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Wednesday, June 28, 2006 

June 27, 2006
The poverty impact of trade integration

Leading specialists in the areas of international trade and poverty met at IDB headquarters to discuss the poverty impact of trade integration in Latin America

Whether you’re a subsistence farmer in southern Mexico, the manager of an asparagus cannery in Peru, an indigenous artisan in Ecuador or the owner of a textile company in Guatemala, you will understandably have differing expectations, hopes and fears regarding trade liberalization and integration into the global economy.

Similarly, economists, trade ministers, agricultural specialists, environmentalists and social development experts likely back different aspects of the trade liberalization debate, some focusing more on the potential macroeconomic impacts brought by integration into the world economy and others more on the micro-level implications for subsistence farmers and local economies.

However, whatever your title or lot in life, there is a general consensus that the trade agreements, reforms and policies adopted throughout Latin America and the Caribbean within the last ten to fifteen years have had uneven impacts, with many of the benefits concentrated in the hands of the elite few, while the poorest often bear the brunt of the ills wrought by greater exposure to the world market.

The fact is that trade liberalization has not reduced poverty nor inequality. And clearly there have been winners and losers.The interrelationship between trade integration and poverty levels, including understanding the challenges in designing and implementing pro-poor policies and what institutions like the IDB can to do address these challenges, was the topic of the recent workshop, Trade and Poverty in Latin America and the Caribbean, held at IDB headquarters in Washington, D.C. Experts from various disciplines presented papers and discussed the complex amalgam of issues related to the subject.

Are trade and poverty related?
A fundamental problem brought up by Professor Albert Berry of the University of Toronto, and echoed by others, is the general paucity of specific information surrounding the relationship between trade and poverty in the region.

“We don’t know enough to understand the mechanisms that connect liberalization to poverty and inequality and too much of the literature has tried to make broad conclusions, “ often overlooking the need for specifics, noted Berry, adding that “what we do know is generally not easily translated into policy”.

Considering that various regions and countries—and regions within countries—have unique economic, demographic, political and social environments, all containing complex intervening factors that influence the way trade policies are developed and implemented, it is paramount that more in-depth, country-specific research be carried out in order to make the information more relevant and accessible to policymakers and to promote the integration of poverty reduction into trade agendas.

In the same vein, Peter Hakim, President of the Inter-American Dialogue, noted the difficulty of drawing conclusions on the issues of trade and poverty—for policymakers and the public alike—if the information available is unclear, stressing that economists and academics need to better respond to each other’s arguments, confronting and challenging their disparate views on trade, to make for a more fruitful dialogue on the issue. However, unlike Berry, Hakim also called for a more coherent, broad approach to researching trade and poverty, before delving into the specifics.

Social impacts of trade
Trade liberalization has failed to reduce poverty, according to Julio Berdegué, President of the Latin American Center for Rural Development (Rimisp), who, based on a study of 14 countries, noted that after 20 years of economic integration and trade liberalization, the number of rural poor has increased, with extreme poverty and the displacement of local producers also rising.

Overall, Berdegué highlighted the importance of designing policies that consider how trade will affect regions within a country differently, taking into account the myriad intervening factors and stepping away from the overly simplistic models used in the past.

On a similar note, senior labor economist Carmen Pages of the World Bank and the IDB, discussed job losses due to trade liberalization, while also stressing that job reallocation is already very high in Latin America—one of every three registered jobs is created or destroyed any given year—making it hard to unequivocally determine trade-caused job displacements.

Nonetheless, she also pointed to the need to shield workers from the costs of trade through improving protection systems in the region, from income support mechanisms and wage insurance to improving job search assistance using the internet, for example.

The options
In light of the persisting levels of poverty and inequality throughout the region, after 20 years of trade liberalization, what are the alternatives?

Completely ignoring trade integration would be unrealistic, noted Nohra Rey de Marulanda, Manager of the IDB’s Integration and Regional Programs Department. But it would be nearly impossible to implement all of the policies to mitigate the various negative impacts of trade integration. Nonetheless, policymakers need to decide a domestic trade agenda rather than ignoring the issue. “Trade should be seen as an instrument, but not as a means in itself,” she added.

This means taking into account the sectors likely to benefit from opening markets, as well as the sectors likely to be hit. Integrating poverty reduction into the core of policy design from the beginning, could be an option, something in which institutions like the IDB could play a role.
The workshop was funded through the Trade and Poverty Trust Fund, a multi-donor fund established by the IDB, with an initial contribution from the UK's Department for International Development (DFID), that seeks to both strengthen IDB capacity to assess the impact of trade and integration on poverty reduction and support the adoption of pro-poor trade-related strategies and policies in the countries of the region.

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© 2006 Inter-American Development Bank. All rights reserved.

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