country to another. International trade and investment flows have grown dramatically and consistently during the past half country. In 2006， the volume of economic growth， the impact of trade on poverty reduction has been uneven. Almost half of the world population which is an estimate of three billion people live on less than $2.5 a day. Statistics also show that 80% of humanity survives on less than $10 a day， of which majority is at the top of global agenda and large organizations are coming together to find measures that can completely eradicate poverty.

The view that trade liberalization has a positive impact on economic development has become a tacit consensus in academia. But when it comes to the impact of trade liberalization on poverty， it becomes controversial. Because the impact of trade liberalization on poverty is complex and pluralistic， there are a large number of complex causal links between the two， both macroscopically and microscopically （Winters， 2004）. Trade liberalization affects poverty mainly through three channels： economic growth， labor market and price changes （living standards）.

Economic Growth and Poverty

Historically， India has been viewed as being far less vulnerable to global financial crises than other large economies because it was much less integrated with the global economy than countries like， say， the US or China. Today， however， at least as far as trade goes， the opposite is true. World Bank data shows that in 2014 India's total trade （exports plus imports） was equivalent to about 50% of its GDP. This was higher than the trade to GDP ratio of the US， Japan or China. During the 1997 Asian financial crisis， which India escaped relatively unscathed， total foreign trade was equivalent to only 22.2% of the country's GDP. One way to measure the extent to which an economy is globally linked is by comparing its international trade with its GDP. By this yardstick， India's aggregate exports and imports of goods and services was 49.6% of the country's GDP in 2014， compared to China's trade to GDP ratio of 41.5% for the same year. In 2013， the year till when bank data is available for the US and Japan， international trade was about 30% of GDP for US and 35.5% for the Japanese economy. Prior to trade liberalization， the Indian government's development plan was basically self-sufficient， emphasizing government intervention in the economy and import substitution policies. Under strict restrictions on import licenses and foreign direct investment （FDI）， Indian companies have been able to maintain a monopoly in import substitution sectors， such as raw materials and semi-finished products industries. These anti-competitive trade policies have in fact had negative impact on the capacity of Indian industries. In 1991， India underwent radical reforms through substantial tariff reductions and relaxation of import licensing and FDI restrictions. This is very beneficial to the business sector dominated by several large family groups in India， such as Tatas and Bajajs. After trade liberalization， these family businesses can enter IT， communications， entertainment and other industries. In addition， FDI has increased its investment in growing trade since its entry into India. These factors all reveal why India's export sector has experienced unprecedented growth after trade liberalization. Labor Market - Employment Rate and Wages of Low-skilled Workers

Prior to the liberalization of the labor market - the employment rate and wages of low-skilled workers， academics believed that， according to the prediction of the HOS model， the poverty population in Latin America would theoretically decrease as a result of trade liberalization. The HOS model predicts that a country's comparative advantage in low-tech labor-intensive industries will be strengthened. This leads to an increase in the demand for labor and an increase in job opportunities and wages， thus reducing the number of people living in poverty. However， contrary to the predictions of the HOS model， the number of poor people in Latin America has not decreased. The demand for low-skilled labor should increase after trade liberalization， but the job opportunities and wage growth of this group of workers are in fact very limited （Thorbecke， 2008）. Many reasons lead to this phenomenon， but the main reasons are as follows： first， low-tech industries were protected "too well" before trade liberalization， so that after liberalization， because border prices fell， these companies had to reduce production costs to increase competitiveness， so that wages and jobs were reduced. Secondly， the export sector， which originally preferred cheap labor， tended to demand skilled labor after trade liberalization， especially foreign-funded companies （Feenstra， 1997）. As a result， this preference has led to a large transfer of low-skilled workers to dangerous and inexpensive informal jobs. Informal workers account for 66% of new jobs in Latin America. Popli （2010） found that in Mexico， low-skilled workers have no access to wage-increasing jobs， which means it is very difficult for them to escape poverty by selling cheap labor. He believes that it is necessary for poor people to receive education and skills training through trade liberalization. In areas where the poor have skills， trade liberalization has been proven to reduce poverty; on the contrary， where the poor are low-skilled workers， poverty persists and has not been alleviated.

Conclusion

This paper analyses the impact of trade liberalization on poverty， and expounds three ways of impact - economic growth， labor market and price changes. Generally speaking， trade liberalization has a positive impact on the reduction of long-term average poverty， but the extent of the impact depends on initial inequality， labor skills， and some infrastructure. In the short term， it will have a negative impact， so it needs to be accompanied by some compensatory social policies to develop.

Trade liberalization， solely， cannot be directly proportional to economic growth， there would be an iota of poverty despite increased trade if policies are not being harmonized. The need for macroeconomic stability is to reduce budgetary imbalances through reduction in the size and sole of government and greater reliance on the private sector development financing.

Finally， in the issue of international trading and poverty， it is viewed in two ways： positive for an under-developed and developing countries and negative nations.

Reference

[1] Winters， L.A.， McCulloch， N. and McKay， A. （2004）. ‘Trade Lib- eralization and Poverty： The Evidence So Far’， Journal of Economic Lit- erature， 42（2）， pp. 72- 115.

[2] Bhaskar， V.， Bishnupriya， G. （2007）. ‘India's development in the era of growth’， Oxford Review of Economic Policy， 23（2）， pp. 135- 142.

[3] Ravallion， M. （2002） Is India's Economic Growth Leaving the poor Behind. Development research group. Washington： The World Bank.

[4] Thorbecke， E.， Nissanke M. （2008）. ‘The Impact of Globalization on the Poor in Latin America’， Economia， 9（1）， pp. 153- 166