Complementary reforms needed for poverty reduction

Whether trade liberalisation is a vehicle for poverty alleviation in developing countries remains contentious. Whilst free-trade advocates highlight the benefits of new export opportunities, its critics emphasise unfair competition from developed countries due to agricultural subsidies and non-tariff barriers, such as standards. Whatever the outcome of the Doha Round, on its own the round cannot do much to reduce poverty.

A cotton merchant in Africa. Global trade barriers are low in cotton but agricultural subsidies to cotton growers in the US and EU depresses world prices by encouraging over production. Low-income economies in West and Central Africa depend upon this labour-intensive crop for employment, foreign exchange, and poverty alleviation. Removing subsidies in the US would reduce US exports by 40 percent and raise world prices by 10 percent. Least Developed Country producers lose more than US$ 200 million as result of US and EU support policies.
(Taken from: Global Monitoring Report, World Bank, 2005)
Photo by: Mark Henley/Panos Pictures

Domestic trade-oriented complementary reforms in infrastructure, finance, and other sectors are critical for increasing exports and reducing poverty. As most poor people live in rural areas and depend on agriculture, complementary actions must focus on increasing agricultural output and productivity.

By participating in export markets, producers can increase their returns either by receiving higher prices for their products or by shifting into new 'non-traditional' activities that generate greater profits. For example, firms may sell more goods at higher prices once granted better access to export markets, thus increasing employment and wages. Or, farmers may shift from subsistence crops, such as cassava or maize, to export crops, such as coffee or cotton, thus earning higher income.

However, producing for international markets is not straightforward. It requires investment in inputs, including technical knowledge, as well as access to distribution-related services such as transport, storage and marketing. The potential gains from trade will not be realised if farmers do not have access to such inputs and the finance to pay for them. A lack of adequate roads and ports will erode production cost advantages by increasing transport costs. Similarly, if domestic competition (among traders who buy and export the goods) in the exporting sector is limited, the benefits of higher export prices from trade reforms may accrue to intermediaries and not be passed down to the farmers or small firms producing the export goods.

In Zambia, research has shown that marketing reforms in the cotton sector, as well as extension of credit, market information, access to seeds and fertilisers, increased yields per hectare by nearly 50 percent. Moreover, agricultural extension services were important to induce farmers to shift from subsistence crops into cotton. The switch to export production and the provision of extension services increased incomes by 20 to 30 percent (see figure below).

Examples of complementary policies include:

• improved access to credit through microcredit programmes of the type pioneered by Grameen Bank in Bangladesh
• technical knowledge in agriculture through provision of extension services
• building skills, such as the ability to follow written instructions and thus move into higher technology crops and production methods; this could be improved with schooling
• health programmes, in particular to address the HIV/AIDS epidemic - a major factor reducing productivity in Zambia - to reduce labour constraints
• investment in trade-related infrastructure such as roads and ports
• encouraging foreign direct investment - even if only on a sub-contracting basis - to provide marketing skills and awareness of needed infrastructure.

Complementary policies bring high returns as they allow poor people to take advantage of new trade opportunities. Many of these complementary policies, however, will require resources. As all poor countries face severe financial constraints, there is a strong case for additional development assistance to strengthen trade capacity.

Irene Brambilla
Department of Economics
Yale University
P.O. Box 208264
New Haven
Connecticut
USA 06520-8264
T +1 (0)203 432 6563
F +1 (0)203 432 6323
irene.brambilla@yale.edu

See also

An analysis of the WTO Development Round on poverty in rural and urban Zambia, by J. Balat, I. Brambilla and G. Porto, 2005. Background paper for the UN trade taskforce report
www.ycsg.yale.edu./documents/task_force.html

Farm productivity and market structure: evidence from cotton reforms in Zambia, Economic Growth Center, Yale University, Discussion Paper No. 919, by I. Brambilla and G. Porto, 2005

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