Lifting All Boats: Why Openness Helps Curb Poverty

• Author: Andrew Berg and Anne Krueger
• Position: First Deputy Managing Director of the IMF/Division Chief of the Financial Studies Division of the IMF's Research Department

Although there is a near-consensus among economists that trade liberalization strongly promotes growth and poverty reduction, concern about its ill effects has not abated. Hence, it is important to assess the quality of the evidence regarding the links between openness, growth, and poverty reduction. This article provides a critical survey of recent studies.

One of the most common criticisms of trade liberalization and globalization, particularly in developed countries, is that it drives down wages and exports jobs to low-wage economies. Critics see the creation of a global "sweatshop economy" in which corporations pit workers around the world against each other in a race to the bottom to see who will accept the lowest wages and benefits. In contrast, developing countries worry about a brain drain to the North of their most skilled workers and fear that greater openness and economic liberalization will bankrupt domestic industries overwhelmed by foreign competition. What is the basis for believing that reducing trade barriers and opening economies up to competition can increase wealth and help reduce poverty?

We focus on the links between trade and growth, for the simple reason that changes in average per capita income are the main determinant of changes in poverty. Over the past 20 years, the share of extremely poor people in the world (those living on less than two 1985 dollars a day) has fallen sharply, from 38 percent in 1978 to 19 percent in 1998. This decline is almost entirely attributable to growth itself, not to changes in income distribution. The irrelevance of changes in income distribution in explaining changes in overall poverty over the past 20 years is not a coincidence. In general, income distributions move around much less over time than does average per capita income. Thus, most variation in the income of the poor is a result of changes in average income, not changes in income distribution.

But how important is the contribution of trade openness to higher incomes, and how does trade openness affect poverty and inequality? We attempt in this article to cut through the mass of material on this topic by focusing on a number of key issues and by keeping in mind a few important methodological concerns. One such concern is the measurement of openness. The openness of an economy is the degree to which foreigners and nationals can transact without government-imposed costs (including delays and uncertainty) that are not levied on a transaction between two domestic citizens. Tariffs and other charges, nontariff barriers, domestic content requirements, and health and safety requirements (or inspection delays) above and beyond those imposed on domestic products raise the cost of buying from abroad.

As should be clear from this definition, it is extremely difficult to compare degrees of openness over time or, especially, across countries. In our survey of empirical work, we necessarily take an eclectic approach. We consider case studies and microeconomic studies, which often allow for the most detailed and careful measurement of trade barriers. We also consider many analyses that use policy-based measures, particularly the work of Jeffrey Sachs and Andrew Warner. Finally, we look at studies...