Poverty is bad for health in many dimensions, so the question ‘does increased trade reduce poverty?’ is an important one. Despite huge research efforts over the last two decades we still do not have a definitive general answer. That is because there is none. Rather than seek one, the job of researchers is to understand the determinants of the effect of trade on poverty and to provide tools to anticipate or explain the outcome in any specific context.[1]
The evidence is overwhelming that allowing an economy to trade more almost always increases average incomes. No country has successfully developed without engaging more fully with the rest of the world, and even if the stimulus is entirely domestic, income growth depends on being able to sell surpluses and buy deficit goods/services abroad.[2]
Exports vs. imports
To the inconvenience of economists, however, we are not all average. Within a national average there may be individuals, communities or regions that suffer from increased trade and some of these may be (or may become) poor. To start to identify ‘losers’ we need to recognise two critical dimensions over which people differ – what they consume and what they produce, or more broadly how they earn their income. Heavy consumers of an importable good may gain from increased imports (trade) and heavy consumers of an exportable good may lose if trade increases exports and thus drives up the price. In developed countries, there is strong evidence that opening up trade with China has benefitted poorer consumers because their consumption baskets are biased towards the goods China has supplied in abundance (e.g., Fajgelbaum and Khandelwal (2016).
People tend to differ more according to the sources of their income than in what they spend it on. Hence, if we are looking for deviations from an average, they are likely to be larger in the production domain than in the consumption one and so the stronger poverty effects are more likely to be located in the former than the latter. This takes us to a fundamental and obvious insight: if imports are liberalised and you work in an import-competing sector, you will tend to suffer, whereas if liberalising imports also stimulates exports (as we would expect because ultimately trade has to be balanced) and you work in an export sector, you tend to gain.
Several excellent papers show that regions that are more exposed to import competition have worse poverty performance than other regions (e.g. Topalova, 2010, and Autor et al, 2014), but that when exposure to export opportunities is factored in there are offsetting gains, usually larger in aggregate (e.g. Topolova, 2007, and Feenstra et al, 2018). We also know that when imports provide inputs to local production, their growth helps producers and local incomes (Amiti and Konings, 2007).
Labour mobility
Labour mobility is a key contributor to sharing the gains and pains from trade. Imagine a sector that was rigidly restricted to employing exactly the same amount of labour through time. When demand for its output went up (say, its exports increased), its prices would rise and firms would compete for workers and drive wages up. If demand went down, the same process would operate in reverse and lower wages. Now imagine that workers could move freely between sectors. Workers would move from jobs in importables to those in exportables which would mitigate the wage changes in each sector, possibly to the point of eliminating them.
Of course, in the ‘real’ world, the intersectoral migration of labour will be imperfect, because, for example, of skills, preferences, and, most significantly, geography. Hence, while average wages might rise, workers in importables may not keep up and those in exportables may earn a premium, at least for several years. Moreover, to take full advantage of changing opportunities to export, not only does labour need to move in, but so do capital and infrastructure in order to allow the exportables sectors to expand to their maximum extent.
It is not difficult to think of reasons why the poor and disadvantaged are less able to adjust (to cope with) any shock than are the better off. For example, they have fewer skills, fewer contacts, fewer assets and fewer borrowing opportunities, which results in their having less ability search for solutions, invest in new activities, finance moving costs or take risks. Thus, in any change particular attention needs to be paid to the ability of the poor to cope and to take advantage of new opportunities.
These effects might also be exacerbated by heterogeneity across firms – Helpman et al (2017). Better firms survive import competition better (Iacovone et al, 2013) and are more heavily export-oriented; but they are also able to recruit better workers who then earn higher wages. A trade shock can thus impinge harder on weaker firms and, through them, weaker (poorer) workers.
Three policy lessons
I draw three groups of policy implications from this brief discussion. Each helps to maximise the gains from trade, to share them more evenly and to help to avoid clusters of bad consequences even as averages are improving.
First, facilitate the reallocation of factors of production – not just labour – between sectors, because changes in trade affect sectors very differently.
Second, facilitate the movement of people geographically. This will often amount to encouraging urbanisation by permitting movement, reducing restrictions on city growth, and making cities function better. Governments should ensure that facilities such as housing, health and education are readily open to in-migrating workers. These last are not easy policies – they are subtle and there is great resistance to internal migration in many countries – but, in fact, no economy I can think of has developed without significant internal labour movement.
Third, ease the strains of adjustment on the poor and disadvantaged. This is fair, efficient, and facilitates the politics of making the most of international trade.
L Alan Winters
Professor of Economics,
University of Sussex Business School,
Co-Director, Centre for Inclusive Trade Policy, University of Sussex
References
Amiti, M. and Konings, J., (2007). Trade liberalization, intermediate inputs, and productivity: Evidence from Indonesia. American Economic Review, 97(5), pp.1611-1638.
Autor, D.H., Dorn, D., Hanson, G.H. and Song, J. (2014). Trade adjustment: Worker-level evidence. The Quarterly Journal of Economics, 129(4), pp.1799-1860.
Fajgelbaum, P.D. and Khandelwal, A.K., 2016. Measuring the unequal gains from trade. The Quarterly Journal of Economics, 131(3), pp.1113-1180.
Feenstra, R., Ma, H., Sasahara, A., and Xu, Y., 2018. “Reconsidering the ’China shock’ in trade”, VoxEU https://voxeu.org/article/reconsidering-china-shock-trade
Helpman, E., Itskhoki, O., Muendler, M.A. and Redding, S.J., (2017). Trade and inequality: From theory to estimation. The Review of Economic Studies, 84(1), pp.357-405.
Iacovone, L., Rauch, F. and Winters, L.A., (2013). Trade as an engine of creative destruction: Mexican experience with Chinese competition. Journal of International Economics, 89(2), pp.379-392.
Topalova P. 2007. Trade Liberalization, Poverty and Inequality: Evidence from Indian Districts. In Globalization and Poverty, ed. Ann Harrison, 291–336. Chicago: University of Chicago Press.
Topalova, P., (2010). Factor immobility and regional impacts of trade liberalization: Evidence on poverty from India. American Economic Journal: Applied Economics, 2(4), pp.1-41.
Winters, L Alan (2022) ‘Inclusive Trade: Four Crucial Aspects’, Chapter 3.2 of Saha, A.; Abounabhan, M.; Di Ubaldo, M.; Fontana, M. and Winters, L.A. (2022) Inclusive Trade: Four Crucial Aspects, IDS Working Paper 564, Brighton: Institute of Development Studies, DOI: 10.19088/IDS.2022.009
Winters, L Alan (2000) ‘Trade and Poverty, Is there a connection?’, Chapter 3 in Ben David D, Nordstrom H and Winters L A, Trade, Income Disparity and Poverty, WTO Geneva, June 2000, pp.43-69.
Winters L Alan, Andy McKay and Neil McCulloch (2004) ‘Trade Liberalisation and Poverty: The Evidence so far’ Journal of Economic Literature vol. XLII, pp. 72-115.
Footnotes
[1] I have been as implicated as anyone in this research effort, starting with Winters (2000), through Winters et al (2004), to Winters (2022), the last of which is the basis of this blog.
[2] Only by trading surplus for deficit goods/services can a country specialise in what it does relatively better than other countries.