Free trade disruption

By PDS | 25 July 2005

It should, two centuries after Adam Smith wrote The Wealth of Nations, be axiomatic that to alleviate poverty, developing economies need to grow faster, and the poor need to benefit from this growth. Trade can play the key role in reducing poverty, because it boosts economic growth and the poor tend to benefit from that faster growth. Yet this is sometimes disputed by anti-capitalism / anti-globalization fanatics who put their ideological values before the needs of the developing world, caring more about opposing capitalist corporate symbols then raising living standards.

Whereas anti-globalization zealots are today very much marginalised from the mainstream, a more respectable body of opinion argues that free trade can be economically disruptive and damage livelihoods in the short-term. This has some validity, but to promise perpetual protection from competition would be against the common good. Whilst uncompetitive producers remain in business, they will continue to over-charge for their protected goods at the expense of their customers. The few producers will be protected at the expense of the many consumers.

In a study made by Dan Ben-David of Tel Aviv University and L. Alan Winters of Sussex University, Trade, Income Disparity and Poverty (2000), it was found that:

While there is no simple one-to-one relationship between trade and poverty, the evidence seems to indicate that trade liberalization is generally a positive contributor to poverty alleviation - it allows people to exploit their productive potential, assists economic growth, curtails arbitrary policy interventions and helps to insulate against shocks. However, most trade reforms will create some losers (some even in the long run), and poverty may be exacerbated temporarily. The appropriate policy response in those cases is to alleviate the hardships and facilitate adjustments rather than abandon the reform process.

Opening markets may sometimes lead to economic disruption for a few, it may be right to financially compensate losers, but it should be temporary and for a fixed period to encourage them to re-allocate resources and change direction.