Trading Up from Poverty

WASHINGTON, DC – 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 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 (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% 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 few options when such changes occur.

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. Policymakers 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.