Argument: Trade liberalization damages the growth of poor countries

Issue Report: Free trade

Supporting Evidence

  • From free trade to free and fair trade” “Fair competition means that free trade should not, as it does today, take place at the expense of workers and the environment. Unfettered free trade leads to business going where – other things being equal – wages are lowest, obligations to workers (worker safety, social insurance) least, and environmental regulations most lax. Consequently, in the competition to attract investment there is constant pressure on countries to relax both social and environmental regulations. Especially in poor countries this leads to the unfettered exploitation of workers and abuse of the environment. Economists, and in their wake mainstream politicians – not least in the poor countries – and leading opinion makers in the media hold that the exploitation of workers and the environment is a phase developing economies have to go through. They point out that the economies of rich countries developed in the same way: in a first stage, economic growth was obtained at a high social and environmental cost. Only in a second and third phase had enough wealth been created to allow for raising wages and improving social conditions, and for investment in environmental protection. Poor countries, so the argument goes, will have to go down the same path. Unfortunately it won’t work that way. First, because of globalization. Contrary to the past, when it was difficult for business to move abroad, industries can now fairly easily move elsewhere if they want to avoid rising labor and environmental costs. So, different from the past, they move rather than conform to stricter rules.A second factor impeding the above-described three-phase development is today’s combination of technological development, excess labor and political repression. In the past, in the early development stages of the rich nations, large numbers of workers were needed to produce sufficient goods to meet demand. That gave workers some bargaining power. Today, thanks to technological development and population growth, especially in the poor countries, relatively limited numbers of (poorly paid) workers are able to produce sufficient goods to satisfy demand. Relatively small numbers of workers on the one hand, and large numbers of people waiting to take their place on the other (even for dismal wages and working conditions) make for a weak bargaining position.”
  • Stephen Byers,“The IMF and World Bank orthodoxy is increasing global poverty” ,The Guardian, May 19 2003 ”Mr Byers says: “The course of international trade since 1945 shows that an unfettered global market can fail the poor, and that full trade liberalisation brings huge risks and rarely provides the desired outcome.“The evidence shows that the benefits that would flow from increased international trade will not materialise if markets are simply left alone.“When this happens, liberalisation is used by the rich and powerful international players to make quick gains from short term investments.”He has been converted to a “regime of managed trade in which markets are slowly opened up … with subsidies and tariffs being used to achieve development goals.”His new thinking was dismissed as “ill-informed” by the former head of the economics and statistics department of the Organisation for Economic Cooperation and Development, David Henderson.Professor Henderson said: “The widening of the gap between the rich countries and many of the poor ones cannot be blamed on globalisation.” “None of these factors explains the current problems of, for example, North Korea under Kim, Liberia and Somalia under their respective warlords, or Venezuela under Chavez.” Internal influences, including the actions of their governments, were what had kept them poor, he said.The Department for International Development maintains that free and fair trade is best achieved by removing barriers through the WTO.
  • “Africa: The Costs of Free Trade”. AfricaFocus Bulletin. July 5, 2005 – “Christian Aid commissioned an expert in econometrics to work out what might have happened had trade not been liberalised, using economic modelling. The work was reviewed by a panel of academics. The model looked at what trade liberalisation has meant for 32 countries, most in Africa but some in Asia and Latin America.
The data came from the World Bank, International Monetary Fund, United Nations and academic studies. We established the year each country began to liberalise and the extent of its trade liberalisation. We used evidence on the impact of trade liberalisation on imports and exports, and the effect of this on national income, to estimate how much income was lost given the extent of liberalisation. The results suggested that:
  • imports tend to rise faster than exports following trade liberalisation
  • this results in quantifiable losses in income for some of the poorest countries in the world.
We are not arguing that countries which liberalise do not grow, or that some people in them do not become less poor but we are saying that without liberalisation, growth could have been higher and poverty reduction faster.”
What poor people have paid for trade liberalisation
When trade is liberalised, imports climb steeply as new products flood in. Local producers are priced out of their markets by new, cheaper, better-marketed goods. Exports also tend to grow, but not by as much. Demand for the kind of things sub- Saharan African countries tend to export such as raw materials doesn’t change much, so there isn’t a lot of scope for increasing exports. This means that, overall, local producers are selling less than they were before trade was liberalised.
In the long run, it’s production that keeps a country going and if trade liberalisation means reduced production, in the end it will mean lower incomes. Any gains to consumers in the short term will be wiped out in the long term as their incomes fall and unemployment rises.
This has been the story of sub-Saharan Africa over the past 20 years. Trade liberalisation has cost the 22 African countries in the modelling exercise more than US$170 billion in that time.2 According to our model, this is the amount that the GDP of these countries would have increased had they not liberalised their trade in the 1980s and 1990s. If the model is applied to all of sub-Saharan Africa, the loss is US$272 billion.
While some countries in Africa have increased their GDP over the past 20 years, this increase is not as great as it could have been. There are more poor people in sub- Saharan Africa now than there were 20 years ago some of them would not be poor today, were it not for inappropriate trade liberalisation.
In the year 2000 alone, sub-Saharan Africa lost nearly US$45 dollars per person thanks to trade liberalisation. Most trade liberalisation in Africa has been part of the conditions attached to foreign aid, loans and debt relief. This looks like a bad deal: in 2000, aid per person in sub-Saharan Africa was less than half the loss from liberalisation only US$20. Africa is losing much more than it gains if aid comes with policy strings attached.
The staggering truth is that the US$272 billion liberalisation has cost sub-Saharan Africa would have wiped clean the debt of every country in the region (estimated at US$204 billion) and still left more than enough money to pay for every child to be vaccinated and go to school.
The negative effects of trade liberalisation are not confined to Africa. Low-income countries in Asia and Latin America have suffered similar consequences. The average loss to the countries in Christian Aid’s study was about 11 per cent of total GDP over 20 years amounting to several billion dollars for each country. The total loss for the 32 countries in the study was US$896 billion.” [see full article for more extensive analysis of harms to poor countries]