The Impact of Trade Liberalization on Poverty Reduction and Responding Strategies

1. The Impact of Trade Liberalization on Poverty Reduction and Responding Strategies School of Agricultural Economics and Rural Development Wang Sangui

2. I. Trade Liberalization, Growth and Poverty Reduction • Economic theories and empirical studies tend to support the argument: free trade promotes economic growth • Giving play to specialization and comparative advantages • Dissemination of knowledge • Weakening of the law of diminishing returns (to small countries) • Economic growth is necessary for poverty reduction • Economic growth can improve the average welfare • Only when the impacts of growth on poverty reduction outweigh the negative impacts of increased inequality of income distribution on poverty reduction can growth promote poverty reduction • Experience in international development show: in general, the poor could benefit from growth

3. Per capita income logarithm of the 20% poorest population Per capita income logarithm of the entire population of one country Fig.6-9 Relation of per capita income between the 20% poorest and the entire population in 137 countries and regions Source:

4. II. Impact of Trade Liberalization on Poverty Reduction in Different Perspectives • Short-term impact: direct impact of agricultural products and input prices and changes of wage rates, without considering the dynamic adjustment • Depends on the changes in the trade conditions of agricultural products • depends on whether the peasants are net producers or net consumers • depends on the employment structure and wage rate changes of the peasants • Long-term impact: dynamic coactions of multiple factors, and taking peasants’ responses to various changes in particular consideration • depends on the adjustment capacity in accordance with the changing market and factor endowment • while the adjustment capacity depends on human capital , knowledge reserve and system flexibility

5. Impact at the regional level: the impact of trade liberalization on different regions is likely to vary. • Urban and rural areas • China’s trade liberalization favors city rather than countryside. • Things may be exactly the opposite in some ASEAN countries. • In different areas • China’s trade liberalization is unfavorable for major producing areas of agricultural products (such as northeast China) • favorable for manufacturing hubs

8. Impact on peasants: the impacts vary in different types of peasants • The lower the peasant income level is, the greater the negative impacts on peasants are, thus the higher the proportion of peasants suffering adverse effects is; • In contrast, the impact on urban households is exactly the opposite. • China’s poverty-stricken households rely more on crop production instead of non-agricultural activities compared with non-poor households. Poverty-stricken households are most influenced as they cultivate mainly drought-resistant crops such as corn, wheat, potatoes, and beans in crop production.

11. III. The Responding Strategies of the Government • In the long run, the most effective strategy is to improve the adjustment ability of the impoverished population . • Human capital investment (especially in health and education) • Infrastructural investment • Supportive policies and systems • The availability of resources (such as financial services) • Reduce the system cost of market access • In the short run, social protection system can play an important role for the poor to respond to the risk of trade liberalization, and serve as a guarantee for the success of long-term strategies. • Basic medical security system

12. Direct and appropriate subsidies and price support are necessary in a specific period of time Support technological innovations and enhance the product competitiveness