Linkage between trade, development and poverty reduction

Type Working Paper
Title Linkage between trade, development and poverty reduction
Publication (Day/Month/Year) 2005
Trade policy reforms constitute a major element in macroeconomic reforms. They are not
introduced in isolation; they are associated with other macroeconomic reforms and
liberalization. Macroeconomic policies shape the investment climate for economic growth
and promote efficiency of investment. Sound macroeconomic policies through credibility,
predictability and transparency encourage investment -- giving price signals for private
sector activities; removing market distorting regulations and institutions; defining the
complementary roles of the state and the private sector in agricultural, manufacturing, and
services sectors; and ensuring efficiency of both the government and the private sector in
the production and distribution of goods and services. Evidence shows that acceleration of
economic growth has taken place in countries with sound macroeconomic policies; and
poverty has been better addressed in high growth condition (UNDP, 2004). It is
substantiated by high and sustained economic growth in South East Asian countries, China,
and of late that of Vietnam, India, and Bangladesh resulting in marked reduction in poverty.
In particular, economies with trade openness have been able to enhance growth and reduce
poverty faster than others. Experience has also shown that sharp drop in economic growth
resulting from shocks and economic adjustments may increase the incidence of poverty, as
observed in many South-East Asian countries after the financial crisis of 1997. Experience
from the same crisis has also shown that countries which have adopted sound macro
economic policies can recover from the crisis soon and attain catch up growth with poverty
But sound macroeconomic policies have to be supported by good institutions and
governance to make growth built-in distributive so that reduction of poverty is faster and
deeper. A strong relationship between growth and poverty reduction holds through the
creation of employment in the process of trade and industrial expansion along with labour
market conditions, public sector institutions and fiscal regime. But trade led high economic
growth might initially tend to address urban poverty, and rural poverty might remain
unaffected if there is no strong backward linkage between trade and rural economic
activities like agriculture. The urban areas have better employment opportunities in an
economic growth pattern supported by urban-based industrial and service activities. For
high economic growth to reduce rural poverty in agriculture-dominated countries like
Nepal, trade must lead to a transformation of the agricultural sector along with rural
industrialization based on local resources.

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