International Trade and Poverty Reduction in Africa-An Evaluation - Term Paper Example

International Trade and Poverty Reduction in Africa-An Evaluation International Trade and Poverty Reduction in Africa-An Evaluation Introduction The role of international trade in alleviating poverty has been a topic of considerable interest among researchers for a long time. On the one hand, it is argued that trade liberalization leads to enhanced growth, which in turn will reduce poverty (Winters etal,2004 ).On the other hand, it is argued that trade liberalization can lead a country into less productive and dynamic sectors which can adversely affect growth and hence increase the poverty(Rodriguez and Rodrick,2001). However, theoretically it remains unsettled and remains an empirical question. The empirical studies show mixed results and show that this is a region specific question. In this essay, the case of Africa is discussed in this regard. Studies have shown that a stagnation of exports took place in Africa for the past three decades. Moreover, the reports show the composition of exports in Africa remaining unchanged with the share of Africa in the world trade remaining very little (Commission for Africa, 2005). According to the Commission for Africa (2005), given the high poverty, malnutrition etc in Africa without increasing the export performance of the African nations, it will be very difficult to obtain the goals of poverty reduction and enhanced export economic growth. UNCTAD (2008) shows the export performance in Africa far below the performance of many other developing nations. Hence, the review of some existing studies on Africa regarding international trade and poverty reduction in Africa is done in this regard. 2. Review of Literature Ng and Yeats (1996) showed that Sub Saharan Africa showed very poor performance in terms of global exports and the share of exports in world trade had been falling here since the 1950s. The authors argue the protectionist policies of the government here leading to the marginalization of the region from world trade and hence it remained non-competitive. The empirical analysis by the authors showed that the trade preferences of OECD provided a competitive advantage for Africa while the internal protectionist policies significantly contributed to the decline of the export performance here. The study hence demand for the need of more liberalized trade policies in this region which are needed to reduce poverty in Sub Saharan Africa. Anderson et al(2005) showed that trade liberalization can result in poverty reduction in Sub Saharan Africa through increasing farm employment and output, the real value of agricultural and food exports, the real returns to farm land and unskilled labour, and real net farm incomes. It also results in increased income growth, which is greater than for other developing nations and developed nations as shown by the authors in spite of some terms of trade losses. Hence, the authors demanded the need for more trade openness in the region as a policy measure to reduce poverty. Similarly Tuppy (2005) argued that in Sub Saharan Africa trade liberalization can produce welfare gains while this in turn will led to reduced poverty only of there are drastic changes in the economic and political circumstances like governance improvement ,removal of corruption etc along with the trade liberalization policies. This study however shows that trade openness can lead to increased competition and to reduce the protection of privileged groups, which have severe welfare implications. Hence, the author demanded the need for trade openness in Sub Saharan Africa as one policy measure to remove poverty along with other reforms. Collier (2007) in a discussion on the policies to reduce poverty in Africa demanded international trade as the most significant one for poverty reduction than international aid. The author demanded the need for trade openness in Africa so that the continent can compete with Asia through preferential market access and thereby reducing the resource scarcity in the region. All the above studies analyzed only the gains from trade liberalization and those too at the aggregate level. Sectoral and country specific differences are ignored here which can lead to misleading results. Moreover, none of these studies have distinguished between short run and long run effects of trade liberalization on poverty. Evans (2001) based on the example of Zambia, examined the trade liberalization effects on poverty at a disaggregated level. The study distinguished between different households based on income levels for the analysis. The results showed significant differences between the metropolitan and nonmetropolitan households regarding the poverty reducing effects of trade liberalization in Zambia. Moreover, significant differences were obtained for households with different income levels also in this study. Busse, and Groizardb(2003) obtained negative effects of trade openness on income levels in the growth regressions for Sub-Saharan African nations. However, the results are based on cross-country growth regressions, which ignore country specific effects. Moreover the analysis was static only and did not capture the dynamics of the phenomenon. Anderson (2004) obtained both benefits and risks through increased trade openness in Sub-Saharan Africa based on modelling. This study obtained favourable long run effects of trade openness in reducing poverty while considerable adjustments cost in this regard in the short run. The study also demanded several other domestic policy changes to be accompanied with trade openness to have poverty reducing effects in Sub Saharan African nations. Jansen (2006) examined both the gains and risks of regional and multilateral liberalization of financial services trade in African nations. The results showed significant gains from increased trade openness in terms of rising capital inflows and increased financial sector competition, which has welfare implications. At the same time, it can also lead to rising macroeconomic volatility, which can adversely affect growth. The study fond significant differences in terms of existing GATS commitments among the different African nations. Moreover, it also showed significant scope for more liberalization of banking services in all nations with respect to mode 3. Mabugu and Chitiga(2007) examined the short run and long run effects of trade liberalization on poverty based on a dynamic micro simulation computable general equilibrium approach. The results showed differences in short run and long run effects of trade liberalization on poverty. Negative effects in terms of poverty reduction and welfare by removing the tariffs on imports completely were obtained in this study while in long run the results are positive through accumulation effects .Moreover significant sectoral differences and differences among households like African, coloured and numbered households were also obtained in terms of effects of trade liberalization on poverty. Vos(2008) by examining the large number of studied on trade liberalization and poverty in general and Africa in particular obtained significant differences among different nations in terms of benefiting from trade openness. The study obtained most of the results sensitive to model specification and parameter assumptions. Hence, the results obtained in most of the studies are not robust according to the results obtained from this study. The impact of trade liberalization on poverty is mainly a country specific question, which depends on trade structures of each nation and hence cannot be generalized according to this study. 3. Conclusion The review in this essay shows that the effects of trade liberalization on poverty in Africa cannot be generalized. It differs significantly between different nations and within nations themselves among different households based on their income levels and locations. It also differs based on the trade structures of different nations. The review shows that trade openness alone cannot lead to poverty reduction but it needs to be accompanied with several economic and political reforms like alleviation of corruption and similar governance problems in Africa. Hence, a detailed empirical study is needed in this regard distinguishing between different nations, households and between short run and long run effects in Africa. References Anderson K(2008) “Agriculture, Trade Reform and Poverty Reduction: Implications for Sub-Saharan Africa”, Policy Issues in International Trade and Commodities Study Series No. 22, NewYork and Geneva, UNCTAD, United Nations. Busse, M., & Groizardb, J. L. (2003). “Does Africa Really Benefit from Trade?”. Hamburg Institute of International Economics (HWWA). Retrieved March 11, 2010 from http://www.ssrn.com Collier, P. (2007).”Poverty reduction in Africa”, Special Article, PNAS, vol. 104 , no. 43 p16763–16768 National Academy of Sciences, USA. Evans, D. (2001). Identifying Winners and Losers in Southern Africa from Global Trade Policy Reform: Integrating Findings from GTAP and Poverty Case Studies. Retrieved March 11, 2010 from https://www.gtap.agecon.purdue.edu/resources/download/344.pdf. Jansen M and Y Vennes(2006): “Liberalizing Financial Services Trade in Africa: Going Regional and Multilateral”, WTO Staff Working Paper ERSD-2006-03. Mabugu, R and C, M. Mabugu(2007): “Poverty and Inequality Impacts of Trade Policy Reforms in South Africa”, MPIA Working Paper No. 2007-19. Ng F and AYeats (1996) : “Open Economies Work Better! Did Africas Protectionist Policies Cause Its Marginalization in World Trade?” World Bank Policy Research Working Paper 1636. Rodriguez, Francisco and Dani Rodrik. 2001. “Trade Policy and Economic Growth: A Sceptic’s Guide tothe Cross-National Evidence,” NBERMacroeconomics Annual 2000. Cambridge, MA:MIT Press, pp. 261–324. Tuppy ML(2005): “Trade Liberalization and Poverty Reduction in Sub-Saharan Africa”, Cato Institute Policy Analysis,No.557. UNCTAD(2008) : “Weak supply capacity limits Africas export performance: UNCTAD”, http://www.unmultimedia.org/radio/english/detail/35994.html, Accessed April 14 2010. Vos, Rob(2008): “Trade Liberalization and Poverty: What We Know and Dont Know” , DESA Working Paper Series No. 50 Winters A, Neil Mcculloh and A MxKay(2004): “Trade Liberalization and Poverty: The Evidence So Far”, Journal of Economic Literature, Vol. XLII (March 2004) pp. 72–115. Read More