Last Updated 28 Jan 2021

Trade Liberalisation and Poverty

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International Trade is simply referred as the exchange of goods and services across national boundaries. International trade accounts for a significant share of gross domestic product (GDP) in most of the countries. The value of international trade in 2010 was $19 trillion which is 30% of the world GDP. It means about one third of the goods and services are exchanged globally around the world.

According to "Global Policy Forum", till 2030, 60% of the world economy will exchange their goods and services internationally.

Theories of International Trade

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1. Trade Liberalization

When countries are interested in International Trade they need to follow trade liberalization or free trade.

Over 200 years two opposing forces: the promotion of free trade and protectionism has been the main challenge of International Trade. Trade liberalization is the removal of the restriction or the reduction of barriers on the free movements of goods and services across countries. The main objective of trade liberalization is to remove tariff and non-tariff barriers. It includes the removal or reduction of both tariff and non tariff obstacles. The easing of such restrictions is often referred to as promoting "free trade." Trade liberalization encourages and facilitates countries to specialize and benefit from the principle of Comparative Advantage. Further, it has helped to increase the world output by which competition has increased and consumers are able to get products and services at lower prices.

The UK is an extremely open economy with a long history of promoting trade openness. By 2009, trade accounted for around 60% of the UK's national income. (Source:, 2009.)

1. Poverty

Poverty simply means lack of income or consumption. According to World Bank, almost half the world, over three billion people lives on less than $2.50 a day and 0.88 billion people live under less than $1 a day (see Appendix). The World Bank’s World Development Report 2001, ‘Attacking Poverty’, provides another important description of poverty (World Bank, 2001). This call for a focus of anti-poverty efforts in three key areas: opportunity, security and empowerment.

1. Links between Trade Liberalization and Poverty

Trade liberalization has a deep relationship with poverty. In general, trade liberalization is a supporter in the fight against poverty. Trade liberalization tends to increase average incomes and supplying more resources to tackle or fight against poverty. Trade liberalization mainly affects the income distribution.

Today poverty is the greatest challenge to public policy and reducing it is the most fundamental objective of every government and county. Here, trade liberalization is believed to be an important part of the policy package for prosperity and growth and potentially for poverty mitigation.

Mainly Trade Liberalization affects poverty through its effect on:

1. Economic growth.

2. Factor markets (income and employment),

3. Product markets (prices and availability of commodities

4. Government capacities to implement pro-poor policies (government revenue and expenditure).

1. Trade Liberalization and Poverty – The Case of Nepal

Before1980s, Nepal’s trade policies were mostly influenced by state-led development strategies. Government was providing protection to domestic industries, import substitution, state-led industrialization, and government monopolies in major industries and sectors. From 1984/ 85 Nepal has initiated economic reform through structural adjustment program. The key elements of the reform process were Liberal and market oriented trade policy. The reform process was intensified after the restoration of multi-party democracy in 1990. The credit for reform process in Nepal has been credited to multi- party restoration democracy.

The main features of liberalization in Nepal due to the economic reform were included as devaluation and introduction of flexibility in the exchange rate, rationalization of the tariff structure, reduction in the average level of tariffs, elimination of import license and quotas implementation of full convertibility of the rupee in the current account, liberalization of foreign investments, privatization and institutional reform of state-owned enterprises, market-based pricing of agricultural inputs and outputs, and reduction of subsidies on credit and irrigation.

1. Implications of Trade liberalization on Poverty

There has been some debate about whether or not trade liberalization has been in favor of poor people of Nepal. However, the relationship between poverty and trade liberalization is very complex. But we cannot disagree with the fact that trade liberalization has affected the poor in Nepal. Trade liberalization can affect poverty in a number of ways. Indirectly, trade liberalization has affected poverty through its effect on poverty. Directly it has affected poverty through effect on factor markets (income and employment), product markets (prices and availability of commodities) and government capacities to implement pro-poor policies (government revenue and expenditure) in Nepal.

1. Factors effecting Poverty through Trade Liberalization

1. Economic Growth

Nepal is a poor country with a Gross Domestic Product (GDP) growth rates averaging less than 5% (see Appendix I). The growth of the agricultural sector, in which most of the people depend upon, was very slow as compared to the growth of the non-agricultural sector in Nepal. Due to the slow growth in the agricultural sector, Nepal’s trade liberalization process did not favor the country’s to meet the objective of government to reduce poverty through agricultural development.

1. Government Revenue:

International Trade has been one of the main sources of revenue. Despite of slow growth in the revenue from international trade taxes, international trade still accounts for nearly 50 percent of revenue in Nepal (see Appendix II). Government revenue in the post-reform period has increased significantly. It has been believed that reducing tariff barriers helps to reduce revenue of government. But in the case of Nepal, government revenue from international trade has increased from the economic reformation. Actually, the negative crash of tariff reduction has been counteracted by creating higher revenue base. These revenue bases are created by higher imports, wider income tax base, introduction of value added tax (VAT) system, and upward revision of VAT rate.

Sources: international-trade-percent-of-revenue-wb-data.html

1. Labour Markets

Nepal is an agricultural country. More than 80% of the populations are engaged in agriculture. In spite of high unemployment and underemployment, some improvements in wages rates have been seen during last three decades. During 1981-2010 real wage rates has increased unequally in agricultural (averaging 1.7%) and non-agricultural sector (2.5%). Most of the workers in Nepal are in the unorganized sector and self-employed (78 % self-employed and 22 percent wage-workers). Thus, trade liberalization in the labor market has not benefitted the rural poor.

1. Micro Level Effects: Household Income and Consumption

42.5 % of Nepalese were below the poverty line at the time of economic reformation. In 2003/2004 poverty rate was 30.85% and in 2010/2011 poverty rate was 25.16% (see Appendix II). Amazingly, poverty was reduced when there was low GDP growth (less than 4 %) as well as high population growth (1.768%). Hence, it cannot be said that poverty was reduced only because of trade liberalization. One of the main determinants for reducing poverty in Nepal is large inflow of remittance. Around 55.86 % households of Nepal receive remittance every year by which it has helped a lot to reduce poverty in Nepal. Hence, remittance should also be credited for reducing poverty in Nepal.

It was expected that Trade liberalization in Nepal would accelerate high and sustained growth and poverty reduction.

But facts imply that the benefits of Nepal’s economic reforms have been limited to a few sectors. Furthermore, trade liberalization only focused on non-agricultural sector and did not give emphasis to the agricultural sector. Due to the low response or better to say “no response” towards agricultural sector has resulted in low agricultural growth. It has lead to slow growth in incomes.

1. Links between Trade liberalization and Poverty in Vietnam

Vietnam has been a prime example how to bring the development and reduce poverty by embracing the markets. The country once a communist state is now fully utilizing the benefits of free markets. It has become an attractive destination to either invest or do business in the region as well as a globally. This has been done through both trade liberalization and also economic reforms.

The major features during external reform process were as follows:-

1. There were rationalization and unification in the rate of exchange,

2. No barriers in the export and import controls,

3. Free trade for the foreign direct investment,

4. Simple in licensing procedure,

5. Strategy of ‘open door policy’ to promote foreign investment and the formation of legal frame work to approve,

6. Integrating the economy of the world via regional and multi trading agreement.

To make engagement directly in external trade, it was made allowed to the private companies in 1990-1991. There was a rule while licensing for enterprise to be involved in trade and later, it was in progress in a decade. After some years, ministry of trade eliminated the licensing process. We all know that Vietnam is continuously working in encouraging ever since the making of open door policy in 1987. Approval of foreign direct investment was under control by the ministry of planning and investment. There was a diverse in entering number of trading arrangements during the 1990s. In 1992 treaties agreement were done with strong economies with European Union and it increases the quotas of Vietnamese textiles and clothing in the European market. After the increase of export goods in European market later it joined with different types of association to develop the free trade to different countries.

The doi moi policy set in 1986 made reforms that made the impoverished, isolated, stagnant nation gradually through 1990’s into a vibrant, market driven capitalist nation. Much economic deregulation was set forward with the government playing decisive role. There was a boom in enterprise and trade which was also part due to the informal and shadow sector of family and peasant run through currency trading and smuggling existing before the policy was set. The trade was expanded from CMEA (The Council of Mutual Economic Assistance) to trade pacts with western and other south East Asian countries. The per capita income increased through many folds. The shocks international trade was transferred via many channels.

1. Channels of Transmission: Price, Employment ; Wages Channel ; Fiscal Channel

The country’s real GDP grew with a 7-8 % annum growth in between 1990-2005. This can be taken as a clear indication in growth of household income. A clear relevance of trade can be seen with trade when export per capita is compared. In 1985 the export per capita was US $11.6 increased to US $390.3 in 2005. The share of export to GDP increased from 4.6 to 62.7 in same period. Thus the purchasing power of the people with increased in the trade.

1. Market Channels: (Price)

The increase in trade was beneficial to agrarian rural population as it drove the price of rice high as their income increased from sale of their yields. The income went to landowners and finally to works through wages. However the net consumer share of food expenditure accounted more than before. The consumer benefited by low tariff as they were able to purchase more imported goods with less money.

1. Channels of Enterprise: (Wages and Employment)

The labor intensive export industries had quite a growth due to availability of large pool of low skilled workers. These industries employed a large workforce providing a better pay than traditional informal sector and agricultural sector. The “doi moi” reform saw growth of employment in service, stable in industrial and downfall in agriculture sector. The unemployment decreased and foreign invested created better working environment for workers than the domestic industries.

1. Government Channels: (Fiscal)

With the reduction of import rates and opening of market the government was able to collect larger revenue for its extensive social program for poor and needy. Government was able to invest in much poverty alleviation and income generation schemes. It was able to allocate, mobilize and utilize available in prioritized objectives and localities.

The case of Vietnam helps to ascertain that trade liberation help to reduce poverty. But there also raises the question economic inequality and gender disparity.

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