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Liberalisation is good for poverty alleviation, but how can we help the losers?

Trade liberalisation generally reduces poverty. However, even the staunchest pro-liberalisers recognise that the move from closed to open economies is inherently stressful. What is ‘liberalisation-induced poverty’? How can the transitional and long-term victims of liberalisation be identified and supported? Can market institutions become more pro-poor?

Drawing on empirical evidence from southern Africa and south Asia, a paper from the University of Sussex Poverty Research Unit argues that opening up trade generally increases economic opportunities for consumers and producers and raises earnings.

In Africa, the paper examines how liberalisation-prompted shocks changed the prices of tradable goods and the effects this had on household and individual welfare. In many countries official marketing boards used to provide farmers with markets and credit for inputs. For cotton in Zimbabwe, liberalisation appears to have been successful, replacing the marketing board with strong competition between private buyers, raising prices and providing inputs.

For maize in Zambia, on the other hand, post-liberalisation private agents stopped purchasing in isolated areas, causing great hardship for affected farmers. General safety-nets are a better response to such problems than reversing liberalisation, or assistance-packages targetted just on the losers from liberalisation. Even so, care is required that the more articulate and politically influential middle classes do not capture the safety-net programmes. Inefficient safety net programmes in Zambia and Zimbabwe have achieved little, whereas in Bangladesh they have substantially assisted large numbers of the rural poor to survive crises.

Evidence from India, referring mainly to the labour market, suggests grounds for optimism: liberalisation has boosted formal manufacturing employment and to a lesser extent wages. Nevertheless, despite the evidence of quantitative data, many individuals employed in the formal sector, and most trade unions and NGOs, complained that liberalisation has not brought the expected benefits. The outcome of liberalisation in the informal sector was less clear, with some evidence of manufacturing job losses. Whether this had serious poverty consequences, however, is difficult to tell, as it is not know how well off these people were to start with or what alternative sources of income they found.

Further findings include:

While declines in incomes and formal sector employment lead people to set up in the informal sector (mostly in trade and services) the poor may be excluded as they lack sufficient start-up capital.
Bangladesh’s spectacular post-liberalisation export drive (focused on ready-made garments and shrimp fishing) provided significant employment opportunities for women. It has not, however, met the needs of rural males.
Trade deregulation has created significant new opportunities for small-scale agro-processing in Zimbabwe.
Markets are key to spreading the gains from liberalisation. The worst instances of poverty arising from liberalisation reflect the collapse of markets and their strongest gains their creation.

The report suggests that policymakers should:

pursue income-generating trade liberalisation over sensible time horizons and with adequate safety-nets for those pushed into poverty
learn from the kind of successful external assistance projects cited in the report which have helped the poor to create markets for horticultural and craft products.
focus concern over transitional unemployment on those who were poor or near poor prior to liberalisation, not on those who can make the most noise
be wary of any single source of information; match formal quantitative data with the experience of a range of individuals at the frontline of trade liberalisation.

Source(s):
‘Trade liberalisation and poverty’, PRUS Working Paper #7, Poverty Research Unit, Sussex University by L. Alan Winters, April 2000 Full document.

Funded by: UK Department for International development (DFID)

id21 Research Highlight: 4 September 2001

Further Information:
Poverty Research Unit
University of Sussex
Falmer
Brighton BN1 9SJ
UK

Tel: +44 (0)1273 678739
Contact the contributor: L.A.Winters@sussex.ac.uk

University of Sussex, UK

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