How Much Will Trade Liberalization Help the Poor? Comparing Global Trade Models

The world community and international institutions have made development and poverty alleviation a high priority. The Millennium Development Goals, fixed by the United Nations for 2015, call for halving the number of people living on less than a dollar a day. With this goal in mind, the international community is calling current global trade negotiations, conducted by the World Trade Organization (WTO), the Doha Development Agenda. Trade liberalization is expected to act positively on development and poverty reduction. The recent empirical literature identifies several key linkages through which trade liberalization affects development: the price and availability of goods, factor prices, government transfers, incentives for investment and innovation, terms of trade, and short-run risk (Winters, McCulloch, and McKay 2004). The traditional argument in favor of a positive relationship between liberalization and poverty reduction focuses on the first two linkages. A large proportion of poor people work in the agricultural sector, where trade distortions are particularly high. Liberalization could lead to higher world agricultural prices and raise activity and remuneration in this sector in developing countries. The same beneficial outcome could occur in the textile and apparel sectors, where protection remains high and developing countries have a comparative advantage. But openness can also have negative effects. First, government transfers can shrink as liberalization cuts the government’s receipts of trade-related taxes. Second, terms of trade can deteriorate as liberalization affects world prices. Third, liberalization can impose adjustment costs and raise short-run risk owing to competition from imports and reallocation of productive factors. As a consequence, it is uncertain how much trade liberalization would reduce poverty, and many studies have attempted to assess the size of these benefits. The main empirical tool for this work is the multicountry computable general equilibrium (CGE) model—a sophisticated and complex tool of analysis that often appears as a “black box” from which results are difficult to understand.