*EPF306 09/05/01
Byliner: Larson on Freeing Trade to Combat Poverty
(Trade leads to economic growth and democracy) (1620)

(Following is an article that appears in the September 2001 issue of the State Department's electronic journal Economic Perspectives titled "Addressing Global Poverty." The entire journal can be viewed at: http://usinfo.state.gov/journals/journals.htm)

FREEING TRADE TO COMBAT POVERTY
By Alan Larson
Under Secretary for Economic, Business and Agricultural Affairs, U.S. Department of State

Countries that aggressively enter the global open market system prosper. Their political systems and societies become more open, offering new opportunities for their current citizens and for future generations. As President George W. Bush has said: "Free trade is the only proven path out of poverty for developing nations. When nations are shut off from the world, their people pay a steep price.... Those who condemn free trade condemn the poor to permanent poverty."

Liberalizing trade has a profound effect on growth and poverty because free trade opens economies to competition and societies to comparison. Free trade creates opportunities by allowing resources to flow where they are put to productive uses, raising standards of living. Free trade helps build open investment climates, discourages corruption, and welcomes new ideas, allowing democracy to take root and grow. Free trade lowers the cost of basic necessities like food and clothing, leading to a better quality of life -- especially for the poor.

FREE TRADE'S ROLE IN ECONOMIC GROWTH AND POVERTY REDUCTION

Economic growth is the primary means by which countries reduce poverty. Several very recent empirical studies by World Bank economists have concluded that developing countries that have lowered trade barriers and increased trade over the past 20 years have also experienced stronger economic growth.

These studies suggest that openness to trade leads to declining absolute poverty rates and does not increase income inequality. For example, developing countries that reduced barriers to trade during the 1980s and 1990s grew an average of 3.5 percent and 5 percent, respectively, on a per capita basis. Income inequality in those countries did not increase; rather, the incomes of the poor tended to correlate very highly with overall growth in gross domestic product.

Free trade's contributions to growth go beyond a country's balance sheet. Open trade increases the competitiveness of domestic economies by exposing domestic firms to sharper competition. Perhaps most importantly, vigorous participation in the world trading system, including following global trading rules, heightens the transparency and predictability of economic transactions. These effects often reinforce the attractiveness of developing country economic environments as destinations for direct investment.

Foreign direct investment (FDI) contributes to growth by increasing the size and soundness of a country's economic assets. FDI, in contrast to portfolio flows and bank lending, tends to be less attached to economic downturns and financial spillover and so is a more predictable and durable part of a country's asset base. FDI flows to developing countries in 1999 reached $208,000 million, dwarfing total official development assistance flows at $50,000 million.

LEAVING NO COUNTRIES BEHIND

America's goal, in the words of President Bush, is to "include all the world's poor in an expanding circle of development." One of the most significant steps we can take to reach this goal is to put our full support behind the launch of a new multilateral trade round at the World Trade Organization (WTO) meeting in Doha, Qatar, this November. Developing countries have a large stake in this discussion: the developing world as a whole now ships some 45 percent of global exports.

Multilateral trade liberalization is more important than ever for developing countries due to the burgeoning trade relationships among them, which now account for 40 percent of total developing country trade. However, these trade flows often face the highest trade barriers. Despite important reforms, developing country trade protection remains high and may have increased in the 1990s. Average developed country tariffs on manufactured goods, including textiles and clothing, now stand at 8 percent, while average developing country tariffs on the same items are 21 percent. A multilateral trade round would give developing countries an opportunity to lower their trade barriers at the same time as their neighbors, allowing them to participate more fully in the global economy.

Despite the benefits of a new round, some developing countries have real concerns. Institutional weakness, scarce resources, and a general lack of experience in trade policy can make it difficult for poor countries to implement the wide-ranging and sometimes complex legal and policy obligations undertaken by WTO members.

The United States is well aware of these roadblocks and is prepared to work in partnership to overcome obstacles to the integration of developing countries into the trading system.

MARKET ACCESS

One of the most fundamental ways developed countries can assist is to widen access to our markets. Last year, Quad members -- the United States, the European Union, Japan, and Canada -- agreed to lower trade barriers to the least developed countries (LDCs). In May 2000, the United States initiated the African Growth and Opportunity Act and enhanced our Caribbean Basin Initiative. These two preference programs, combined with improvements in our Generalized System of Preferences and market opening measures under the Uruguay Round of trade talks, have eliminated most tariffs and quotas on goods from least developed economies. As a result, U.S. imports from LDCs have grown by 50 percent in the last four years.

However, preference programs for least developed countries are not a panacea, and they will not take a huge bite out of global poverty since more than 80 percent of the world's poor live in larger developing countries such as India, China, Pakistan, and Egypt that do not benefit from these programs. To lift all of the poor out of poverty, the capacity of these countries to trade must be strengthened.

BUILDING TRADE CAPACITY

Many developing countries need assistance in building adequate and effective trade capacity. Developed countries and multilateral institutions must do more to build trade capacity within and among countries while integrating trade into comprehensive and coherent economic development strategies.

One way to ensure that adequate attention is given to trade within economic development policy is to mainstream trade into national development plans and poverty reduction strategies. At the 2001 International Monetary Fund/World Bank spring meetings, the Bank committed to mainstream trade capacity-building into its country assistance strategies and to support borrowers' efforts to incorporate trade capacity-building in Poverty Reduction Strategy Papers (PRSPs). The PRSPs are economic development strategies drawn up by the debt relief recipients and reviewed by the Bank.

Since 1996, the WTO has cooperated with other multilateral institutions to assist the least developed countries in building the capacity to trade. The Integrated Framework, supported by the WTO Secretariat, coordinates efforts of six core international agencies that deal with trade and/or technical assistance to ensure that programs are complementary. The United States has given $200,000 to the Integrated Framework Trust Fund.

In 1995, the WTO created a Global Trust Fund to assist the least developed countries to participate actively in the WTO and take advantage of new opportunities in international trade offered by WTO agreements. In 2000, the United States gave $1 million to the trust fund. Further, the United States recently provided $650,000 to the WTO to assist many sub-Saharan countries address WTO issues and $640,000 to the World Bank for a project on research and institution-building for sanitary and phytosanitary standards and product standards development in Africa.

The United States also uses bilateral assistance programs to strengthen developing country capacity to trade. In the last two years, the U.S. Agency for International Development (USAID) has contributed $600 million to programs designed to build the capacity to trade. These programs address a wide range of needs -- from programs to strengthen governance and the rule of law, to workshops in trade negotiation and regulatory policy. Truly integrating trade liberalization into country strategies increases the chance that new areas for growth opened by liberalization will be identified and used fully.

INCREASING HUMAN CAPACITY

Both developed and developing countries need to devote more attention and resources to nurturing human capacity, especially through basic education. Education boosts individuals' abilities to make informed choices, giving them more tools to combat poverty and the flexibility to adapt when change is warranted. The more flexible an economy and its workers are, the more a liberalizing country can take advantage of growth opportunities brought by freeing trade. President Bush has asked the Congress to increase U.S. funding for international basic education programs by 20 percent. He has also called upon the multilateral development banks to expand education funding. In addition, education will be a primary theme of the 2002 G-8 Summit in Alberta, Canada.

Poverty reduction requires a comprehensive partnership between developing and developed countries. The journey might be longer for some countries than for others, but there is more hope each day. And trade is one of the brightest beacons leading the way on the path out of poverty to truly sustainable development. We have an unprecedented opportunity to change the lives of half of the world's people who live on less than $2 a day.

President Bush has reminded us that, "What some call globalization is, in fact, the triumph of human liberty stretching across national borders. And it holds the promise of delivering billions of the world's citizens from disease and hunger and want. This is a great and noble prospect, that freedom can work not just in the new world or the old world, but in all the world."

Poverty, at root, is the absence of human freedom. Development, in contrast, is the fruit of human freedom. Free trade can be a powerful means to empower the poor and foster development and prosperity.

(The Washington File is a product of the Office of International Information Programs, U.S. Department of State. Website: http://usinfo.state.gov)
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