International trade is critical to poverty reduction. Whilst globalisation is helping boost trade globally, increasingly complicated trading structures are creating barriers to less developed countries. In order to break these barriers and nurture sustainable, inclusive trade, a two-tiered approach between open policy and improving logistics and infrastructure at a local level.
The fall of traditional trade barriers and the emergence of new technology driven by the fourth industrial revolution are each helping lower trade costs lower and enable more communities to join in.
Countries that are open to international trade tend to grow faster, innovate more, improve productivity and provide higher income and more opportunities to their people. Open trade benefits lower-income households by offering consumers more affordable goods and services and allows integration with the world economy and global value chains that can drive economic growth and reduce poverty—locally and globally.
According to the World Bank, the number of people living in extreme poverty has fallen by around one billion since 1990. Many researchers have put this successful decline in poverty levels down to growing participation of developing countries in international trade and sustained efforts to lower barriers to the integration of markets. As a result, as a proportion of global GDP, trade has approximately doubled since 1975 driven by increasingly integrated goods and services.
Opening up to trade increases a country’s GDP because it allows more efficient use of resources and specialisation of the production of goods and services that it can produce more cheaply. Openness to trade can also deliver long-term growth as it provides access to more advanced technological inputs that are available in the global market, enhancing the incentive to innovate.
Trade also contributes directly to poverty reduction by opening up new employment opportunities. For example, expanding export sectors calls for job creation and structural changes in the economy increase employment of low-skilled, poor workers in the informal sector. It also provides better access to external markets for the goods that poorer communities produce. Consequently, the integration of global markets through improved trade openness is the critical factor in lifting communities out of poverty. However, delivering inclusive trade is increasingly complicated.
The complexity of global trade is worsening the divide between the rich and the poor in terms of access to trade, leaving those who are disproportionately disconnected from global, regional – or even local – markets disconnected from the opportunities strong markets can deliver. For instance, thriving markets can facilitate the chance to develop a skilled, competitive workforces yet if communities are blocked from global production chains, they are less able to diversify their products and therefore, skills.
Other barriers to trade less developed countries suffer from include; inefficient or inadequate infrastructure, transportation, logistical, or customs systems, poor digital or telecommunications connectivity and complex regulatory environments that serve to discourage investment. Further, less developed countries often also experience anticompetitive behaviour displayed by the few organisations that dominate the economy, stifling innovation, productivity and growth.
In order to break these barriers and nurture sustainable, inclusive trade, a two-tiered approach must be taken. On a macro level, policies that maximise competitiveness must be designed and implemented to encourage interaction with poorer communities and on a micro level, action must be taken to make logistical systems more reliable, streamline procedures for clearing customs, and develop an open, rules-based, predictable multilateral trading system for all. On both levels, the key to ensuring a boost in trade is sustainable is designing and implementing policies that maximise competitiveness, increase connectivity, and facilitate trade.
In some places, this movement is underway. For example, in February 2017, the World Trade Organization’s Trade Facilitation Agreement entered into force, spearheading a global effort to reduce trade costs and help countries better connect to the global economy. This milestone presents an opportunity for governments to design practical reform strategies to pursue poverty reduction and shared prosperity.
In addition, to further enhance global trade, the World Bank Group (WBG) has been working with governments to address trade obstacles by designing and implementing policies that maximise competitiveness, increase connectivity, and facilitate trade. The WBG is currently supporting projects in Bosnia and Herzegovina, Macedonia, and Indonesia to make trade across borders easier. Each project is working towards the wider aim of helping create a global trading system that is more open, reliable and predictable for all. To do this, the WBG is working to deploy key strategies including;
As a result of these and supporting initiatives, in 2017, global trade volumes grew by 4.3%, the fastest rate in 6 years. In addition, behind increased trade levels are countries whose GDP is growing, companies who are trading goods across borders and citizens who can access goods and services at lower prices. For example, in Bosnia and Herzegovina, the WBG was involved with policy reforms to facilitate cross-border trade by simplifying government processes such as issuing export-import licenses. By the end of the project, businesses had saved an estimated $1.26 million in compliance costs, a reduction of approximately 4%. The reductions in trade-related administrative costs is significant as it helps strengthen the business environment and reduces the costs of doing business in the country. By reducing trade barriers for businesses, this project enhanced Bosnia and Herzegovina’s trade competitiveness and facilitated economic integration with the neighbouring European Union market.
Over in Indonesia, the WBG leveraged provisions of development policy lending (DPL) to implement procedures, customs, and formulation of reduced and simplified non-tariff barriers. The result was a reduction in the number of days needed to export and import: from 21 days in 2007 to 17 days to export and 27 days in 2007 to 23 days to import products. The Investment Project Financing (IPF) project financed investments and provided technical assistance for the Directorate General of Customs and Excise to strengthen client services through improved customs operations and trade facilitation.
Whilst it is important that organisations such as the WBG help deliver these reforms, it is also vital that a wide range of stakeholders, including the private sector, multilateral institutions and regional economic communities, work together as trade champions to promote open, rules-based international trading systems.
It would appear that the appetite to do so is there. The private sector is increasingly interested in ensuring that free trade is protected and helps support business opportunities including entry and growth for SMEs and MSMEs as well as participation in global value chains.
Although the drivers of poverty are multi-dimensional, the key to its reduction in a sustainable way, is economic growth. In order to encourage inclusive trade, local, regional and global trade policies must be examined and where required, tweaked, to ensure they are fit for purpose and generate genuine, sustainable growth in trade.
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