All posts by Dionisio Da Cruz Pereira

Is trade liberalisation a panacea for poverty?

With the inception of globalisation at the beginning of 21st century, facilitated by the discovery of fast communication systems such as the computer and internet, the world is increasingly becoming integrated. The invention of the computer and internet assist people to instantly communicate and to conduct trade with one another.

Proponents of globalisation believe that trade liberalisation is the key to fight poverty in developing countries (World Bank 2002; WTO 2000; McCulloch, Winters & Cirera 2000). Most of the experts define trade liberalisation as the total or part elimination of trade barriers such as quotas and tariffs imposed by governments on imported and exported goods (Marchant & Snell 1997). It is believed that the relaxation of trade barriers will facilitate trades and attract foreign direct investment (FDI) which in turn will boost economic growth and ultimately lead to poverty alleviation (WTO 2002).

In spite of this, reports from the UNCTAD (2001) indicate that poverty in developing countries continue to exist. The number of people living on less than one dollar a day has been increasing by almost 50 per cent in the last few years and the gap between rich and poor people in developing countries is widening. UNCTAD (2001) points out that the poorest 49 countries make up 10 per cent of the world population, but accounts for only 0.4 per cent of world trade and this disparity is continuing to grow at an alarming rate.

By using the case study of India and China, this essay will argue that trade liberalisation has contributed to increasing poverty and inequality in many developing countries. This will be supported from three main aspects: the increasing gap between rich and poor, the increase in human rights violations and the dept of environmental damage.

Arguments in favour of trade liberalisation tend to suggest that trade liberalisation is the key to fight poverty and inequality in developing countries. It is frequently argued that trade liberalisation provides opportunities for developing countries to gain access to international markets, and also allows the flow of Foreign Direct Investment (FDI) to developing countries which in turn boosts economic growth. The arguments for this in turn contribute to reducing poverty in developing countries (WTO 2007; World Bank 2007a). For instance, the emergence of India and China as an economic powerhouse has been hailed as the major achievement brought by trade liberalisation.

The World Bank (2007a) stated that since embarking on trade liberalisation, both India and China have achieved considerable economic growth and have been able to lift millions of their people out of poverty. In addition, the improvement in education provides fundamental skills to the Indians and Chinese to enable them to compete at international levels.

While India is the leading player in information technology, business process outsourcing, telecommunications, and pharmaceutical medicines, China on the other hand is taking the lead in manufacturing various goods ranging from textiles to technological innovation. This demonstrates that since engaging in trade liberalisation, both India and China have enjoyed considerable economic growth.

It is further asserted that trade liberalisation also promotes equality to both developed and developing countries. This is because, according to its proponents, trade liberalisation encourages openness and competition for developed and developing countries alike to equally participate in the global market and contribute to poverty alleviation (WTO 2007).

Likewise, it is argued that trade liberalisation leads developing countries to further develop themselves through a market oriented economy. In such circumstance, exports and imports are seen as the two big factors to promote a country’s economic growth and lessen its dependency on foreign aid or on international assistance (CATO Institute 2005; Hirvonen 2005). Thus, proponents of trade liberalisation seem to suggest that trade liberalisation tends to bring enormous economic benefits and to raise living standards in developing countries. This also seems to indicate that trade liberalisation is an inevitable means which developing countries need to adopt in order to boost economic growth and subsequently to improve the living conditions of their people.

Despite the fact that trade liberalisation is believed by many proponents of free trade to bring substantial economic benefits, trade liberalisation remains controversial. First, arguments against trade liberalisation suggest that as trade liberalisation is intensified, poverty and inequality disturbingly increase and persist. Analyst argues that though India has been hailed by the international community for achieving considerable economic growth over the last few years, India still has the largest concentration of poverty in the world (IMF 2008, p. 3; Asian development Bank 2004, p.30).

While the opening of India to international trade has undeniably strengthened and diversified the economy benefit few Indian middle class, this positive economic growth has in fact little effect to lift millions of Indian farmers whose livelihoods are dependent on agricultural activities (Mehta 2004) out of poverty. For instance, a research conducted in the Warangal village of India, shows that the replacement of native cottons with the genetic modified Bt Cotton promoted by Monsanto Company from the USA has detrimental effects on the farmers. Many farmers in the village fall into the so called “debts traps” because they have to purchase expensive fertilisers and pesticides to sustain the crops.

The increasing use of fertilisers and pesticides consequently contribute to polluting the soils and leading to other major crop failures. Similarly, the inability to repay bank loans in turn leads to increasing suicide rates among farmers in rural India (Stone 2002, p.2; Qayum & Sakkhari 2002).

Many accidents have occurred, the worst accident being in 1998, when more than 500 farmers took their own lives in Warangal village, the number of incidents has continued to increase ever since (Stone 2002). This case study therefore suggests that while multinational companies take the advantages of free trade in developing countries, farmers in rural India continue to suffer despite the increasing economic growth.

Second, opponents of trade liberalisation also argue that trade liberalisation indirectly contributes to ever increasing in human rights violations in developing countries. Since the accession of China to trade liberalisation in the 1980s, the Chinese economy grew considerably (Lardy 2003). Low cost labour in China, attractive tax incentives and sound financial systems have attracted significant numbers of multinational companies to invest in the country and to further contribute to its economic growth (China Daily 2007). Though this rapid economic growth, to some extent, may contribute to improving the living standards of many Chinese, their individual liberty has been constantly curtailed by the state.

Under the disguise of economic growth, the Chinese government limits individual rights such as freedom of expression and freedom of assembly. Furthermore, the suppressions of workers and democratic movement groups in China have been widely reported. The Chinese government regards economic progress takes precedence over individual rights and freedom of expression (Human Right Watch 2009; 2005). In contrast, the international community, especially at government levels is reluctant to criticise the Chinese human right violations due to strong economic ties with China (Human Right Watch 2009).

It can be argued that all though trade liberalisation brings economic benefits to China, the fundamental rights of individuals have been curtailed in the name of economic growth. Furthermore, strong western business interests in China dissuade developed countries from taking strong criticisms against the Chinese notorious human rights violations.

Lastly, it is further suggested that another unintended consequence of trade liberalisation is the impact on the environment. Trade liberalisation has allowed the free movement of multinational companies to conduct business globally, especially in developing countries. As previously discussed, the main reasons for moving to developing countries are cheap labor, low taxes and fewer regulations. These factors encourage both foreign and national companies to conduct business in the developing world, which consequently lead to job creations and fast growth of economy. Despite this, the operations of national and international corporations also pose serious threats to environment and biodiversity. According to Blacksmith (2007) most industrial cities located in the northern part of China are heavily polluted. Patients suffering from air and water related diseases such as bronchitis, pneumonia, and lung cancer have been also widely reported.

World Bank report (2007b) indicates that despite incredible economic achievement over the past few years, China is home to 20 of the world’s 30 most polluted cities due to the increase use of coal for energy. Problems like soil erosion, acid rain and polluted waterways affect the millions of lives.

Despite the fact that currently China is taking serious actions to address the environmental problems including issuing fines to a number of multinational corporations for violating environmental laws (World Watch Institutes 2006; Harney 2008), environmental problems remain the biggest challenges facing the country.

This seems to suggest that the increase of trade liberalisation has led to environmental problems. These environmental problems do not only pose threats to China, but also contribute to worldwide environmental problems.

In conclusion, it is clear the acceptance of trade liberalisation by developing countries poses risks as well as benefits. While, it is argued that trade liberalisation brings economic benefits to developing countries, trade liberalisation can also create poverty and inequality in many developing countries. This is clearly demonstrated through the increasing gap between rich and poor, the increasing in human rights violations and the causing of environmental degradation.

Despite the fact that during the last few years India and China have enjoyed considerable economic growth brought about by trade liberalisation, poverty and inequality remain ubiquitous problems. These considerable drawbacks have drawn strong criticisms from some developing countries. These countries argue that trade liberalisation brings more economic benefits to developed countries and that it only benefits a few people in developing countries.

It is, therefore, suggested that if developed countries are serious about tackling poverty and inequality in developing countries, it is important to use trade liberalisation to promote fair trade competition, human rights values, and environmental sustainability as any failure to address these problems will further exacerbate poverty and inequality in developing countries.


This article first appeared in ‘On Line Opinion’ on 19th October 2010


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