Trade and growth go hand-in-hand. When the 2008 global financial crisis hit, both collapsed.
Since then both have steadied somewhat. But recovery has been jobless in many countries. The biggest challenge that developing countries will face: sustaining economic growth, while maintaining their focus on reducing poverty and inequality. Trade can be an important weapon in the policy-maker’s arsenal to help tackle these dual objectives.
Broadly, economists agree that declining levels of poverty have been accompanied by sustained periods of rapid growth and openness in all countries. In India, there has been a wealth of econometric work that demonstrates the links through which openness to trade has contributed directly to poverty alleviation – via growth and employment. More recently, Arvind Panagariya and I measured the impact of trade on poverty across different social groups – castes and religions – in India. We found that trade openness lifts all boats, for schedules castes and tribes, and for marginalized communities. Interestingly, the impact was especially strong in urban regions. Other research finds that states whose workers are on average more exposed to foreign competition tend to have lower rural, urban and overall poverty rates.
It is firms that trade, not countries. Firms are one of the main channels through which trade impacts welfare. Caroline Freund and Martha Denisse Pierola show that a small number of large firms have a significant impact on most countries’ export growth and pattern of diversification, while most job creation happens within rapidly-growing small and medium-sized firms which are often downstream suppliers to these large firms.
If trade helps lift people out of poverty, creating wealth at the bottom of the pyramid, so what? As Atul Gawande says, what about the how? How do we come up with implementable solutions based on this knowledge? What might be some of the policies that maximize the impact of trade on poverty and shared prosperity?
First: Let’s focus on gazelles – firms that grow and create value rapidly and consistently. These firms often look to international markets for growth. They are important because they are often engines of employment, technological innovation and growth. Even more, they could be indicators of a country’s emerging competitive advantage. I’ve blogged about gazelles in the past, and won't repeat myself here. But suffices to say, we need to complement our focus on entrepreneurs, with a focus on productive survivors - or gazelles.
Second: We need a focus on clusters. Economic clustering helps create upstream and downstream linkages across firms, usually large firms with small and medium-sized firms, thereby creating a network. These linkages are important channels for the transfer of technology and offer an opportunity for SMEs to grow from sub-contracts and economies of scale. SMEs contribute only 28 percent of US gross exports - but they account for 41 percent of value-added exports, reflecting their role as intermediate suppliers. Clustering of firms helps to trickle-down the benefits of trading in international markets – for instance, through technological linkages with upstream intermediary suppliers. This has been the case with Volvo’s bus and truck plants in Brazil, Mexico, India and China. As a case in point, domestic SMEs in Bangladesh that supplied to large exporters are more likely to be productive and grow faster, creating wealth at the bottom of the pyramid.
Third: Cities and trade are inextricably linked. Trade liberalization is associated with growth in urban agglomerations. In turn, cities provide the space for specialization and market access that facilitate trade. Cities attract and galvanize entrepreneurs and productive capital, and much of job creation – both in modern sector activities and in the informal sector – is overwhelmingly urban. 80 percent of global economic activity is generated in cities, activities that benefit from density and proximity – of goods, people and ideas. In a world of mobile capital and labor, cities remain critical nodes for trade because exporters and importers can benefit from economies of scale and access to large local markets. In turn, these exports help inject income from the rest of the world to the local economy, generating employment and income spillovers for city residents.
Trade is fiercely competitive. By focusing on firms, clusters and cities, policymakers can maximize its returns to people and places.