Trading Up from Poverty Mahmoud Mohieldin -WASHINGTON, DC – A long-held tenet of international-trade theory is that, in the
long run, increased trade correlates with faster GDP growth. But the challenge –
which my institution, the World Bank, is working to overcome – is to ensure that
trade-driven growth benefits the poor. That is why the heads of seven multilateral
institutions, including the World Bank, strongly supported the push for the
trade-facilitation agreement that was reached earlier this month at the World Trade
Organization’s ministerial conference in Bali.Mahmoud_Mohieldin

To be sure, the incidence of poverty worldwide has reached an historic low, with the
extreme-poverty rate (the share of the population living on less than $1.25 a day,
in purchasing-power-parity terms) falling in 2010 by more than half since 1990. But
that still leaves more than one billion people worldwide living in extreme poverty.
Moreover, progress has been uneven, with poverty rates having declined far more in
East Asia and Latin America than in Sub-Saharan Africa.

In order to cope with this changing global context, the World Bank has introduced a
new objective to guide its poverty-reduction efforts: promoting sustainable, shared
prosperity by monitoring the income growth of the poorest 40% of every country’s
population. Indeed, we are rethinking how we define success in development and how
we provide trade-related support to developing countries.

Trade’s relationship with poverty is variable and complex. Increased trade benefits
consumers by reducing the prices of goods and services. It gives the poor access to
a wider variety of commodities, while providing firms with a more diverse selection
of inputs.

But increased trade can also eliminate low-skill factory jobs and reduce
agricultural prices – outcomes that disproportionately hurt the poor. In India, for
example, poverty has declined more slowly in areas where farmers face increased
foreign competition. Given constraints on inter-sectoral labor mobility, stemming
from barriers to skills acquisition and rigid labor-market regulations, the poorest
workers have few options when such changes occur.

As a result, increased trade may demand difficult adjustments in the short term.
Individuals may need to change their consumption habits; labor may have to be
reallocated across sectors; and some workers may have to adjust to lower wages, at
least temporarily. Some firms will grow, while others will contract.

Experience has demonstrated that, with forward-looking policies, governments can
enhance trade’s benefits and mitigate its negative impact on the poor. Policymakers
can promote retraining programs for displaced workers and remove regulatory
obstacles that impede their flow into thriving, export-oriented sectors. And, in
order to protect farmers, they can eliminate export restrictions and ensure that
timely, accurate market information is accessible.

With such policies in place, the World Bank’s efforts to bolster developing
countries’ trade linkages could facilitate substantial poverty reduction. For
example, we help developing-country governments connect firms, farmers, and
households to markets and supply chains, thereby fostering increased investment and
boosting economic activity.

Furthermore, we support infrastructure-development projects, enabling countries to
build the roads, bridges, and ports that link traders to markets. For example, a
$1.8 billion highway project in Kazakhstan is facilitating trade-related transport
across the country, stimulating the economies of the country’s poorest provinces,
and creating more than 30,000 jobs. In Nepal, the Bank is financing reconstruction
of the steep, dangerous, and busy road that carries most of the country’s exports to
India, and it is supporting the government’s efforts to connect some of the
country’s remotest districts to the main road network.

The World Bank also helps countries to establish clear customs rules that more
effectively protect traders from inconsistent treatment or solicitations for bribes.
And we are working to address costly border inefficiencies. For example, we are
helping to simplify and modernize trade procedures through Cameroon’s Douala port,
and we have helped the government of Laos to establish an online portal that
provides traders with access to all relevant laws, procedures, schedules, and forms
from border-management agencies.

Moreover, since 2010, the International Finance Corporation, the Bank’s
private-sector lending arm, has been promoting the integration of small and
medium-size enterprises into global supply chains by increasing their access to
capital. The $500 million Global Trade Supplier Finance program, a joint investment
and advisory initiative, is currently providing short-term finance to thousands of
emerging-market SMEs.

In order to maximize the impact of such initiatives, world leaders should cooperate
to build and maintain an open trading system. The WTO’s Bali conference provided an
important opportunity to develop a new trade-facilitation agreement that expedites
the movement, release, and clearance of goods at border stations; clarifies and
improves trade-related rules; enhances technical assistance; and encourages
cooperation among border-control agencies.

But the agreement that was reached in Bali cannot succeed unless wealthy countries
and donors agree to support developing countries’ efforts to enact related policies
and reforms. Given this, it is crucial that developed-country policymakers recognize
that a more efficient, better integrated, and more inclusive global trade regime
will benefit all countries.

With genuine commitment from the international community and the appropriate
domestic policies in place, trade can be a powerful force for poverty reduction.

Mahmoud Mohieldin is the World Bank President’s Special Envoy

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