How Free Trade Reduces Global Poverty: Facts You Need to Know

A sharp increase in the number of developing countries participating in trade corresponds with an equally dramatic decline in extreme global poverty. Developing countries now comprise 48 percent of world trade. This statistic reflects a nearly 1.5 percent increase since 2000. The number of individuals subsisting in extreme poverty has halved since 1990 to fewer than one billion people. Free trade reduces global poverty by accelerating the quantity and quality of employment opportunities in developing countries by stimulating economic growth. Moreover, it encourages increases in productivity.

Indonesia’s Minister of Finance, Sri Mulyani Indrawati indicates Indonesia will apply to join the Trans-Pacific Partnership (TPP) in the future. According to Indrawati, global trade tariffs will not hurt Indonesia now but could in future. “The direction is towards the (TPP), but we have to address a lot of structural issues. That is why the Indonesian government is paying attention to connectivity, human capital and reform to the ease of doing business,” Indrawati says.

 

So, if free trade reduces global poverty, why do governments protect specific industries at the expense of the rest of the economy? Some enterprises have built up enormous political influence over time, including by making large donations to political parties and campaigns. Specific industries wield wildly successful Public Relations machines that convince the public to support measures to protect them, personally, and to oppose projects that might expose them to foreign competition.

 

After the United States abandoned plans to join the TPP trade agreement, 11 other countries decided to revive it and signed a revised version in March. Now participating are Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam.

 

Indrawati says Indonesia’s trade focus in future will not focus solely on TPP nations. “I think we are going to make sure that Indonesia focuses on non-traditional markets. We are going to look at central Asia as well as India and Africa.” The Finance Minister fears the anti-trade movement sweeping several areas of the world will hinder global efforts to propel millions out of poverty.

 

Data from Indonesia’s Statistics Agency (BPS) indicates Indonesia’s absolute poverty increased from 27.76 million in September 2016 to 27.77 million people in March 2017. In contrast, Indonesia’s relative poverty figure fell from 10.70 percent of the population in September 2016 to 10.64 percent in March 2017. Rising absolute poverty accompanied by declining relative poverty results from Indonesia’s growing population. The country’s population presently numbers about 261 million people.

 

The Indonesian economy expanded at a solid pace in the third quarter of 2017. Commodity tailwinds and increased domestic and external demand propelled this growth according to the World Bank’s December 2017 Indonesia Economic Quarterly. Indonesia’s gross domestic product growth increased from 5.0 percent between the second quarter of 2017 to 5.1 percent in the third quarter. Investment growth jumped to its highest level in more than four years and foreign direct investment recorded the most significant net inflow in more than seven years. Export and import volumes had not experienced double-digit gains since 2012.

 

The World Bank noted in a previous report that, “sustained long-term poverty reduction depends on stimulating economic growth, which in turn depends on trade policy reform.” They concluded that, consistently, free trade reduces global poverty.

 

Free trade and reducing trade costs are imperative to producing gains for the poor. A range of coordinated policies helps maximize the benefits of openness for the poor, particularly programs relating to human and physical resources, access to finance, governance and organizations or macroeconomic security.  Innovative policy frameworks that improve consultation with the poor, and target their needs more carefully could help reduce poverty. To achieve this will require dedicated cooperation across sectors, a cooperative effort across government departments and offices and encourage a broader range of stakeholders to work together effectively.

 

According to Tim Worstall of “Forbes” magazine, “if you’re pro-poor, then you really should be vehemently pro-free trade and globalization. Those are the two things that have led to the most significant reduction in poverty in our history. Therefore, they have been the two most effective instruments for reducing poverty in history.”

 

Analyzing statistics from 92 countries over a 40-year period, economists David Dollar and Aart Kraay found that “growth-enhancing policies and institutions, including openness to international trade, low inflation, moderate size of government, financial development, and strong property rights and the rule of law.” The income of the poor rises to the same degree that it increases the revenue of the other economic groups. Pro-growth policies enable conditions for low-income families to increase both production and income.

 

According to the Brooking Institution, worldwide economic growth is the result of the rise of globalization, the expansion of capitalism and the improving quality of economic governance. Collectively these factors have permitted the developing world to begin uniting on the subject of advanced economy incomes after centuries of division. The poor countries that demonstrate the most significant success today are those who engage with the global economy, allowing market prices to balance supply and demand and to allocate scarce resources, and pursuing sensible and strategic economic policies to spur investment, trade and job creation. This effective combination allows the present to differ from the trend of flat growth and intractable poverty of the past.