An International Monetary Fund working paper surveys “conflicting literature” on the relationship between trade and inclusive growth, concluding that more can be done to foster more inclusive trade.
Trade openness is positively correlated with per capita income, poverty reduction, economic growth, and employment, but benefits are unevenly distributed across sectors, firms, regions, and workers.
Behind the border factors such as high domestic transport costs and lack of competition in the distribution sector limit the extent to which benefits from trade reach the poor.
A working paper published by the International Monetary Fund (IMF) finds that although international trade is strongly associated with improvements in inclusive growth, rising inequality in many countries can be attributed to concurrent increases in trade competition.
Based on a survey of “conflicting literature” on the relationship between trade and inclusive growth, the working paper concludes that “more can be done to foster more inclusive trade.” Noting that some studies show aggregate benefits from trade whereas others portray adverse impacts, the authors identify policies that can improve inclusivity from trade.
The authors examine the relationship between international trade and inclusive growth, and describe international trade trends and the shifting country and industry composition of trade. Pointing to aggregate net benefits of trade, the paper cites empirical evidence showing that trade openness is positively correlated with per capita income, poverty reduction, economic growth, and employment, and that trade liberalization leads to lower prices and greater variety of consumer goods. From a gender perspective, the authors note improved economic outcomes and increased bargaining power for women.
The WTO plays a role in underpinning an open and inclusive global trading system.
Despite the aggregate gains, the paper acknowledges that these benefits are unevenly distributed across sectors, firms, regions, and workers, and that trade integration has adversely affected several industries and localities. Likewise, employment losses due to import competition have had prolonged and profound economic and social consequences, including knock-on effects such as negative health outcomes and higher mortality rates. The authors note that in emerging and advanced economies alike, adverse impacts of trade depend on the region’s exposure to import competition.
The working paper emphasizes that policy intervention is required to mitigate adverse impacts—especially on disadvantaged groups—and reviews evidence for using trade policies and other complementary policies as a means of sharing trade gains and compensating groups that have been negatively affected by trade. Trade facilitation, for example, can play a key role in reducing transaction costs and enabling small and medium-sized enterprises (SMEs) to overcome barriers to entry such as relatively high fixed costs posed by tariffs.
Trade-related policies to offset negative impacts include lowering tariffs between countries, which the authors describe as “an essential element for inclusive growth.” The paper highlights tariff barriers as being inversely related to income and higher for women, those in the informal sector, and those living in rural areas. Trade barriers can also pose obstacles to increasing farmers’ productivity in countries with large poor and rural populations, the paper notes. While specific provisions addressing inclusivity are an increasingly common element of regional trade agreements, the authors flag that little is known as to the actual efficacy of such provisions.
Complementary policies are emphasized as critical “behind the border” factors, as poor people, women, and SMEs face constraints relating to access to finance, education, and technology. Among other factors, the authors highlight high domestic transport costs and lack of competition in the distribution sector as limiting the extent to which benefits from trade reach the poor.
Action at the multilateral level, the authors stress, can also improve inclusivity by addressing market distortion and access, and by reducing price volatility. The paper emphasizes the role the World Trade Organization (WTO) “plays in underpinning an open and inclusive global trading system.” [Publication: Trade and Inclusive Growth] [Publication Landing Page]