Does Free Trade Cause Economic Growth And Reduce Poverty?

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For many years, people have been convinced that openness to international trade was the key determinant for economic growth and poverty reduction. In 2000, WTO’s Mike Moore said that the surest way to help the poor was by opening markets. This idea has been accepted by many multilateral organizations (like the WTO).

Recent empirical evidence, however, shows that being open to international trade is not the most important factor that leads to economic growth and poverty reduction, and that human ideology should change if we ever want to achieve these goals.

In 2001 noted development economist Dani Rodrik showed that in order to attain economic growth and decrease poverty, being open to international trade is not a priority. Too much attention has been given to the importance for poor countries to open themselves to trade.  Instead of focusing on what countries need to do to integrate. We should focus on what countries need to do in order to achieve equitable economic growth.  Before focusing on global integration, it is important for developing countries to concentrate on economic reform policies with a poverty focus.

According to another well noted development economist, Acemoglu (2000), the quality of a country’s public institutions is a critical, and perhaps the most important determinant of a country’s long term development.

Lets look at an example, Vietnam has been phenomenally successful, achieving not only high growth and poverty reduction but also a rapid pace of integration into the world economy despite high barriers to trade. On the other hand, Haiti’s economy has gone nowhere, even though the country took a comprehensive trade liberalization in 1994-1995.

The differences in these countries highlight 2 important points:

  1. A leadership committed to development and standing behind a coherent growth strategy counts for a lot more than trade liberalization.
  2. Integration with the world economy is an outcome, not a prerequisite of a successful growth strategy.
– Dani Rodrik, 2001

Literature reveals no systematic relationship between a country’s average level of tariff and non-tariff restrictions and its subsequent economic growth rate.

Empirical evidence shows that no country has developed successfully by turning its back to international trade and long-term capital flows. The strongest link between trade and growth in developing countries is that imported capital goods are likely to be significantly cheaper than those manufactured at home. Exports are also important since they permit the purchase of imported capital equipment.

Evidence also shows, however, that no country has developed simply by opening itself to foreign investment and trade.  In other words, although trade liberalization is definitely preferred to trade protection, it cannot be relied on to deliver high rates of economic growth.

The effect of openness to trade to economic growth and poverty reduction has become a debatable issue in the last decade. Economists such as Wacziard and Welsch have agreed, however, that liberalization is a key to achieve economic development.

Liberalization has strong positive effects on growth, openness and investment rates in other countries. According to Helliner (2000), the world trading regime has to move from a market perspective to a development perspective. Although openness to trade is a very important factor that leads to economic growth and poverty reduction, we have to be aware that trade is a means to an end, not the end itself.

 

2 thoughts on “Does Free Trade Cause Economic Growth And Reduce Poverty?

  1. Reply obuachingy Nov 15,2012 %I:%M %p

    this is the most challenging question people keep asking them self with each and every moment,i think most developing economies need to so focus on economic reform policy with poverty enradication and creation of more emploment opportunities,since open economy trade import let into the country cheaper capital goods and services than those at home

  2. Reply Robin Jan 30,2013 %I:%M %p

    Thought-provoking post–and I tend to agree with the premise.

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