Seeking Shared Prosperity through Trade

Abstract

The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.

Trade liberalization and poverty reduction

“…On the positive side, some models show that trade leads to more innovation through the international exchange of technical information (some of it embedded in traded goods and services) and the elimination of research duplication across countries [3]. Furthermore, the increased foreign competition introduced through trade strengthens the incentives of domestic producers to innovate.…”

“…Finally, trade affects poverty through multiple channels: consumption, production, and the labor market (wages and employment) [3]. The net welfare impact through consumption and production depends on whether an individual's net consumption and net production are of importable or exportable goods, while the net impact through the labor market channel depends on an individual's occupation and industry.…”

“…These channels, in turn, are affected by the pass-through of price changes as a result of tariff reforms. Price change pass-throughs to local markets are determined by the condition of a country's transport infrastructure, distance from the nearest port, and the relative market power of international buyers, local retailers, and distributors [3]. Because all of these factors can have heterogeneous effects, studies generally consider net aggregate effects of trade on the poor, while sometimes also considering how the effects interact with region-or industry-specific characteristics.…”

“…For example, there is evidence that higher road density, more flexible labor markets, and greater financial development enhance the beneficial impact of trade reforms on poverty [1], [3]. Trade liberalization has been less effective in reducing poverty in economically lagging Indian states.…”

“…Trade liberalization has been less effective in reducing poverty in economically lagging Indian states. Their distance from the nearest port, coupled with the lack of proper road connectivity, leads to relatively imperfect price transmission from tariff reductions [1], [3]. Thus, building more ports and roads becomes important for boosting the poverty-reducing effects of trade reforms.…”