Is trade liberalisation really the best strategy to lift developing nations out of poverty?

By Harrison Gardner

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Source: World Bank - Kenyan Farmer

In the 21st century, the world has become far more interconnected than ever before. With this ever-increasing globalisation comes the opportunity for poverty-stricken nations to develop healthy economies. Currently, international bodies, such as The World Bank and The International Monetary Fund (IMF), believe that trade liberalisation is the best strategy for developing nations to lift themselves out of poverty; however, in reality, this strategy may only benefit the already wealthy in said countries as opposed to the impoverished people desperately in need of economic support.

What is Trade Liberalisation?

Trade Liberalisation is the removal or reduction of restrictions on the free exchange of goods between countries. These barriers can include tariffs, such as duties and surcharges (an additional fee/tax added onto the cost of a good or service, such as on petrol), and nontariff, such as quotas and licensing rules. The aim of trade liberalisation is to create an economic environment that encourages domestic and inward investment, as well as to open up markets to generate greater competition within the economy and allow domestic producers to sell exports on the global market.

In theory, this should provide the climate that developing nations need to prosper, and the hugely significant impact that free international trade could have in lifting people out of poverty should not be overlooked. According to the Office of the United States Trade Representative, if there were an increase in Africa’s share of world trade from 2 to 3 percent, there would be an extra $70 billion of annual income for the African people, which is also 3 times the total development assistance the continent gets from the rest of the world. In fair markets, it seems evident that trade liberalisation could do wonders for developing nations. However, the reality is that global markets are immensely unfair; there are major drawbacks that will continue to arise unless a reconsideration of strategy is considered.

What are the drawbacks?

Western countries may be willing to open their markets and allow free trade between themselves and developing nations. This, however, does not mean that they will end existing subsidies on their own domestically produced goods. In order to access Western markets, developing nations would have to somehow undercut the prices of these subsidised goods – something that is simply unrealistic. Goods produced in developing nations would also become very defenceless against these heavily subsidised exports in their own domestic markets, meaning a developing economy may, in reality, become even more vulnerable than it was before barriers to trade were lifted.

This became evident in both Ghana and Zambia, where the removal of restrictions to trade resulted in sudden falls in growth rates due to their industries struggling to compete with foreign exports. Even if growth rate figures do increase, it does not necessarily mean that living standards for the population see any improvement. Mexico during the late 20th century is one of many examples where growth has risen while the number of people living below the poverty line has also increased. This was because the benefits of this growth that had arisen due to the opening of Mexico’s markets was reaped by multinational corporations.

What is the alternative?

The vast majority of rich nations, the USA, UK, and France for example, actually became rich through combinations of protectionism, subsidies and other policies that they currently advise against. If developing economies put in place measures to protect their infant industries (industries which are still in their early stages), this will allow them to grow and become far stronger and more competitive while also allowing the economy to diversify into new areas.

The arguments against protectionism involve how these measures prop up inefficient, uncompetitive industries, however, this strategy is not protectionism for the sake of it. Instead, it is part of a transitional period in place to establish a strong industry that is capable of competing on equal footing with the rest of the world. Once these infant industries have grown to be competitive, there will be no more need for protectionist measures and developing economies will be able to take advantage of international trade without sacrificing their own industry in the process.

Singapore - Source: the Telegraph

The Four Asian Tigers - Hong Kong, Singapore, Taiwan and South Korea - are considered the first generation of newly industrialised countries. Hong Kong has become an icon of trade liberalisation, seeing vast growth due to free market policies. The other three Tigers, on the other hand, have a far less clear history. Many scholars have made strong arguments suggesting that their trade liberalisation was gradual and at a much later stage of their development. The initial growth began during a developmental stage with the government playing an active role in directing economic growth through tariffs and subsidies, meaning that these Three Asian Tigers demonstrate that a transitional protectionist stage remains a very successful strategy for developing nations in the modern era.

Rather than opening up their markets to threatening foreign exports, the way forward for developing nations is through a carefully planned strategy of managed, protected growth that is gradually relaxed as industries become more capable of competing in global markets. This may be an unpopular strategy among multinational corporations and international organisations, but it is the strategy that truly has the interests of those in extreme poverty at heart.