On the Margins
The Poor in LDCs in a Global Trade Era
By Andrea Gibbons, for the Chronicle
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The “age of globalization” has brought unprecedented levels of communication, exchanged ideas and shared technologies. However, in many arenas, globalization has meant controversy and fragmentation. The debate over free trade has escalated tremendously in the last fifty years, as physical boundaries inhibiting international trade have fallen. The United Nations Conference on Trade and Development (UNCTAD) recently contributed its findings to the abundant research on this topic in The Least Developed Countries Report 2004—”Linking International Trade with Poverty Reduction”. UNCTAD condemned “money transfers” from rich to poor countries and acclaimed the benefits of open trade. But even as such research might contribute to a loss of millions of dollars in aid to least developed countries (LDCs) (see box on LDCs), it is important to recognize the plight of the poor in these countries as the rest of their economies are swept into the globalization atmosphere.
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| Source: The Least Developed Countries Report 2004 Linking International Trade with Poverty Reduction |
Empirically, the existing international trade system has appeared beneficial to the countries it incorporates. David Dollar and Aart Kraay, economists at the World Bank’s Development Research Group, argue that trade encourages economic growth and investment in countries and the development of productive capacities, eventually leading to increased gross domestic product (GDP). These claims are supported by case studies of most countries, both developed and least developed. In its most recent report, UNCTAD found that over the last ten years, as exports proliferated, GDPs of LDCs have risen almost universally. Merchandise exports alone increased 44.5 per cent between 1998 and 2002, compared to 15.3 per cent in other developing countries (not including China). While their average annual growth rates vary from 1.6 per cent in Malawi to 36.6 per cent in Equatorial Guinea, very few countries have seen a negative growth rate during this period. Overall, trade appears to be the answer for struggling economies.
Unfortunately, trade in LDCs has not followed the pattern outlined by Adam Smith and his contemporaries. In a perfect Ricardian world, every farmer in the United States would turn in his hoe for a computer, and produce would be collected daily from small Rwandan farms and sent to developed countries in exchange for their technology and manufactures. However, this is not the case in most LDCs; instead, many have used export-promoting tools, such as export processing zones (EPZs), to encourage trade (see box below). These policies have increased exports greatly but failed to include all producers of the goods in which they have a comparative advantage: agriculture.
Jay Mazur, Chair of the International Affairs Committee of the American Federation of Labor–Congress of Industrial Organizations (AFL-CIO), is hesitant to glorify the gains of trade. He is wary of the many hurt by trade: “Millions of workers are losing out in a global economy that disrupts traditional economies and weakens the ability of their Governments to assist them. They are left to fend for themselves within failed States against destitution, famine and plagues. They are forced to migrate, offer their labour at wages below subsistence, sacrifice their children and cash in their natural environments and often their personal health—all in a desperate struggle to survive.”
Mr. Mazur’s fears may be supported by statistics released by UNCTAD, which show that in virtually all LDCs, viable indicators of poverty levels, i.e., average private consumption, have suffered as exports have increased. For example, in Burundi, exports have quadrupled since 1996 while average private consumption has dropped by almost 25 per cent. In addition to falling private consumption, 50 per cent of people in LDCs live on $1 or less a day and 80 per cent live on $2 a day. Despite an increase in total GDPs, the poverty level in these countries has not changed.
The plights of the impoverished have actually worsened, while the climate on poverty reduction policy has turned from money transfers to open trade regimes. Whatever benefits the poor have received from foreign aid are being lost in the global trend towards market liberalization. Aid directed at improving economic infrastructure in LDCs dropped from 45 per cent in the 1980s to 23 per cent in 2002. Aid has decreased with the promotion of trade as a tool for improving least developed economies, and those not benefiting from open economies are hurt by the sudden absence of international economic aid.
Programmes that encourage trade through incentives offered by national governments, such as the EPZs, seem to have contributed to this effect. Proponents of EPZs argue that they are effective tools for achieving trade benefits. Richard L. Bolin, Director Emeritus of the World Export Processing Zones Association, lauds a successful EPZ in Puerto Rico, citing increased investment in the economy, better worker productivity, more jobs and a contagious effect on other sectors. However, not mentioned in his case study are the poor who do not have access to EPZs and do not share the benefits he cites.
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| Source: Hermann (2003b). The Least Developed Countries Report 2004 |
These poor were recognized by the Rwandan Government in its 2002 Poverty Reduction Paper, which identified six characteristic households in rural areas of the country. Only the highest of the six, the Umukire (misleadingly denoted by the report as the “money rich”) had access to a “vehicle”. These people were often found trying to better their situation by moving to urban centres. Four of the other five categories, as the Government concedes, are actually below the poverty line and have no access to transportation beyond a bicycle. Only those dubbed Umukungu—”food rich”—the Paper’s second highest socio-economic category, would have any surplus to spare for trade should they be able to transport them to markets. Clearly, 96 per cent of the “food poor” living in rural areas in Rwanda are not helped by the existence of EPZs.
In addition to their inability to physically access markets, farmers in LDCs have been squeezed out of markets by farm subsidies in larger countries. The United States, despite its comparative advantage in manufactures, accounts for 41 per cent of global cotton exports. This control of the market is largely due to subsidies offered which allow farmers to sell their goods at a lower price, making those in other countries unable to compete. It would be difficult for a Rwandan Umukungu farmer, who can barely afford health care, to grow and personally transport his crops at a lower price than a subsidized American farmer.
So how can an economic tool such as trade, which is obviously beneficial to one economic sector but has devastating effects on the opposite half of the population, be used effectively? Many, including economist Kevin Watkins of Oxfam and, more recently, UNCTAD, have tried to answer this question. Watkins suggests land redistribution, investment in marketing infrastructure, improved access to health care and education, and measures to tackle corruption as ways to make trade work towards poverty reduction. He also recommends policies that he asserts have become “anathema in the ‘openness’ era”, such as protection of small farmers and infant industries and minimum wage requirements.
Watkins’ bottom line is that trade “in and of itself is not a poverty reduction strategy”. And Dollar and Kraay of the World Bank see the potential of trade in fighting poverty. “International trade … can be a powerful catalyst for poverty reduction.” Like Watkins, UNCTAD in its LDCs Report 2004 make suggestions to policy makers packaged as a “3 Pillar Approach”, which include mainstreaming trade in national development strategies, improving the international trade regime, and improved assistance for developing production and trade capacities.
While it would be possible to trace the debate over international trade as far back as the “true causes of poverty”, as Dollar and Kraay do in their paper entitled “Trade, Growth, and Poverty” , it boils down to the same question that representatives from the Central African Republic, Chad and Ghana raised at the presentation of the LDCs Report in June 2004: How can we link our internal poor to the opportunities created by trade? Despite praise contributed to the growing interconnectedness of our world and benefits of this phenomenon in various arenas, we still must take steps gingerly toward “one world”, taking all members of the international community into consideration. There is no economist arguing that the poor do not exist, and one would be hard-pressed to find a theorist who argues that they do not need to be helped. The hope can only be that the current “losers” in trade are considered in these debates and that from the many suggestions made by academics come policies that show real results worldwide for the rural poverty-stricken like the Umukunga.
| Tariff barriers of developed countries are
the inverse of the share of goods that benefit from duty-free access to developed countries,
which is one measure of progress towards Goal 8 of the Millennium Development Goals. |
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“Least developed countries” (LDCs) is a term that describes the 49 poorest countries worldwide in three continents and Oceania. According to UNCTAD, countries are designated as “least developed” based on three criteria: low national income, weak human assets and high economic vulnerability. More than half of Africa is considered least developed.
Low national income is determined as below $900 GDP per capita. The weak human assets index is calculated using a combination of statistics, including health, nutrition and education indicators. Economic vulnerability is determined by the instability of agricultural production and exports, and diversification and size of the economy.
LDCs have come together in three conferences since 1981, primarily discussing policy ideas and ways to better their situation. Their economies have been analyzed and assisted by UNCTAD, which releases an annual report on LDCs that is read by policy makers, Governments and researchers concerned with their policy and development. LDCs are an important arena to UN policy makers, as it is their populations who are most grossly deprived of their basic human rights. Much of the UN agenda, including the Millennium Development Goals, focuses on improving the plight of those living in LDCs.
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Export processing zones or EPZs are areas specified by Governments to receive assistance and benefits for promoting trade-oriented activities, categorized as designated geographic areas or specific industries.
Zimbabwe’s EPZ programme is typical of many LDCs. It offers two ways to become part of an EPZ: the “Industrial Park” model offers infrastructure, such as factory space, communication networks and water/sewage facilities, to companies willing to set up export-oriented production within certain boundaries. “Stand-alone EPZs” offer tax benefits and accommodations to export-oriented companies outside the physical EPZ area. Some countries like the Dominican Republic only give support to geographically defined EPZs, while others such as Barbados and Mauritius do not have actual “zones”; rather, specific industries receive incentives.
EPZs were first established in developing countries during the 1970s and have been used to create jobs, attract foreign investment, promote exports or otherwise jumpstart stagnant economies. A total of 67 countries have or plan to establish EPZs, which include least developed or developing countries from Africa, Asia and the Pacific, and Latin America and the Caribbean. EPZs have caused mixed reactions in the international community as they have had a substantial effect on trade and globalization. Some countries, in an effort to attract foreign investment to EPZs, have relaxed labour laws, while many developed countries with higher labour standards argue that these leniencies steal jobs from their workers.
Supporters of EPZs cite success stories like Mauritius, where such a zone significantly increased exports, as well as gross domestic product. Jobs were created and the economy as a whole seemed better off as a result of the EPZ policy. The important and diverse effects of EPZs make them one of the most prevalent international economic debates today.
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