Poor Country Gains from Trade Greatly Overstated

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November 18, 2004

Poor Country Gains from Trade Greatly Overstated

Economic Growth a Bigger Factor in Poverty Reduction

For Immediate Release: November 18, 2004

Contact: Debi Kar, 202-387-5080

The Bush administration announced plans this week to move forward with bilateral and regional trade agreements in President Bush's second term. But the World Bank has cast doubt on the benefits to developing countries from these agreements in its Global Economic Prospects 2005. A new report from the Center for Economic and Policy Research, "Poor Numbers: The Impact of Trade Liberalization on World Poverty" by Mark Weisbrot, David Rosnick, and Dean Baker, similarly finds that gains to developing countries from trade liberalization are smaller in reality than the numbers that have been widely cited in the public debate. The authors' calculations show that the impact of trade liberalization on poverty reduction - while not inconsequential - will be to lift less than 100 million people from a per capita income just below the international poverty line of $2 per day to just above $2 per day. entitled "

"The gains from trade liberalization for poor people in developing countries have been overstated," said CEPR Economist and Co-Director Mark Weisbrot, a co-author of the report. "At the same time, the costs to developing countries of complying with commercial agreements such as the WTO are often ignored. This leads to a lot of misunderstanding regarding the potential impact of trade liberalization and the conditions that are attached to it."

Cline (2004), a leading reference on this subject, projects that rich country trade liberalization would lift 540 million people out of poverty. This new CEPR study shows that the projections in Cline (2004) substantially overstate the likely benefits for three reasons. First, a calculation error led to an overstatement of approximately 17 percent in the number of people who would be lifted out of poverty. Second, the methodology used in the book - fitting the income distribution using the Gini coefficient - is arbitrary and often quite inaccurate. An equally plausible alternative methodology - fitting the income distribution using the poverty rate - yields projections that are less than a fifth as large. Third, calculating the combined impact of the economic growth projected for a period in which any trade liberalization process takes place and trade liberalization itself, shows that the impact of trade liberalization on poverty reduction is approximately 20 percent as large as the corrected Cline projections.

Further, the typical person raised above the poverty line in these projections is someone with an income just below the international poverty level of $2 per day. Trade liberalization is projected to raise their income just above this $2 per day poverty level. While this gain can mean a significant improvement in the lives of some poor people, most of the people who are commonly described as being "pulled out of poverty" as they cross the $2 per day threshold would still be seen as impoverished.

Though any reduction in poverty is desirable, since poor countries are being forced to make concessions in exchange for trade liberalization in rich countries, it is important that they approach trade negotiations with a clear assessment of the size of the potential benefits. Many of these concessions, such as the enforcement of rich country patent and copyrights, impose substantial costs on developing countries. In addition, trade agreements often limit the ability of developing countries to pursue the same sort of industrial policies that rich countries used in order to develop. It is entirely possible that the cost to developing countries from paying copyright- and patent-protected prices to rich countries will equal or exceed the gains from rich country trade liberalization, as suggested by the World Bank's preliminary research. It is only by comparing the estimated costs and benefits of international commercial agreements to developing countries that we can say whether these will benefit poor people in developing countries.