There is little understanding of the effects of trade policy changes on urban and rural communities. However, gathering evidence confirms links between levels of trade liberalisation, urbanisation and inequality. Is it becoming possible to forecast how a trade policy change might affect the balance between rural and urban economies in a particular country?

A paper from the UK’s Institute of Development Studies examines the impact of international trade reform on urban and rural change and proposes a future research agenda. Analysis is provided by trade theory with insights from new economic geography – helpful for understanding how trade affects distribution of economic activity within a country.

By allowing some economic activities to expand and forcing others to contract, trade clearly influences the pattern of economic activity within a country. Trade liberalisation is likely to cause urbanisation to accelerate in countries with a comparative advantage in manufactures (including South and East Asia) and to slow down in countries with a comparative advantage in primary products (such as Latin America and sub-Saharan Africa). Trade reform can also affect the distribution of poverty between urban and rural areas.

Trade liberalisation may also promote more varied economic activity, although less so in countries where population and economic activity is already focused in cities with greatest access to external markets. This is the case for Thailand, Indonesia, Philippines and Vietnam where the overwhelming majority of inward foreign direct investment has flowed into the core urban area, increasing the concentration of activity and employment.

Literature on the impact of structural adjustment shows that it causes a slowing of urban growth in developing countries. This is because of economic recession but also because new pro-trade policies reduce the large gaps in wages and profitability between urban and rural areas.

To investigate trade’s impact on rural-urban balance, countries can be roughly categorised into four groups:

• those able to continue to trade in a commodity only because of their preferences: Barbadian sugar is an example
• those that receive preferences and appear to have a comparative advantage in production of a commodity – such as Malawian sugar and Zimbabwean tobacco
• those with neither a comparative advantage nor preferences in a commodity – thus unlikely to be affected by trade policy changes
• those unable to exploit their comparative advantage due to trade distortions and denial of preferential treatment.

If governments want to soften the negative impact of changes in trade policy it will be important to:

• identify measures to offset undesirable impacts on rural–urban balance and redistribution
• improve forecasting tools by research in countries where imminent trade policy change is most likely to have implications for rural–urban balance
• measure the extent of geographic movement by firms and workers as well as governments and households
• study countries affected by the phase-out of the Multi Fibre Agreement – the mechanism which since the 1970s has distorted trade by protecting developed countries against developing country textile and clothing exports.

Source(s):
‘The Impact of the Reform of International Trade on Urban and Rural Change’, Working Paper 245, Institute of Development Studies: Brighton, by Christopher Stevens, Edward Anderson and Jane Kennan, June 2005 Full document.

Funded by: UK Department for International Development (DFID)

id21 Research Highlight: 26 June 2006

Further Information:
Chris Stevens and Jane Kennan
Globalisation Group
Institute of Development Studies
University of Sussex
Brighton BN1 9RE, UK

Tel: +44 (0)1273 678790
Fax: +44 (0)1273 621202
Contact the contributor: C.Stevens@ids.ac.uk

Institute of Development Studies, UK

Edward Anderson
Overseas Development Institute (ODI)
111 Westminster Bridge Road
London SE1 7JD, UK

Tel: +44 (0)207 922 0359
Fax: +44 (0)207 922 0399
Contact the contributor: e.anderson@odi.org.uk

Overseas Development Institute, UK

Other related links:
'Central America's free trade flop. Why liberalisation failed to boost agricultural performance'

'Squeezing out poor farmers: understanding the constraints and benefits of urban proximity'

'Mind the gap! Bridging the rural-urban divide'

'The Impact of the Reform of International Trade on Urban and Rural Change'