Making trade work better for the poor

The relationship between trade, growth and poverty reduction is unequivocal. From 1990 to 2017 developing countries increased their share of global exports from 16 percent to 30 percent.  At the same time, extreme poverty plunged from 36 percent to 9 percent. 

But for every tariff that is lifted or regulation that spurs competition, there is a potential business owner or employee whose livelihood is at risk. 

Changes in trade policy create winners and losers, sometimes undermining popular support for trade liberalization, triggering increasing support for economic nationalism. Even for the staunchest defenders of trade, it is vital to recognize that the distributional impacts of trade have been uneven and unequal. Gains and losses have been heavily concentrated in some sectors, jobs, and regions. To ensure support for trade, we need to reduce regional and sectoral disparities, putting policies in place to spread gains more widely. 

The newly released World Bank report, “The Distributional Impacts of Trade: Empirical Innovations, Analytical Tools, and Policy Responses,” not only examines the incontrovertible links between global trade and poverty reduction but advances our understanding of how “trade shocks”  — rapid increases or decreases in trade — affect the poor and how policies can ensure that gains are shared more widely. 

It looks closely at the impact of trade on wages, employment, and income of the poor in five countries: Bangladesh, Brazil, Mexico, South Africa, and Sri Lanka. This work is vital at a time when the adverse distributional impacts of trade associated with globalization are increasingly used as an argument for protectionism.
 
While the aggregate gains from trade are clearly established, a burgeoning literature within economics has shown that the losses from trade may be deeper, more concentrated, and longer-lasting than previously understood.  The literature, however, has been focused primarily on advanced economies. This report enhances our understanding of the distributional impacts of trade in developing countries and provides guidance on policies to make trade more inclusive. 

"As the world strives to recover from the COVID-19 pandemic, the importance of trade will be more critical than ever to growth, job creation and poverty reduction."

Take the example of Bangladesh, where rising exports have increased wages and helped women transition into formal sector jobs. A $100 gain in exports per worker between 2005 and 2010 led to a 0.7 percent decrease in informality in districts with a higher exposure to trade. The positive effects on wages and reduction of informality spread throughout the economy over time.

Looking to the future, the research shows that if Sri Lanka reduced its trade barriers it would boost GDP growth and international trade while reducing poverty. But it would also create greater wage inequality. Without complementary policies, the gains probably would be concentrated in urban areas. Improving the business environment and reducing the mobility costs for workers could spread gains more widely.

Importantly, the report’s analysis shows that countries should continue seeing trade as a pathway to development.  Among its most critical lessons is that maximizing the gains from trade requires a comprehensive and economy-wide approach. 

Developing countries can use these tools to better understand potential distributional impacts before policies are implemented, monitor their implementation, and coordinate responses across government. 

The report also provides practical solutions countries can implement to ensure trade supports poverty reduction and shared prosperity.  These include policies that reduce distortions and make it easier to do business, reduce trade costs through improved trade facilitation and logistics, and speed up labor market adjustment so that workers can find new jobs. 

As the world strives to recover from the COVID-19 pandemic, the importance of trade will be more critical than ever to growth, job creation and poverty reduction.