Trade Liberalization and Poverty: The Evidence So Far

M economists accept that, in the long run, open economies fare better in aggregate than do closed ones, and that relatively open policies contribute significantly to development. Many commentators fear, however, that in the shorter run, one of the steps towards openness—trade liberalization— harms poorer actors in the economy, and that, even in the longer run, successful open regimes may leave some people behind in poverty. Liberalization by its nature implies adjustment and so is likely to have distributional impacts, but to what extent are the poor likely to suffer adverse effects? This paper takes these concerns seriously by examining the evidence about whether developing countries’ own trade liberalizations have reduced or increased poverty.2 If trade liberalization and poverty were both easily measured, and if there were many historical instances in which liberalization could be identified as the main economic shock, it might be easy to derive simple empirical regularities linking the two. Unfortunately, these conditions do not hold, so there is relatively little direct evidence on this question. Analysts therefore are obliged to try to decompose the link into steps and compile the evidence on each of them individually. A conceptual framework decomposing the links between trade policy and poverty has been developed by L. Alan Winters (2000a, 2002a), and the review in this paper is based on an examination of the evidence linking these components.3 Even