Strategic Dialogues on Hemispheric Challenges

The CIP Americas Policy Program is committed to fostering strategic dialogue and reflection among civil society actors engaged in Latin American and Caribbean issues. To that end, we have started a regular series of briefings that summarize different views about pressing hemispheric issues. We welcome your feedback and comments, which will be posted to our website www.americaspolicy.org and circulated in our Spanish and English e-zines. Please send your comments in English, Spanish, or Portuguese to americas@ciponline.org.

Trade, growth, development, poverty reduction—each term represents a complex set of problems that continues to be at the forefront of the challenges faced by Latin American societies. Lately the relationship between them has become a subject of hot debate.

The standard neoliberal argument can be reduced to a simple equation: trade=growth=poverty reduction. One of the classic studies purporting to prove this equation was published by the World Bank and authored by World Bank economist David Dollar.

More recently, however, economists in the region have found flaws in both the methodologies and the conclusions of the World Bank and other studies purporting to prove this relationship. In the first place, longer experience with trade liberalization has shown that neither high growth rates nor poverty reduction are automatic dividends of market integration. The Asian crisis, Mexico's 1995 crisis, and sluggish performance among some of the region's most integrated economies call into question the equation. But even more important is the overwhelming evidence of increasing income inequality resulting from liberalized trade and opening up economies to international investment.

The critics have left their mark on the debate. Proof of the need for rethinking has come from the World Bank itself. In a lengthy study, chief regional economist Guillermo Perry attempts to respond to the failure of trade liberalization to lead to growth and growth to lead to poverty reduction by advocating continuing the course but noting the need for accompanying domestic policies.

In the following Strategic Dialogue, we present the classical view and its more recent modification, followed by a critique and proposal by U.S. economist Thomas Palley and a critique by Uruguayan researchers Eduardo Gudynas and Carolina Villalba. The dialogue concludes with a view from the South on the fallacy of a simple relationship between growth and development and the need for sustainable models.

1. "Globalization Leads to Faster Growth and Poverty Reduction in Poor Countries"

In a classic 2001 paper for the World Bank, David Dollar presents a cross-country analysis that supports the view that globalization leads to faster growth and poverty reduction in poor countries by comparing more globalized countries' trade and growth rates with others. After applying models to see how general the patterns are and analyzing the proportionate share of the poor over the period of trade growth, he concludes that "the increase in growth rates that accompanies expanded trade translates on average into proportionate increases in incomes of the poor. Absolute poverty in the globalizing developing economies has fallen sharply in the past 20 years. The evidence from individual cases and from cross-country analysis supports the view that globalization leads to faster growth and poverty reduction in poor countries."

By 2006, however, the World Bank acknowledged that in Latin America there were "... two disappointments—lagging growth and persistent inequality." This forced the Bank to reconsider the across-the-board equation between globalization and poverty reduction. In a study entitled "Poverty Reduction and Growth: Virtuous and Vicious Circles," regional director Guillermo Perry led a team of researchers that concluded that, indeed, there are trade-offs in the process. "More specifically," the report concluded, "while a more developed financial sector, an economy more open to international trade, and a smaller government may all be associated with faster growth, they also seem to be associated with higher levels of income inequality." The study also concluded that openness to international economy increased income risk and should be accompanied by "compensatory mechanisms" in unequal countries.

The World Bank study predictably recommended against altering the forms of globalization: "Do these findings imply that poverty reduction strategies should tend to avoid policies that involve potential growth-inequality trade-offs? The answer to this question is unequivocally no." Instead, the World Bank team advocated "a policy mix" that takes into account "complementarities, understood as the interactions that take place among and between policies and existing conditions of the country, region, or individual ..."

Trade, Growth and Poverty
By David Dollar, World Bank Economic Papers 2001
Online at:
http://econpapers.repec.org/paper/wbkwbrwps/2615.htm

Poverty Reduction and Growth: Virtuous and Vicious Circles
By Guillermo E. Perry, Omar S. Arias, J. Humberto López, William F. Maloney, and Luis Servén
Online at:
http://siteresources.worldbank.org/EXTLACOFFICEOFCE/Resources/
870892-1139877599088/virtuous_circles1_complete.pdf

2. International Trade Rules Must Change for Development and Poverty Reduction

Mainstream policy economics has been gradually lowering its claims about the trade's positive impact on development and poverty reduction. The new approach is a compassionate agenda that contends that if trade liberalization is to reduce poverty, it must be flanked by public investment in infrastructure and human capital. However, this new agenda raises numerous questions about how to finance public investments, whether these investments should be sequenced in advance of liberalization, and whether trade liberalization is desirable if the investments are not made. But the new agenda still does not address the systemic critique that the type of rapid trade liberalization promoted by the World Trade Organization and free trade agreements hinders development by preempting the use of important national economic and social policy tools.

This contribution to the Strategic Dialogue presents an alternative framework for evaluating trade, development, and poverty-reduction strategies. This framework emphasizes domestic-commerce promotion and strategic "value-chain" analysis that focuses on how developing countries can capture more of the value they create. It argues for incremental policy change rather than on grand liberalizations. In a world of uncertainty, optimal decision theory advises: "Go slow if you don't know." Finally, it proposes a tropical-products trade round that can produce a win-win outcome for both North and South.

Thinking Outside the Box about Trade, Development, and Poverty Reduction
By Thomas I. Palley
Online at:
http://americas.irc-online.org/am/4470

3. Growth without Equality and Sustainability is Anti-development

The Persistent Confusion between Economic Growth and Development
By Eduardo Gudynas and Carolina Villalba

The authors, Uruguayan economists from the nongovernmental organization Latin American Commission for Social Ecology (CLAES), argue that even where growth does occur, it is far from synonymous with development for Latin American countries. In their essay, they outline a more integral approach. They conclude: "It is time for the issue of development to return to center stage in all its dimensions—economic, social, and environmental."

Discussion Questions:

1. Can export-led growth models efficiently reduce poverty? What are the necessary conditions?

2. If trade and investment liberalization polices must be accompanied by domestic policies, what sort of domestic polices are needed? Is there room for implementation of such policies under WTO and Free Trade Agreement rules?

3. Are regional South-South trade agreements a superior way of stimulating commerce and retaining value?

4. Can the global South work directly with Northern NGOs and consumers to capture value by insisting on corporate codes of conduct and by developing Southern brands?

5. Can global labor standards help capture value by prescribing a floor that ensures that a minimum level of value is retained within each country?

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