Trade, Growth, and Poverty

• Author: David Dollar/Aart Kraay
• Position: Research Manager in the Development Research Group of the World Bank's/Senior Economist in the Development Research Group

How has many developing countries' increased participation in international trade affected their economic growth rates, and what implications has this had for the international distribution of income and the incidence of poverty?

The world has become a much smaller place over the past two decades. International trade has grown twice as fast as worldwide income during this period. Spurred by advances in information technology, a growing share of this trade is in services rather than merchandise, especially among rich countries. International direct and portfolio equity investment has also surged tremendously during the same period.

What are the implications of international integration-or globalization-for inequality and poverty? In recent research (Dollar and Kraay, 2001b), we have explored this question by studying the experiences of a group of developing countries that have significantly opened up to international trade during the past two decades. We provide evidence that, contrary to popular beliefs, increased trade has strongly encouraged growth and poverty reduction and has contributed to narrowing the gaps between rich and poor worldwide.

[ SEE THE GRAPHIC AT THE ATTACHED RTF ]

We illustrate our main points by focusing on the experiences of a small group of developing countries that have seen large increases in trade over the past twenty years. We refer to these countries (see table) as the "post-1980 globalizers." We first exclude the member countries of the Organization for Economic Cooperation and Development (OECD), as well as the East Asian tigers (Hong Kong SAR, the Republic of Korea, Singapore, and Taiwan Province of China), and Chile, whose experiences with trade liberalization in the 1960s and 1970s are well known. We then ranked the rest of the developing world according to their increases in trade as shares of their GDPs over the past twenty years and selected the top one-third as our globalizers. As a group, these countries saw their trade as a share of GDP double to 33 percent, while trade relative to GDP actually declined among the nonglobalizers. The 24 globalizers contain many well-known trade liberalizers, including Argentina, China, Hungary, India, Malaysia, Mexico, the Philippines, and Thailand. Because China, India, and several other large countries are included, more than half of the developing world's people live in this group. But it also includes some anomalies, such as Haiti and Rwanda. These serve to remind us that changes in trade reflect many factors other than trade policy, as we discuss below. We have used the experiences of these globalizers to make four points.

Growth rates have increased

Per capita GDP growth in the post-1980 globalizers accelerated from 1.4 percent a year in the 1960s and 2.9 percent a year in the 1970s to 3.5 percent in the 1980s and 5.0 percent in the 1990s (Chart 1). This acceleration in growth is even more remarkable given that the rich countries saw steady declines in growth from a high of 4.7 percent in the 1960s to 2.2 percent in the 1990s. Also, the nonglobalizing developing countries did...