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How Trade Can Help Alleviate Poverty

by Samantha Greene / Aug 25, 2023 / 5m

No country has achieved long-term economic growth and poverty reduction by closing itself off to international investment and trade. After a year of growing trade tensions, the world must not forget that open trade has been a significant driver of economic development and poverty reduction in recent decades. With the global economy undergoing a slowdown, attempts to increase economic opportunity through trade are becoming vital. As Jeffrey Sachs, Special Advisor to the UN Secretary-General, says, "When countries open up to trade, they can greatly benefit as they can sell more; then they can buy more. So trade has a two-way gain." Let’s dive deeper and look into the key ways in which trade can reduce poverty and promote economic growth.

The Role of Open Trade for Economic Growth

Poverty is the most serious scourge of our time. To minimize the number of people living on less than $1 per day, developing countries should significantly accelerate their economic growth by carefully opening their markets. The main argument behind it is that trade liberalization promotes economic wellbeing and contributes to long-term economic growth. Global yearly welfare gains from trade liberalization are projected to be in the range of $90 billion to $200 billion, with poorer nations receiving two-thirds of the benefits. This might help move 140 million people out of poverty. But how exactly does it work? How can trade help alleviate poverty?

Trade Creates Employment Opportunities

One of the most direct ways trade can reduce poverty is by generating employment opportunities. When countries engage in international trade, they often produce goods and services in which they have a comparative advantage. This leads to increased production and job creation. As industries expand to meet international demand, more jobs are created throughout the supply chain, from raw material extraction to manufacturing and distribution. This not only reduces unemployment rates but also enhances income levels, enabling individuals and families to escape the clutches of poverty.

Trade Enhances Income Levels

Trade allows countries to access larger markets beyond their borders. By exporting goods and services, developing nations can tap into a global customer base, increase their sales and revenue. This influx of foreign exchange can bolster a country's economic stability and contribute to higher income levels. As incomes rise, people have the means to invest in education, healthcare, and other critical areas that play a key role in breaking the cycle of poverty. Additionally, higher income levels can empower individuals to plan for a more secure future.

Trade Allows for Technology Transfer and Knowledge Sharing

International trade facilitates the transfer of technology and knowledge between countries. When nations trade, they often exchange ideas, practices, and technological innovations. This can lead to the adoption of modern production methods, better agricultural practices, and improved infrastructure. For developing countries, access to these advancements can be transformative, enabling them to enhance productivity and produce higher-quality goods. This, in turn, can lead to increased trade opportunities, higher revenues, and ultimately reduced poverty rates.

Trade Diversifies Economies

Heavy reliance on a narrow range of industries or commodities can make countries vulnerable to economic shocks. Trade encourages countries to diversify their economies by seeking new markets and products. Diversification can help nations become more resilient to fluctuations in commodity prices and global demand. By expanding their economic base, countries can reduce their susceptibility to external shocks and ensure a more stable and sustainable path to development.

Trade Attracts Foreign Direct Investment

Trade often goes hand in hand with foreign direct investment (FDI). Countries that engage in international trade tend to attract more FDI as investors seek opportunities in growing markets. But how does it relate to the topic, and how does trade reduce poverty? FDI brings with it capital, technology, and expertise, which can be instrumental in promoting economic growth and development. When foreign companies set up operations in a country, they create jobs, transfer skills, and contribute to the local economy. As a result, there are more opportunities for income generation and skill development.

Trade Strengthens Institutions and Governance

To effectively engage in international trade, countries need to develop and implement sound trade policies, establish transparent regulatory frameworks, and ensure efficient customs procedures. These efforts often require countries to strengthen their institutions and governance structures. As countries work towards improving trade-related processes, they inadvertently create a conducive environment for overall development. Transparent and efficient institutions foster trust, attract investment, and ensure that the benefits of trade are distributed more equitably.

Trade Provides Access to Essential Goods and Services

Trade allows countries to access goods and services that they may not be able to produce domestically. This includes vital commodities such as food, medicines, and energy resources. By engaging in trade, countries can secure a stable supply of essential products, mitigating the risk of shortages and price spikes. This is particularly crucial for impoverished populations, as access to these goods can directly impact their quality of life and well-being.

Trade Empowers Vulnerable Groups

Trade can have a positive impact on gender equality and the empowerment of vulnerable groups. As industries expand and diversify, new job opportunities arise, creating avenues for people to participate in the workforce. Trade can challenge traditional gender roles, promote equal pay, and provide women with economic independence. Furthermore, increased income from trade can support initiatives that target women's education and healthcare, contributing to broader social and economic development.

Final Say

Economic growth is necessary but not sufficient for reducing poverty. Developing countries now account for 48% of global commerce, up from 33% in 2000, and the number of people living in extreme poverty has been reduced by half since 1990, to just under one billion. Trade has helped developing nations enhance the quantity and quality of employment, boost economic development, and drive productivity advances. However, if you wonder, "How can I help reduce poverty?" here is the answer: Complementary domestic policies and institutions are required so that labor mobility rules, proper financial development, and decent public infrastructure are covered and well addressed.