Does international trade liberalization reduce poverty? The question is an important and relevant one. It was high on the agenda in the late-1990s—think of the Seattle riots against the World Trade Organization (WTO) in 1999—and after a decade or so of quiescence it is starting to worry policymakers again. Fortunately, it permits a fairly definite answer, one that surprises many people. While there clearly are exceptions, the answer is “in the long run and on average, almost always, yes, trade liberalization reduces poverty.” The terms “long run” and “average” are not weasel words, but they do mask a lot of heterogeneity. The variance encompassed by those terms is the subject of this article.
Some History
Figure 1 gives a little factual background. It shows the evolution of five key variables since 1981, each expressed as a fraction of its value in 1981. On top, and growing, are world gross domestic product (GDP), GDP per head of population and openness, which is the sum of exports plus imports as a percentage of GDP. The growth of global GDP has been persistent and, between the mid-1990s and 2008, has continued at rates that have been quite unprecedented. The slump since 2008 has taken a little of the gloss off that growth, but in truth rather little. That is, in terms of the amount of “stuff” that we produce, the world has never had it so good and never had it improving so fast. Likewise, GDP per head—essentially income per head—has grown spectacularly: a 50 percent increase in living standards over 30 years!