Executive Summary

The reason, of there being little evidence of direct linkage between trade liberalisation and poverty, is that poverty by itself is a multidimensional and complex socio-economic phenomenon. Theoretically, liberalisation is expected to lead to efficient allocation of resources and catalyse  a chain reaction that would ultimately increase welfare of the society. The issue is how do we empower people to actually get an entry into this virtuous circle. Should prescriptions to this exercise be of a macro nature or sector specific? 

Even if the total welfare of society is expected to increase as a result of liberalisation, there are bound to be losers. How can we effectively equip and empower the losers so that they don’t get the short end of the stick of liberalisation? As the basic philosophy of liberalisation rules out government interference in micro issues, one needs to understand as to who would provide a much-required cushion to beneficiaries to benefit more and for losers to grapple with the situation? Would the institutional approach provide a solution? What would be the role of civil society and governments in this emerging scenario? 

1. BACKGROUND

1.1.1 In reviewing the evidence between trade liberalisation and poverty, one finds little evidence of any direct linkage between the two phenomenon. Interestingly, the evidence throwing light on the indirect linkages between trade liberalisation and poverty is inconclusive about the positive impact of trade liberalisation on poverty. 

1.1.2 The reason, of there being little evidence of direct linkage between trade liberalisation and poverty, is that poverty by itself is a multidimensional and complex socio-economic phenomenon. 

1.1.3 More so trade liberalisation, or the costs and benefits of the same, affect people directly concerned with a particular activity. For example, employment would be affected positively or negatively in a particular sector which would either gain or lose when the conditions governing that sector change due to external factors or internal factors. To that extent it may alleviate or worsen conditions of deprivation in the society which revolves around the particular community engaged in the sector and its upstream, downstream and tertiary activities. Summing such micro impacts to give a macro picture is an arduous task not only for theoretical reasons but also because data at the household or enterprise level is not available. 

1.1.4 With this as a backdrop, this paper examines the linkage between trade liberalisation and poverty as it relates to a country’s policies in the context of its international trade and the relevant domestic policy environment. A short review of the findings of mainstream analytical and empirical literature on impact of trade liberalisation and poverty precedes this exercise.  The analysis put forward in the paper assumes that conditions necessary for trade liberalisation are both exogenous and endogenous. 

1.1.5 The analysis is based on field surveys done by Consumer Unity & Trust Society (CUTS) in the context of a research project in India: “Conditions necessary for trade and investment liberalisation to reduce poverty”. This project was commissioned by the UK’s Department for International Development, for preparing its input into the World Development Report, 2000-2001. As a part of this project CUTS with its network partners from Pakistan and Bangladesh did a detailed literature survey on the same subject in their own countries. 

1.1.6 The main thrust of this paper is on India, and therefore the paper restricts itself to preliminary findings of the field survey in the Indian context. However in the context of exogenous factors (i.e. analysing how trade liberalisation is impacting poverty given the existence of the World Trade Organisation), the analysis tries to highlight the facts thrown up by the literature surveys done in context of all the three countries, viz. India, Pakistan and Bangladesh. 
 

II. ANALYTICAL AND EMPIRICAL EVIDENCE

2.2 At the outset one has to accept that there are very few studies which have been done to analyse the direct impact of trade liberalisation on poverty. As noted above, the multidimensional nature of poverty is a major obstacle for researchers. Given this handicap, literature surveys on this subject, done by the research team, uses those studies that have analysed the impact of trade liberalisation on wages and employment. 

2.3 If one looks at findings on the impact of trade liberalisation on wages and income distribution and its differential effects on skilled and unskilled labour in different societies one finds stark variations too. Studies done in the East Asian context for the decades of 1960s and 1970s show diminishing wage dispersion between skilled and unskilled labour. On the other hand, studies done in Latin America on the impact of trade liberalisation on relative wages, during the decades of 1980s, show the opposite results: wage differentials between skilled and unskilled labour have widened over time. This phenomenon can possibly be due to rigidities in the social structures in Latin America. 

2.4 Even though trade liberalisation is seen to be yielding benefits to unskilled labour in some cases, an optimal situation is one where unskilled labour is being equipped with essential skills to absorb technological changes. The computer software industry in India is a good example in this regard. If such type of skills upgradation did not take place then the distributional aspects of trade liberalisation would not accrue to those placed lower in the social ladder. 

2.5 Trade liberalisation can also have negative impact on creation of employment opportunities. For certain sectors, trade liberalisation is often seen as leading to import of cheaper labour substituting technology. In another situation, in a survey done by us, a domestic producer dependent on intermediate inputs from local small-scale industry has had to close down his factory. 

2.6 Generalisation on the basis of such anecdotal findings can be very risky. The results cannot be extrapolated across sectors also. On the basis of the analytical and empirical works surveyed we can broadly conclude that: 

• Most of the work done to explore the relationship between trade liberalisation and poverty is of a macro nature.
• There is no consensual argument emerging that supports that trade liberalisation on its own leads to poverty reduction.
• The overall impact of trade liberalisation depends very much on a) the level of development and, b) the existing set of complementary policies when the country embarks on the economic liberalisation agenda.
• The success stories in East and South East Asia (before the current financial crises) show clearly that trade liberalisation works successfully iff complemented by adequate social safety nets, prior investments in social sectors such as health and education, and land reforms backed by efficient institutions.
• The same policies that reduced inequality and poverty in the East Asian countries stimulated growth. The experience here also shows that it is possible to achieve growth and curb inequality but under regulated and gradual trade and financial liberalisation.
• It is almost inevitable that when adopting reforms, some will lose while some will gain, and the poor are often the worst affected because of their low absorption capacity.

III. FIELD RESEARCH

3.1.1 We undertook a detailed study of the scenario looking for hard evidence of trade liberalisation leading to reduction or increase in poverty. A three pronged approach was adopted: core research, field study and literature survey. 

3.1.2 Given the relatively short time since the reforms were launched in 1991 and its graduality, complemented by delays in decision making, made it difficult to isolate the effects of liberalisation on industrial structure and performance from other forces acting on these variables. However, the research threw up some interesting facts. These are: 

• While entry for both foreign and domestic investor was made much easier, exit for the typical producer in the organised sector remained as difficult as before the reforms. One of the important reasons for this is that while investment policies were liberalised, the labour policies were not.
• Overall employment in the organised sector grew more rapidly in the three years after 1991 than in the three years before 1991. With respect to labour utilisation, there was an increase in the rate of deceleration after 1991, which could be interpreted as increase in labour productivity. However, there was no sign of increase in earnings in the organised sector, despite increase in total employment. The wages appear to have remained static after adjusting for inflation.

• The levels of industrial employment in the initial (1987-88) and terminal years (1994-95) have a mildly unfavourable impact on poverty reduction. This is probably because the states, where these variables were high, were relatively better off to begin with. In the overall the increase in industrial employment over the period showed a mildly favourable impact on poverty reduction.
• Average social sector expenditure showed a relatively strong and favourable impact on both urban and rural poverty. This may imply that reliable and consistent social safety net mechanisms contribute to poverty reduction.

3.1.5 The following are a few interesting findings for the three sectors that have gained: 

• In the three gaining sectors, labour employment has taken place through informal institutions such as word of mouth, peers already working in the sector and recommendations. This raises an interesting question whether substitution by more formal structures would generate the necessary positive scale and income effect.
• In the RMG sector, there does exist a reserve army of labour. But in spite of having this army the problem of getting skilled labour when required remains to be solved.  Interestingly in the RMG sector, there is no necessary link between higher wages and higher productivity.
• In the context of non-tariff barriers (NTBs) the level of awareness exhibited across all the three sectors was high. It was seen in the gems & jewellery sector that they had addressed the question of child labour quite early and therefore did not face any problems. However their problem has been evolving industry guidelines that would benchmark educational standards in their recruitment policy.
• In the agro-based food-processing sector, NTBs were seen as both a hindrance as well as an instrument that raised quality consciousness. Firstly to cope with it has been a problem for the exporters. Once they are able to cope with it, there has been a positive impact on exports, and in terms of working with a staff that is better trained. More importantly this has positively impacted the quality on goods sold in the local market. However exporters are apprehensive about the kind of new NTBs that would arise in future and more so about their adverse impact on production and employment. It was also said that the richer importing countries should provide technical assistance to enable them to cope with the NTBs.
• In the ready made garments (RMG) sector, a section of manufacturer-exporters expressed doubts as to whether increasing mechanisation could pull them out of the current recessionary phase. They were not sure that they could get the scale effect to increase employment in the long run. Strong feelings were expressed over anti-dumping actions being initiated by some of the importing countries. 
• In all the three winning sectors, the respondents felt that provision of better micro infrastructure with training facilities has the potential for improving labour productivity and that was considered as an important factor that could improve their output and wages.

• The employers in both these sectors are not clear as to the policies they would employ that would protect their labour from the ongoing decline in terms of profits and turnover. 

3.2.1 Other than the core research and a field study, a literature survey was also done, which reflected the following in the Indian context: 

• A large number of exporters complained about the high incidence of transaction costs that are non-financial in nature, and are driven solely by certain procedural complexities and mismanagement. 
• It is not always necessary that changes in the conventional trade policies (such as market-determined exchange rates) will be sufficient to induce growth in exports. Some other areas (such as non-financial costs) when rectified can have a positive effect on exports and its knock-on effects on wages and living standards. 
• Indian agriculture exports hold a very promising future with increasing trade liberalisation globally. 

• Pursue market-based growth strategies that generate rapid growth in demand for labour, productivity and skills of the work force. 
• Take advantage of the new international opportunities by opening up trade and attracting capital, but should first put systems in place that would create shock absorbers against the potential adverse effects brought about by the systemic changes. 
• Develop a framework for labour policy that complements informal and rural labour markets, supports workers’ rights in the formal sector, provides safeguards for the vulnerable and avoids biases in favour of the relatively well-off. 
• Try and design transition to a more market-based and internationally integrated pattern of development without excessive costs to labour. 

IV. EXOGENOUS FACTOR – THE WTO 

4.2 To do any study on trade liberalisation, and its impact on development, without looking at the role of the WTO would not make much sense. India has been a founding member of the GATT and has participated very actively in a leading role during its entire history. This role was accelerated during the UR, when the new and expanded form of GATT was being negotiated. Interestingly there was a huge public debate in India during the UR, which continues till date. Two of the major issues around this debate relates to patents on life forms, seeds and medicines, and on removal of quantitative restrictions on consumer goods imports. 

4.3 In establishing the WTO in April 1994, its 123 odd members adopted the UR Agreements with a guiding principle in the Preamble of the Agreement establishing the WTO, of raising the standards of living everywhere through increased growth and employment etc. This resolve speaks of increased trade as the route to economic development, hence there is a clear desire of all countries, in particular developing countries, to liberalise trade so as to accelerate economic development, create jobs and raise the living standards of its people. This should then lead to increased incomes, which could be shared with all sections of the population. In real life it is not so simple because even if the country’s gross income and its per capita income rises, it may not be uniformly spread over all sections of the society. In fact some studies have shown in the USA that over the last few years the rich have grown much more while the middle class has hardly grown, or if at all at a far lesser rate. This shows how income redistribution can be quite skewed even in a highly advanced economy like that of the USA. 

4.4 This phenomenon is also reflected worldwide where the growth in trade volumes or even percentages of developing countries has been much lesser than that of the developed countries. The least developed countries’ share of world trade has in fact shrunk from 2.0% to 0.4% over the past 30+ years. 

4.5 Therefore, as we come closer to the seventh anniversary of the WTO it is important to take stock of its progress vis-a-vis development and how the resultant terms of trade have behaved for different countries. In the first three years of WTO’s existence the international trade in both goods and services had grown very rapidly, much more than in the past. This showed the positive side of the new GATT though the gains were not uniform. In 1998, the growth rate declined substantially, from nearly 8% to 4%. The main reason for the decline is the financial crises in some countries of Asia and South America. The interdependence of countries in a globalising economy shows that there is a spillover effect of downturn in one economy over the rest of the world. 

4.6 That said, let us turn to the terms of trade and how developing countries have fared since the WTO was established in terms of their own development agenda. Some of the underlying principles of the WTO underscored the need for longer transition periods, other concessions, technical assistance and special and differential treatment for developing countries considering their levels of socio-economic development. In nearly the same spirit even developed countries were allowed concessions and longer transition periods in the Agreements on Textiles & Clothing (ATC) and on Agriculture (AOA). 

4.7 A major barrier for developing countries to industrialise is the presence of both tariff escalation and tariff peaking. Tariff escalation occurs when the tariff applied on a product ‘chain’ rises as the level of processing increases. It is a tax on development. A recent study of the Food and Agriculture Organisation has argued that tariff escalation may present a problem for diversifying exports in developing countries. The study reveals that though food processing is a major export industry in developing countries, their exports are mainly concentrated in the first stage of processing. Second stage processed food exports constitute only 5% of the agricultural exports of LDCs, 16.6% of those of developing countries and 32.5% of the developed economies. 

4.8 In order to understand the issues relating to tariff peaking it will be useful to look at the UR negotiations on the agreement on agriculture. For example developed countries agreed to reduce their tariffs on imports of agricultural goods by an average of 36%. Hence any country can allocate that average to individual tariff lines they chose within a group of agricultural goods imports. The only condition is that the country should reduce the tariff by a minimum of 15%. Thus countries can use this loophole for averaging in such a way that they will reduce little in sensitive items which have already been protected by steep tariff rates. 

4.9 In a recent comment: Africa’s Plight (1 June 2000), the Financial Times says: “Agricultural subsidies in the developed industrial states of the OECD total $300bn a year – equal to Africa’s entire annual income. No single measure to assist Africa’s battle to recover would provide a greater incentive, and have a greater impact, than reducing this support and opening up this market to African products. Lower tariffs on processed agricultural products would be an important benefit, making it easier for African countries to add value to their natural products, and improving prospects for agro-industry”. 

4.10 Our field study in India showed a high level of awareness of non-tariff barriers in the exporting community and to some extent on how these could be overcome. One suggestion was that to enable them to cope with higher standards of food safety they need technical assistance and training. At another level fears were also expressed that such problems would affect their employment potential adversely. The impact was also seen on the downstream employment in the processed food sector. On the other hand the availability of quality raw materials in both the readymade garments and processed food sector was seen a major handicap in meeting with higher standards of finished goods as demanded by the importing countries. 

4.11 Most of the poor countries lack the institutional capacity to comply with the technical conditions imposed by importing countries. Even if they are provided with adequate technical assistance their resources may not allow them to sustain efforts in this direction. Given this, reducing their revenue from exports (which are mainly labour intensive) by erecting new barriers reduces their capacity to be competitive in the long run and also affects the employment scenario. 

4.12 We hope that future trade negotiations, as and when they take place, will take on board such experiences and find solutions so that developing countries can garner benefits for their socio-economic development. This would then atleast make available the wherewithal for them to use in their poverty eradication and environmental protection programmes. 
 

V. DOMESTIC DYNAMICS 

5.2 In analysing the dynamics of poverty and reforms, there can be several approaches. The first is to look at the macro figures, which in the case of developing countries, can often be outdated or even poor. The second is to look at the disaggregated data at the sub-national level and juxtapose them with national level data to test their integrity. Then to draw inferences from the same. The third is to check out the results through well-designed and well-implemented field surveys at the community level or the household level. All this would require resources and time, and yet be based upon some built-in biases and errors. 

5.3 On the other hand getting into the conceptual analysis of poverty and liberalisation one enters into another minefield. The basic definition and measurement of poverty can have several approaches, as briefly mentioned above. It may be one thing to be not poor but it is another thing to have a reasonable standard of living. Then that would also be relative to the society the person is living in. This would vary across countries and within a country as well. 

5.4 However, on the basis of the analysis spelt out through the literature survey we find clear indications that: 

• Trade liberalisation on its own has not been observed to be reducing poverty; and 
• Effective interventions are required to both a) protect the poor from the negative impacts arising out of trade liberalisation, and b) enable them to take advantage of the opportunities arising from trade liberalisation. 

5.5.1 Let us assume that a set of policy measures designed to cover the main two policy recommendations has evolved. But generally this is mortgaged to several factors, which would not allow an ideal situation to prevail for the set of recommendations to succeed without any hiccups. 

5.5.2 It needs to be reiterated that in most developing and poor countries governments are often unstable and are unable to implement pro-people policies due to corruption, nepotism, inertia etc. More so the intensity of the government intervention would depend upon the ideology of the party or the coalition of parties in power. Furthermore, government intervention is often due to the power of lobbying by interest groups, which may not necessarily be to the advantage of the country or the society at large. Nevertheless a sincere government or the concerned minister can set the ball rolling by initiating wider debates on the potential impact of the reforms on the poor. Simultaneously, it can communicate its views to the larger public to gain their support. In India, we have seen such kind of exercises though done in an ad hoc manner when facing criticisms rather than in a planned and effective manner. 

5.5.3 As many developing countries have had to accept the initial dose of economic reforms packaged under the structural adjustment programme the people have suffered. At the same time their governments had very little time to communicate the pros and cons of the reforms and its short and long term impacts. This lack of communication has not been effectively managed with other measures and therefore governments are facing increasing opposition as they go ahead with implementing deeper reforms under their international commitments. 

5.5.4 Under these circumstances, the people have failed to: 

• Understand the process of trade liberalisation and the way it would impact them; 
• Acquire the necessary skills that would help them cope with the adverse effects of liberalisation; 
• Comprehend the direction of liberalisation, and 
• take adequate steps, which would provide protection to them and their social integrity. 

• It is a more micro approach and solutions are provided from within. This approach would help the members to find solutions at the level where they are able to influence them. 
• Over and above this, this approach would reach the poor who are also unemployed. 
• This approach has the capacity to provide, in terms of communicating, the necessary changes its members need to cope up with the impact of liberalisation. 
• This approach has the ability to initiate self-regulation. 

5.5.7 One disadvantage in this arrangement that can be immediately visualised is that these small institutions run the risk of becoming politicised and lose the sight of goals for which they are meant. 

5.5.8 With this as a backdrop, it is interesting to note that similar institutions as envisaged in this paper are in place. For instance, in Pakistan a skill development council exists, which imparts skills to workers in the readymade garments sector. This council has also gained popularity amongst the unit owners as it provides them with adequate supply of labour that meets their demands in terms of quality as well as quantity. More importantly it has been observed that employers have fewer complaints vis-à-vis shortage of skilled labour when they have to execute orders. These are not just skills-imparting institutions but also provide a platform for efficient transition of labour to cope with demands of globalisation and liberalisation. 
5.5.9 The question is can we replicate initiatives like these in the context of other developing countries and other sectors? If yes, then what are the changes required and what should be the other institutions in place to supplement such initiatives. More so, one needs to conceptualise and debate as to what are other forms of institutions that would be required for the sustainability of these successful institutions? This is where civil society organisations can contribute in more ways than one. 

5.5.10 But in order to contribute constructively to this debate/initiatives, civil society will have to build capacities within, especially in the area of research. Capacity building could be achieved by having regular exchange programmes between concerned government agencies and civil society organisations working on particular initiatives. Government organisations working in these areas also need to understand the comparative advantages enjoyed by civil society organisations in the area of networking and advocacy, and more crucially the inherent comparative efficiency. 
 

VI. CONCLUSION 

• There is no consensus argument on the hypothesis that trade liberalisation on its own can lead to poverty reduction. 
• With the formation of the WTO, trade ‘liberalisation’ is going through a phase where tariff levels on an average are going down, but are being replaced by new forms of NTBs or the language of the text is being interpreted without giving due attention to the inbuilt development dimensions. 
• This implies that manufacturers from developing and poor countries face a greater uncertainty vis-a-vis market access and at the same time have to invest in production to enable compliance with standards set by importing countries. 
• In such situations interventions are required to increase the confidence of the domestic industry in the trade liberalisation process and enable them to cope with the liberalising climate. 
• The institutional approach as suggested in the presentation is an effort to provide an effective solution that is not mortgaged to the vagaries of politics and misgovernance. 

6.3 Before we conclude one needs to acknowledge that further work needs to be done to study the micro impacts of trade liberalisation to understand its impact on poverty. Both civil society and government need to understand the importance of complementing each others work on these initiatives. 

Brief Description of the CUTS Centre for International Trade, Economics & Environment

The CUTS-CITEE works through the tools of  Policy Research, Advocacy, Training, Outreach and Networking. More about us on our website: www.cuts-india.org/citee. 

CUTS Centre for International Trade, Economics and Environment 
D-217, Bhaskar Marg, Bani Park, 
Jaipur, 302016, India 
Ph.: 91-141-20 7482-85 
Fax: 91-141-20 7486/20 2 968 
E-mail: cutsjpr@jp1.dot.net.in
Website: www.cuts-india.org
 

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