Can Trade Reduce Poverty in Africa?

Trade liberalization is being actively promoted as a key component of development strategies. Through greater efficiency in resource allocation, specialization in production, dissemination of knowledge and technological progress, and competition, trade liberalization should favor economic development and growth. How is this reflected in poverty? In theory, a more liberalized trade regime will make greater use of the factors of production that are most abundant, thus increasing their relative price. If poverty and relative low income stem from abundance of labor, greater trade openness should lead to higher prices for labor and a decrease in poverty. Hence, the removal of tariff and nontariff barriers (export and import bans, restrictive rules of origin), which remain particularly high in Africa, and improvements in trade facilitation have been recognized as a means for supporting Africa’s economic development. Recent attempts to consolidate trade integration within Africa—for example, the ComWhile most economists accept that, in the long run, open economies fare better in aggregate than closed ones, many fear that trade could harm the poor. African countries, for example, have realized significant improvements in trade liberalization in recent decades, yet Africa remains the poorest continent in the world. It seems that the large gains expected from opening up to international economic forces have been limited in Africa, especially for poor people. Drawing on the findings of a recently published working paper (Le Goff and Singh 2013), this note argues that the benefits of trade are not automatic, but rather depend on accompanying policies aimed at developing the financial sector, promoting primary education, and improving governance. This accompanying policy agenda allows people to take advantage of the opportunities offered by freer trade, by reallocating resources away from less productive activities to more promising ones. Trade liberalization therefore should not be implemented on its own, but with the necessary complementing policies.