Trade Gains, Trade Pains: Development through trade versus trade as adjustment

Reflection Notes

Trade Gains, Trade Pains Diana Tussie* Any economist who appears to question the benefits of trade is at risk of being banished from polite company Dani Rodrik (2000) Introduction Our starting point for these notes is our sense that the academic and policy debate concerning poverty have for long been usually specialized and compartmentalized in terms of which discipline was thought to “own” the issue and come up with policy prescriptions. For much of modern mainstream economic studies, growth, stability and efficiency were core preoccupations. The neoclassical, and especially post World War II Americanization of economics emphasized consumption placed all individuals equal in ‘social’ status in that all agents are consumers. Social goals are then identified with the pursuit of consumer sovereignty, not distributional conflict (Milberg, 2005: 11). The focus on consumption also served to reduce the importance of economic and social distinctions as a category of analysis. ‘Economic man’ is defined according to how the individual participates in society. In classical political economy, this participation had been made in terms of the individual’s role in the process of production that is his/her ‘relation to the means of production’. In essence, neoclassical studies put conflict into the back burner, and at the same time configured the mental map of the discipline as a whole; the conditions of poverty were either blind spots or would be resolved as natural developments of growth, stability and efficiency gains. In a parallel line, the distributive impact of market integration was taken up as a foundational matter in early development economics (recall terms of trade and unequal exchange). Today, it has once again risen to the fore and become an issue of heated debate, worthy of requiring serious consideration. The reasons for this rentrée are beyond the bounds of these notes. Suffice it to say that it is a welcome return and a refreshing injection of air into a serious debate, by no means old wine in new bottles. The rentrée is supported with the well oiled toolkit of modern economic theory but there does not seem to be a clear consensus about how integration, trade patterns and trade liberalization affect distribution. In addition, the view pursued by development economics that all countries are far from ‘similar’ has been dismantled giving place to multidisciplinary studies. But, do we confront a theoretical lacuna? Does trade lead countries to become more equal or does it lead to ever increasing concentration? The links between trade, inequality and poverty are not unambiguous and often affected by local factors

*

Director of the Latin American Trade Network and the Department of International Relations at FLACSO Argentina. The diligent and generous research assistance of Fabiola Mieres is gratefully acknowledged.

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Reflection Notes and specific circumstances. This link is not linear, not least because poverty has many meanings and dimensions. Being poor in one context does not necessarily mean the same in another. This conceptual debate is transferred to measurement, a struggle to find an acceptable answer to identify poverty. The World Bank for example, uses a figure of USD 1 per day (in 1985 purchasing power dollars) to measure absolute poverty. For more advanced developing countries as well as transition countries, this standard is irrelevant, and therefore, a USD 2 day international poverty line is being used in international analyses of poverty. Measurability is a useful tool to raise awareness but a slippery one for analysis, planning and intervention. Measuring and identifying poverty is not the same as understanding why it occurs. In the struggle to unbundle causality we are painfully aware of multiple factors, giving rise to another set of conceptual disagreements. That poverty is a result of many factors does not mean that trade is not one of these. Can it be singled out? Surely not. Does it matter? Over and underestimation of a single factor are equally risky. Underestimation may justify inaction. Overestimation can bring out depressing statistics not set forth in a theoretical context. In either case, it is as if poverty is self evident (so obviously a case of the poor will always be with us) that it does not warrant “a niche in the pantheon of theory”. Out of sight, out of mind. Perhaps we need to explain the lack of focus itself. If there is still much work to be done as to trade per se, conditions of trade, specific patterns of trade, mainstream theory does accept that the path from a closed to a substantially liberalized economy is a policy shock that by its very nature implies adjustment, and so it is likely to have distributional impacts. But when, how and to what extent are the poor likely to suffer adverse or positive effects? There are at least two dimensions of adjustment: between countries and within countries. These notes will concentrate on the latter. Before we unbundle this agenda we need to be clear as to how we can regard the poverty phenomenon. Defining Poverty Let us revise briefly its uses over the past decades. In the sixties, indicators like Gross National Product per capita or Gross Domestic Product per capita were associated with an emphasis on the levels of growth. Thus, the main focus was on the level of income, reflected in macro-economic indicators. The document Partners in Development (1969) elaborated by the Pearson Commission, researched the effectiveness of the World Bank’s development assistance in growth and used this concept of poverty. During the seventies, there were two important shifts. First, there was an emphasis on relative deprivation, inspired by the work in the United Kingdom by Runciman and Townsend (1970). Poverty was redefined not just as a failure to meet minimum nutrition or subsistence levels, but rather as a failure to keep up with the standards in a society. Second, the concept was 2

Reflection Notes broadened from income-poverty to “basic needs” to include access to health, education and other services. In the eighties, the concept incorporated non-monetary aspects such as participation in political activity. There was also a new interest in vulnerability, security and social relations. The broadening of the concept of poverty derived in “livelihood”. This was adopted by the Brundtland Commission on Sustainability and the Environment to develop the concept of “sustainable livelihood”. The work by Amartya Sen (1981) stressed the fact that income was only valuable if it could increase the “capabilities” of individuals and thereby permitted “functionings” in society. The idea of “well-being” was prominent in the nineties. Inspired by the work of Sen, the United Nations Development Programme developed the concept of “human development” with its Index, the Human Development Index (HDI) which measures the overall achievements in a country in three dimensions: longevity, knowledge and a decent standard of living. The latest adjustments to the concept incorporated ideas related to social exclusion which include democratic and legal systems, markets, welfare provisions, and family and community rights. Due to the multidimensional character of the concept, it is important to bear in mind that different definitions shed light on different issues and lead to different interventions. Nowadays, poverty is strongly linked and studied in connection to inequality. The relationship between these two concepts is representing a challenge to research since some policies can help reduce poverty but they do not necessarily reduce inequality in the distribution of income. Inequality calls for other interventions in terms of policy (see box for a clarification of concepts). Box: Unpacking the meanings of inequality (Based on Eyben and Lister, 2004.) Observed (measured) inequality in distribution and/or consumption. This is the principal approach of the World Bank. It looks at inequality in terms of disparities and quintiles. Income differential can be compared against other ways of classifying humanity, for example on the basis of sex, age, geographical location. Inequality as difference in opportunity. This approach is based on concepts of status and rank in social systems. Class and other status ascriptions such as gender, age or ethnicity are understood as determining opportunities, for example in access to education or health care. “Social inequality” is commonly used in this sense of the term. Capability deprivation is the approach that underlies the human development index developed by the UNDP Human Development Reports, building on the work of Amartya Sen and concerned with the extent to which people have the freedom to make choices in their lives. This approach has been significantly un-developed in Latin America (see Rius & Vigorito, 2001) Rights based approaches premised on the universality of human rights in which everyone has equal rights. In practice it is often particular groups of people who cannot claim their rights in different areas of their lives because of discriminatory policies that result in inequitable outcomes. This leads to an interest in political inequality, citizenship and good governance. Much current work on rights has evolved from participatory approaches to development. (DFID 2000)

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Reflection Notes Social exclusion: ‘the process through which individuals or groups are wholly or partially excluded from full participation in the society within which they live’ (De Haan 1999). The value of the concept is the potential to explore the processes that cause exclusion and thereby deprivation. Vertical and horizontal inequality distinguishes between differences in income, on the one hand, and differences between categories of the population in terms of ethnicity or gender, on the other hand.

The poor results of the reform process in the nineties in Latin America has sparkled new interest in how to promote social cohesion. The concept of social cohesion lacks a univocal definition. It represents a means and a goal at the same time. ECLAC defines it as dialectic between social inclusion and exclusion mechanisms, and the responses, perceptions and dispositions of citizenship towards the way these mechanisms operate (ECLAC, 2007). This concept allows integrating dimensions of reality which are normally treated as separate: social policy and the value of solidarity spread in a society; the synergies between social equity and political legitimacy; socio-economic transformations and changes in social interactions; the promotion of higher equality while accepting diversity; the socio-economic gap and the sense of belonging. The concept of social cohesion is no panacea but it calls for a broad development approach. Instead of framing a precise and operational definition of poverty, we settle at this point for a general conception: the poverty phenomena are conceived to consist of both the realities and fears of substandard living conditions. Trade as Adjustment Simple Hechscher-Ohlin trade theory suggests that in relatively unskilled-labourabundant countries, trade liberalization will relieve poverty (labour is poor people’s most abundant asset). However, for developing countries the liberalization of trade brings adjustment costs and transmission mechanisms affecting macroeconomic variables that impinge on its development strategies. There is a time inconsistency dilemma between the gains from multilateral trade (that take longer to materialize, if they do) and adjustment costs which are automatic and not only with one-time effects; the costs could persist over time. Thus, it is not simple for developing countries to rapidly adjust their trade agenda to the new context. In connection to adjustment costs, macroeconomic variables suffer through the monetary effects of transmission mechanisms. Trade liberalization brings about changes in relative prices that have impacts on GDP and employment levels. Winters et al (2004) have made strides in coming to grips with the transmission mechanisms that lie behind trade as an adjustment process. These mechanisms cover the macroeconomic aspects (growth and fluctuations), the impact on households and markets through prices, wages and employment; and government revenue and spending.

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Reflection Notes Developing countries are particularly vulnerable to policy shocks because their export industries are not well diversified – many are dependent on the export and hence world price of just a handful of commodities. Most importantly, developing countries are home to the world’s poorest people and the weakest credit markets. In poorly functioning markets, such redeployments are more likely to be slow, with longer periods during which resources are not fully utilized. In a sense, these adjustment costs can be thought of as the ‘price’ to be paid for the benefits of trade. Together these adjustment costs and trade benefits determine the net effect of trade reform for each country. If trade liberalization augments growth and productivity in the meantime, there are adjustment processes that affect different sectors of society. Identifying the losers and winners becomes a key issue at the time of designing a trade agenda. Even where reform has long-run net positive effects there will be a need to cope with adjustment costs, investment costs, and redistributive effects as resources are moved from one sector to another in the process of reform. Trade liberalization must be carefully managed as part of comprehensive development strategies. When tariffs are reduced, import-competing firms may be forced to reduce their production in the face of new competition, causing some of their workers and capital to lie idle for a period. Laid-off workers will incur costs while searching for new jobs and may need to invest in retraining or worse, may remain unemployed. Governments will be called upon to provide assistance to the unemployed, while also incurring costs associated with implementing the new systems to manage reform. Developing countries with weak social safety nets will have to devote more resources to strengthen these safety nets and to mitigate the cost of risks. This also needs to be viewed as part of the costs. Given the severe constraints on developing countries in raising taxes, the opportunity cost of funds diverted for even partial compensation and to strengthen the safety nets may be very high. Significant trade liberalization will also affect the distribution of income among factors of production. Even the elimination of distortionary policies has costs. Agricultural subsidies or high rates of protection affect the price of land, and landowners will lose substantial amounts when such subsidies are withdrawn. Trade liberalization may impose further costs: the movement from quotas to tariffs, from variable levies to fixed tariffs, or doing away with marketing boards, whatever their merits, may expose countries to additional risks. Adjustment costs are not just one-off costs. The loss of revenue may persist over time. For smaller countries, which tend to rely more on trade taxes, due to the smaller size of the national economies, trade taxes are still very important (Souza Ferreira Filho, 2007). Openness exposes a country to added volatility; volatility means that adjustment must be seen as constant. For all of these reasons, the adjustment to new trading rules is a radically different experience 5

Reflection Notes for developed and developing countries. (Stiglitz and Charlton, 2006). For the purpose of these notes, adjustment costs are grouped into fiscal losses; higher costs for net food importing countries, preference erosion and implementation costs of commitments. Fiscal losses. Trade liberalization reduces tariff revenue. In some countries tariff revenues make up a substantial part of total government revenue. Taxes on international trade account for around one per cent of government revenues in developed countries and around 30 per cent in the least developed countries. Developing countries rely on tariffs as a source of revenue far more than do developed countries largely because tariffs are an administratively efficient way of raising revenues; switching to other sources of revenues not only entails switching costs, but there may be permanently higher administrative burdens. Governments can of course attempt to replace lost tariff revenue with other sources, but these may be limited and may have high associated costs. Thus, either public expenditures get reduced or other taxes are increased and either may have significant adverse effects on growth. The desirability of replacing revenue from trade taxes with domestic revenue sources raises the issue of relative efficiency of alternative forms of taxation. Emran and Stiglitz (2004) have shown that in developing countries with an informal sector in which, say, a V.A.T. cannot be imposed, it is desirable to retain some trade taxes, e.g. to tax imports at a higher rate than domestic production. There is no simple solution for the problem of recovering trade taxes during trade liberalization processes. The most popular solutions, the increase in indirect taxes inside a country, can have negative effects on poverty, provided the broadening of the collection base will usually include necessity good, like foodstuffs, which are disproportionately important for the poorest (Souza Ferreira Fihlo, 2007:7). The main point is that trade reform has significant consequences for the fiscal structures of developing countries, whereas developed countries are by and large immune. As a result developing countries are likely to suffer either a loss of total tax revenue, or at best, a large administrative cost – and even more economic distortions – associated with the implementation of a new taxation system. Net food importing countries. Agricultural liberalization presents developing countries with the benefits of increased market access, but also the (potential) costs of higher prices for domestic consumers. The reduction in tariffs, domestic support and export subsides for agricultural products that has been agreed to will impact on developing countries largely through higher international prices of previously protected and supported products. The World Bank has estimated that total losses for net food importers would be between $300 million and $1.2 billion per year (Mitchell and Hoppe, 2006). Depending on assumptions, between 7 and 16

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Reflection Notes countries risk having food import bills increase by 5% or more. The existence of net losses for developing countries in some areas of reform should not imply that no reform is required – rather it suggests that a selective and gradual approach to agricultural liberalisation is needed and that considerable adjustment assistance may be required for the negatively affected countries. The fundamental point is that consumers benefit from lower prices that result from large agricultural subsidies, and producers lose. Depending on the land tenure system and the marketing system, for the product in particular, producers may be poor farmers, often worse off than the urban net consumers. Even countries who receive net gains from agricultural reform will incur costs associated with managing the internal distributional consequences of higher food prices. Given the limited capacity of developing countries to effect redistributions, there can be a significant welfare loss from such adverse distributional impacts. Preference erosion. Several developed countries offer non-reciprocal preferential market access which reduces the tariff rates on the goods of least developing countries below most favoured nation (MFN) rates. Many low developed countries (LDCs) fear that reductions in MFN tariff rates through multilateral trade liberalization would harm their exports by eroding their preferential margins. Preferential tariffs for LDCs have formed an important part of the global trade architecture since the inception of the Generalised System of Preferences (GSP) in the late sixties. Recently there have been a number of initiatives in OECD countries to further discriminate in favour of LDCs. Most notable among these are the EU’s Everything But Arms (EBA) initiative and the US’s African Growth and Opportunity Act (AGOA). Estimates of the benefits of preferences for LDCs (often calculated as the costs LDCs would experience if they were eliminated) are different from estimates of the costs of preference erosion through reduced MFN tariff rates. The chief difference is that in the case of preference erosion LDCs are compensated for the loss of competitive advantage in donor countries by increased market access in all other countries. As a result the costs to LDCs of preference erosion through MFN tariff reductions are likely to be smaller than the costs of preference elimination. The net effect on LDCs of preference erosion through reduction in MFN tariffs depends on whether the loss of ‘trade diversion’ (the negative switching or substitution that occurs as the margin of their preferences declines) exceeds the gains from ‘trade creation’ (the increase in global trade resulting from improved market access). Most research (Waino and Gibson, 2003; Low, Piermartini and Richtering, 2005) indicates that the average effect of preference erosion on LDCs is unlikely to be large. However this is not true for all industries in all countries. Industries that are particularly reliant on preferences could be seriously damaged by preference erosion. Large effects on a small group of countries and a small group of sectors cannot be ignored. While preference erosion is 7

Reflection Notes not a consideration that should impede liberalization, it does suggest that net losers will need assistance to manage adjustment. Implementation costs of commitments. Implementation costs are another example of adjustment costs. There are few reliable estimates of the implementation costs associated with multilateral trade reform. Finger & Schuler (2000) produced extrapolations based on case studies from the Uruguay Round. Their research concluded that while tariff reductions are relatively easy to implement, regulatory changes imposed a burden on developing countries which may in some cases have been large compared to the benefits they received from new market access opportunities. Mexico spent more than $30 million to upgrade intellectual property laws. Lengyel (2005) calculated costs of implementing WTO Agreements for Argentina and howed that not only were those processes institution-intensive, but also very costly, in the sense of demanding extensive investment in order to comply with and make effective use of the new disciplines as implementation in all cases went beyond the approval of new legislation. Compliance with agreements is not a small matter for developing countries whose administrative systems usually require larger reform to meet agreed standards. In addition, developing countries have the weakest government institutions and most constrained public resources. Implementation of an agreement incorporating regulatory changes requires expenditure on system design and drafting of legislation; capital expenditure on buildings and equipment; personnel training; as well as the ongoing costs of administration and enforcement. For this reason such agreements should be analysed in terms of their rate of return and compared to the alternative development priorities on which the same money could be spent. The important lessons from these studies of the Uruguay Round is that regulatory changes imposed a large and (in the case of the many non-compliant countries) unacceptable burden on developing countries. The rules seemed to be developed with little awareness of development problems and little appreciation for institutional capacities. The costs of implementing the regulatory agreements that could potentially emerge from the Doha Round are likely to be smaller than for the Uruguay Round, because the agenda is less encompassing, the developing countries are being asked to do less, and there are fewer regulatory issues on the table. However the costs of the remaining Singapore issue, trade facilitation, could be large for some countries. Middle Income Latin America: What have we learnt so far? During the nineties, Latin American countries pursued ambitious economic reforms which included liberalization policies in trade and capital flows. In addition, they joined regional 8

Reflection Notes integration schemes and at the same time negotiations at the multilateral level. The impacts of these processes on income distribution, social cohesion, and poverty were not obvious or assumed trickle-down effects along the way. How to tackle the trade and poverty phenomenon in the region? A first order methodological problem is issue-linkage. This means that the transmission mechanisms are intertwined making it harder to isolate the effects of trade on poverty. There is no bi-univocal association between trade liberalization - inequality and poverty. These relations are intermediated by the market structures, institutions, and domestic policies with different characteristics (Ventura-Dias, 2006). There is broad ambiguity in the debate: the prevailing perception is that trade can be positive, but not sufficient to solve distribution problems, and that under certain circumstances it can have negative impacts. However, there is little direct evidence. Most of the quantitative studies rely on the definition of poverty by income or consumption. Moreover, it has become very popular among economists to use Computable General Equilibrium Models (CGE) to evaluate this impact. Though useful, the key problem with this model lies in the assumption about labour mobility: most of the models are designed to assume that the ‘price system’ will respond to liberalization in such a way as to increase overall well-being. These exercises are useful but have been rather problematic when applied to developing countries, calling for a combined research agenda and the use of interdisciplinary as well as sectoral tools. Ricardo Paes de Barros and André Urani (2005) found evidence that the search for competitiveness resulting from trade liberalization induced a production shift to rural areas in Brazil, with negative impacts on metropolitan regions and a higher salary convergence between urban and rural areas. This does not mean that inequality among different regions in the country has decreased, but rather that it reduced inequality within regions. Despite the fact that it has not been possible to establish a positive correlation between trade and poverty, public opinion believes in this correlation and the belief has stimulated revisionist policies. This vision has become, with different levels of intensity, more or less generalized in South America, and has contributed, among other factors, to the adoption of ‘new developmentalist policies’ in the region. The case of Bolivia is of particular interest (Ríos, 2006). The Bolivian case has raised the question of the ownership of land and natural resources. About 65% of the Bolivian exports consists of mineral products and fuels, which are not very labour-intensive sectors. Import liberalization in these cases tends to fuel inequality because it favours capital-intensive sectors to the detriment of unskilled or semi skilled labour. Informality pushes falling salaries in this sector.

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Reflection Notes The concentration of exports in natural resource-intensive sectors is a problem when income from exports weakens the incentives to industrialization and diversification. The lesson from the case of Chile is that the state can play a role in stimulating innovation and diversification if it retains control over resources. A piecemeal contribution from LATN The Latin American Trade Network (LATN) organized a call for papers in order to reign in approaches to the issue. The importance of understanding trade models lies in the policy formulation that derives from them. The studies have showed preliminary conclusions for a broader understanding; they also act as a beacon to outline future research agendas. The studies carried out can be grouped in two groups according to methodology: general equilibrium and partial equilibrium models. The former includes a study of the impact of China on poverty indicators in Argentina. The latter covers three papers on a potential agreement EU-Mercosur, the role of sugar in the Brazilian economy and fruits and vegetable sector in Mexico. The findings can be summarized as follows: •

As regards the China card, under a scenario that assumes the drastic liberalization between Mercosur and China, poverty rises gradually, mainly as a result of the drop in the wages of employed workers. Abrupt liberalization will give no time to different sectors of the economy to adapt (Castro & Saslavsky, 2006). However, phased liberalization would have a positive impact on poverty indicators because the unemployed can be expected to enter the labour market. As Goldberg and Pavcnik (2004) argue, in the majority of Latin American countries, the most protected sectors are precisely the most intensive in the use of unskilled labour. Therefore, trade liberalization tends to affect such sectors more directly. For these authors, the puzzle is why labour-intensive countries have protected such sectors. Perhaps the best explanation is that all countries have for long protected labour, and today the emergence China shows that there are other countries, in which the supply of semi skilled labour is even more abundant. Hence Latin America cannot be seen any longer as a labour abundant region.

•

A study about the impact of an accord between Mercosur and the EU on Argentine regions highlights the fact that the consequences of this deal could be very different among regions. There are many reasons for this: i) productive structures differ; ii) the share of labour in each sector is not homogeneous; iii) unemployment rates among sectors and regions is not the same; and iv) the conditions of poverty do not only vary in magnitude, but also in nature.. The overall result shows that a full accord between the EU and Mercosur would reduce levels of poverty in all regions of Argentina. A partial deal will have positive impacts only in

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Reflection Notes some regions. But in both cases, the most favoured sectors would be those related to foodstuffs (Rupcic, 2006). •

Another study about the impact of fruits and fresh vegetables exports in Mexico, showed that the rise in such exports did not necessarily reduce poverty in rural areas. Leon Arias (2006) found that the extension of crops of these products does not have a great impact on poverty, such as migration and the rise in employment in other non rural activities. These latter two factors seem to have a more significant role in explaining poverty. But the greatest contribution to poverty reduction has come from federal public investment in programmes such as Procampo and Oportunidades .

•

Ferraz and Pitelli (2006) analyzed the sugar sector in Brazil due to its relevance in the Brazilian economy, and the impact of the sugar policy in the European Union. They found that a solid institutional framework (labour laws and the relationship of trade unions with the state) was a key factor in preventing the rise of rural and child poverty in that sector. In Sao Paulo, especially, such institutions contributed to an enhancement in working conditions. The work by Ferraz and Pitelli highlights the importance of legal frameworks that

constrain and soften the effects of transition. In many Latin American countries, weak governance and institutions, and low levels of tax collection impede improvements in many policy areas related to employment and growth. Informality and underemployment are becoming a much more significant problem in Latin America than unemployment. Thus, no single policy area will generate good jobs, so policy making must span different fields and needs to be coordinated. Altogether, the abovementioned cases show that micro effects are important and simple generalizations about all countries will be misguiding. This calls for a more cautious approach to liberalization, and a broadening of the approach to deal with trade and poverty. A comprehensive study carried out by ECLAC-UNDP (2005) concluded that trade liberalization seems to have contributed to enhance inequality and, in some cases, poverty as well. The authors attributed the increase in the gap between the remuneration of skilled and unskilled labour to trade liberalization. Therefore, we should be cautious about where causality is attributed. In cases where macroeconomic stabilization was achieved an the aggregate demand grew, real wages increased and unemployment rates dropped, but the macroeconomic cycles were associated with capital account liberalization and not with trade liberalization. Paes de Barros (2005) also draws attention to the fact that rigidity in the labour market prevents the effects of liberalization on jobs from materializing fully. Trade liberalization produced the most positive effects in countries which had more flexible labour laws. In this context, rigidity in the labour market can contribute toward increasing poverty in trade liberalization periods. 11

Reflection Notes Inequality and poverty are wider in Latin America than in other regions of the world. This highlights the importance of fostering integration processes with the capacity to augment growth and wealth, but also, requires supervision of the impacts, even in the short term, on specific sectors and segments of society. Among other reasons, unequal impacts may provoke resistance which may hamper the integration process itself. As market relations are constantly reconfigured we need to find ways to augment the participation of the population actively involved in the productive process. The way ahead and concluding remarks: Broadening the Approach: From ‘Trade Liberalization’ to ‘Trade and Poverty’ All in all, the experience shows that trade liberalization had different impacts on inequality and poverty. Variety of experiences and multiple causality are an area of agreement and it has led to a self-propelling industry in and of itself. However, pattern (for a scholar) is not just a vital, passionate quality of the thought that makes the data of science. It is the place we inhabit in our search for regularity, order, and principle. It is the world itself. On one hand, such agnosticism may be contributing to the lack of questioning of received wisdom, shrugging of the problem to another area of policy. On the other, it has success in generating political momentum, raising awareness and providing data for policy interventions and instruments for accountability. Agnostics in academia may not necessarily be jubilant. Yet standing in the middle ground between determinism and voluntarism they also have a consolation: in sharing their doubts with their readers, they are suggesting new lines of progress in research. The thoughts offered here may suggest some potentially fruitful hypotheses. The transition from a human resource approach (focused on human capital where humans are inputs in the production function) should lead way to a human development concept where people are the subject of development and not the object. The basic needs approach focuses on people’s minimum requirements (not on their choices) and the welfare perspective looks at people as recipients, not as active participants. Maybe because it is ‘simpler’ to measure (do not leave aside constraints), economists have only concentrated on ‘income poverty’ and not ‘human poverty’ which is a broader concept that takes into account all aspects of the phenomenon. We understand that resources generally used to tackle these interconnections (such as Computable General Equilibrium models, CGE) lie on a number of assumptions that are necessary in order to carry out analyses. However, we pose the following question to direct a future research agenda: Is it right to set boundaries to the analysis of trade and poverty by only considering the effects of trade liberalization on poverty? And will it be possible to identify effective policies to link international trade with poverty reduction if the analysis is limited in this way? A broader approach to policy analysis of the links between trade and poverty is 12

Reflection Notes necessary to enhance recommendations. We do not mean that the work being conducted is limited, what needs to be broadened is the approach, helping policy makers to alleviate poverty during trade liberalization. The field of trade and poverty should also be drawn to encompass all aspects of trade, not only trade liberalization. A major danger which has arisen from an exclusive focus on the question of trade liberalization and poverty is that integration into the global economy has come to be seen as a mechanism of poverty reduction in itself (Gauci and Naringi; 2007). Some authors believe that trade liberalization brings opportunities for the economic activity which can enhance inequality conditions while reducing poverty (Winters, McCulloch and McKay, 2004). Most policy-oriented poverty analysis in the nineties focused on the role of national factors as causes of poverty, and the effects of trade liberalization. The result has been that studies are narrowly framed. The conceptual lenses now needs to focus on development through trade. This line of research must incorporate market power: land tenure system, market structure, unionization of labour, etc. A development approach to trade will also look the complexities of international economic institutions and the negotiations that ensue from them. At the core of these negotiations, lies the question whether the current trade regime enable developing countries to design policies that promote human development and alleviate poverty. This is not an easy subject, and many of the studies have shown that appropriately designed trade reforms have the potential to make a significant contribution to development, and, with appropriate parallel measures, can do so in a socially sensitive or sustainable manner. It has, however, proved extremely difficult to realise these goals through the existing trade negotiating process. For one, the Doha agenda did not change the multilateral process, only its stated goals. Multilateral trade negotiations are not designed to deliver sustainable development. Their purpose has always been to maximise gains, and through a process of give and take, move towards freer trade. To give real life to the development component, it may be necessary to reform the foundations of the negotiating process itself. Most trade agreements have adopted development as a goal, but the bodies which negotiate them are not responsible for sustainable development, do not have the competence to define what sustainable development means, and are not subject to the requirements of any other authority except as provided through international law and other mechanisms of regional and global governance. Moreover, most of the literature reflects about the correct sequence of policies and the timing for liberalising trade. Negotiations are not paced or shaped in such a way as to allow timing and sequencing. So academic knowledge is systematically disregarded by the realpolitik of world trade negotiations. Trade policy choices are path-dependent and that is why a long-term approach to development is so important. The implications for domestic bureaucracies are 13

Reflection Notes paramount since development should be an integral long-term process in all phases of the decision making process, and not an isolated goal stuck on an agreement. There is a disconnection between those in government that deal with the adjustment process and those in charge of trade decision-making process. Attention needs to be paid to the decision-making process itself in order to better address the most significant regional and global issues that have been identified in the trade and poverty linkages.

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Reflection Notes Bibliography

Castro, Lucio, and Saslavsky, Daniel (2006), ‘Impacto de un acuerdo de libre comercio con China sobre la pobreza en el MERCOSUR. El caso de Argentina’, available on line at www.latn.org.ar

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