Trading up from poverty

WASHINGTON, D.C. - A long-held tenet of international-trade theory is that, in the long run, increased trade correlates with faster GDP growth. But the challenge - which my institution, the World Bank, is working to overcome - is to ensure that trade-driven growth benefits the poor.

That is why the heads of seven multilateral institutions, including the World Bank, strongly supported the push for the trade-facilitation agreement that was reached earlier this month at the World Trade Organization’s ministerial conference in Bali.

To be sure, the incidence of poverty worldwide has reached an historic low, with the extreme-poverty rate (the share of the population living on less than $1.25 a day, in purchasing-power-parity terms) falling in 2010 by more than half since 1990. But that still leaves more than one billion people worldwide living in extreme poverty. Moreover, progress has been uneven, with poverty rates having declined far more in East Asia and Latin America than in Sub-Saharan Africa.

In order to cope with this changing global context, the World Bank has introduced a new objective to guide its poverty-reduction efforts: promoting sustainable, shared prosperity by monitoring the income growth of the poorest 40 percent of every country’s population. Indeed, we are rethinking how we define success in development and how we provide trade-related support to developing countries.

Trade’s relationship with poverty is variable and complex. Increased trade benefits consumers by reducing the prices of goods and services. It gives the poor access to a wider variety of commodities, while providing firms with a more diverse selection of inputs.

But increased trade can also eliminate low-skill factory jobs and reduce agricultural prices - outcomes that disproportionately hurt the poor. In India, for example, poverty has declined more slowly in areas where farmers face increased foreign competition. Given constraints on inter-sectoral labor mobility, stemming from barriers to skills acquisition and rigid labor-market regulations, the poorest workers have fewer options.

As a result, increased trade may demand difficult adjustments in the short term. Individuals may need to change their consumption habits; labor may have to be reallocated across sectors; and some workers may have to adjust to lower wages, at least temporarily. Some firms will grow, while others will contract.

Experience has demonstrated that, with forward-looking policies, governments can enhance trade’s benefits and mitigate its negative impact on the poor. Policy makers can promote retraining programs for displaced workers and remove regulatory obstacles that impede their flow into thriving, export-oriented sectors. And, in order to protect farmers, they can eliminate export restrictions and ensure that timely, accurate market information is accessible.

With such policies in place, the World Bank’s efforts to bolster developing countries’ trade linkages could facilitate substantial poverty reduction. For example, we help developing-country governments connect firms, farmers, and households to markets and supply chains, thereby fostering increased investment and boosting economic activity.

Furthermore, we support infrastructure-development projects, enabling countries to build the roads, bridges, and ports that link traders to markets. For example, a $1.8 billion highway project in Kazakhstan is facilitating trade-related transport across the country, stimulating the economies of the country’s poorest provinces, and creating more than 30,000 jobs. In Nepal, the Bank is financing reconstruction of the steep, dangerous and busy road that carries most of the country’s exports to India, and it is supporting the government’s efforts to connect some of the country’s remotest districts to the main road network.

The World Bank also helps countries to establish clear customs rules that more effectively protect traders from inconsistent treatment or solicitations for bribes. And we are working to address costly border inefficiencies. For example, we are helping to simplify and modernize trade procedures through Cameroon’s Douala Port, and we have helped the government of Laos establish an online portal that provides traders with access to relevant laws, procedures, schedules and forms from border-management agencies.

Since 2010, the International Finance Corporation, the Bank’s private-sector lending arm, has been promoting the integration of small and midsize enterprises into global supply chains by increasing their access to capital. The $500 million Global Trade Supplier Finance program, a joint investment and advisory initiative, is currently providing short-term finance to thousands of emerging-market SMEs.

To maximize the impact of such initiatives, world leaders should cooperate to build and maintain an open trading system. The WTO’s Bali conference provided an important opportunity to develop a new trade-facilitation agreement that expedites the movement, release and clearance of goods at border stations; improves trade-related rules; enhances technical assistance; and encourages cooperation among border-control agencies.

But the agreement that was reached in Bali cannot succeed unless wealthy countries and donors agree to support developing countries’ efforts to enact related policies and reforms. Given this, it is crucial that developed-country policy makers recognize that a more efficient, better integrated, and more inclusive global trade regime will benefit all countries.

With genuine commitment from the international community and the appropriate domestic policies in place, trade can be a powerful force for poverty reduction.

Copyright: Project Syndicate/Global Economic Symposium, 2013.

*The author is the World Bank president’s special envoy.

by Mahmoud Mohieldin