A number of global
trends are clear. The integration of developing countries with international
markets, as measured by
trade protection, the share
of imports and/or exports in
GDP, and the magnitude of
capital flows, has increased
substantially in the last
two decades. At the same
time, increases in income
inequality have appeared in
both emerging and mature economies over the past
20 years. Nevertheless, the two previous trends have
coincided with an impressive global reduction in poverty. The major reductions, it should be noted, have
been concentrated in East Asia.
These trends raise some fundamental issues for
Latin America. What causes rising inequality? Is
there a link between globalization and inequality
and poverty? Does the experience vary across countries and, if so, why?
A vast literature deals with these issues, including a number of comprehensive surveys from which
this paper draws, and where the interested reader is
advised to go for more details. 1 For the purposes of
this article, I will review the evidence so far on the
four main ways in which trade is linked with inequality and poverty (economic growth, family income,
the labor market, and fiscal effects) and attempt to
draw some lessons for policy.
two premises empirically.
The difficulties of establishing a link between openness and growth reflect a
series of problems. There are
different ways of measuring national trade policies,
and a wide variety of causes
and sources of growth. Perhaps most significantly, the
fact that trade policies are
always applied, by necessity, in combination with
other public policies, such
as investment in infrastructure and human capital,
institutional reforms and enterprise development,
complicates the ability to draw clear conclusions.
Theory and many empirical studies emphasize
that investment in both infrastructure and human
capital is a key co-determinant of growth along with
trade integration. Poor investment policies thus
undermine trade benefits. 2 But theorists also emphasize the importance of institutions and good governance. In general, there is significant uncertainty
among economists as to the exact policy mix that
can maximize growth. 3
Governments need to put
in place complementary
policies tarGeted at
small farmers, such
as extension services,
credit facilities and
There is broad consensus among economists that trade growth can contribute to
poverty reduction, but this is based on a
syllogism: trade stimulates economic growth, growth
reduces poverty, therefore trade reduces poverty.
However, it has been difficult to demonstrate the first
José Manuel Salazar-Xirinachs is Executive
Director of the Employment Sector at the International Labour Organization in Geneva.
Although there are no easy generalizations about when trade liberalization will
reduce poverty through growth, it seems
clear that economic openness is much more favorable to growth and poverty reduction than a general inward-looking economic policy. Nevertheless, an
economy’s response to trade liberalization is highly
dependent on the specifics of the trade policy design.
As with economic growth, the effects of trade on
poverty depend on complementary investments in
infrastructure and human capital (education, skills),
improved governance and institutions. A final point:
the impact of growth on poverty reduction is also
highly dependent on the particular income pattern
at work in a national economy, and on the combined
use of employment and social policies (transfers) to
ensure that the poor can take advantage of the opportunities opened by trade and growth.