Thursday, August 04, 2005

Globalization is good for the poor

When I wrote about the hypocrisy of the G8 regarding globalization, I did not mean that openness to trade is bad for developing countries like Mali, or the Philippines. Quite the contrary - what is harming poor countries is the subsidy policies in developed countries, that restrict trade from developing countries. The evidence is consistent and strong: openess to trade is favorable to economic growth. This is borne out by a number of cross-section studies. In particular, because trade is good for growth, and growth reduces poverty, Dollar and Kraay (2001) show that trade opennes reduces poverty.

What is not so clear is why trade is good for growth. Economic theory is very good at understanding why opening up to trade moves a country from one level to a higher level; however, a move from a lower to a higher growth path is harder to explain. One approach links trade to innovation. First, expanding global competition would require adjustment, adoption of international standards, etc. Second, technological improvements may be embedded in imported inputs (materials and machinery), are necessary for technical progress in domestic industries. (This may explain why apparently imports cause growth, but not exports.)

The research continues. But one thing we are sure of: a developing country that shuts down its borders to international trade commits itself to the steady growth in the number of its poor people. Now that is a bad kind of growth.

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