Poverty is the challenge of our age. Nearly half the world’s population, about 2.8 billion people, live on $2 a day or less. More than a billion of them live in extreme poverty, subsisting on less than $1 a day.
In 2000, UN Member States committed themselves to reducing extreme poverty by half by the year 2015. This ambitious task, the cornerstone of the Millennium Development Goals, may be achievable if the world financial and trading systems work more smoothly.
Poverty and extreme poverty are concentrated in the 50 very poorest countries, which the UN calls the "least developed countries" (LDCs). In these countries — 34 of them in sub-Saharan Africa — the number of people living in extreme poverty is rising and will continue to increase for some time.
World trade has been expanding at a rate of nearly 5% a year. But gains in trade tend to be concentrated in a few nations. Over 80% of all world exports are produced by only 10 countries. The lion’s share of every dollar of wealth produced in the world economy goes to wealthy or middle-income countries. Only three cents of every dollar, says the World Bank, goes to the low-income countries that are home to 40% of the world’s population.
The benefits of trade are meagre in most developing nations, with some notable exceptions - witness the recent trade boom in China, for instance, where the percentage of the extremely poor has plunged from 64% to 17% since 1981, or the successful performance of some south-east Asian countries. The largest developing-country economies predominated among the grouping’s top 10 non-oil exporters in 2001: China and Mexico, followed by Malaysia, Thailand, Brazil, Indonesia and India. It was slim pickings for the smaller economies: African and other least developed countries accounted for a mere 0.62% of world trade last year, and their economies, combined, made up 0.58% of global GDP. In 15 Latin American and Caribbean nations, more than 25% of the population lives in poverty, according to the World Bank.
Escaping the poverty trap
Finding a way out of the poverty trap and translating trade into higher national income is a conundrum. Expansion of trade doesn’t automatically create poverty reduction. What matters most is whether trade leads to economic growth. Some types of trade clearly do so, thereby generating more resources that could be used to cut poverty.
The type of goods to be produced is even more important than trade liberalization in reducing poverty. Historically, primary products or commodities, such as minerals and unprocessed food crops, are subject to extreme price fluctuations that make them unreliable for supporting growth and create economic instability. Thus, the commodity-dependent LDCs are less likely to see sustained income from exports than those that produce processed goods (such as sugar, vegetable oil or canned fruit) or manufactured products.
But to move into higher-value goods, countries need the investment required to build productive capacity. In countries where domestic savings and investment are low, external capital - primarily official development assistance (ODA) and foreign direct investment (FDI) — can supply the capital, technology and skills needed to do this. Productive capacity will grow in settings where goods and information can be conveyed efficiently: modern roads, ports, railways and telecommunications networks help drive growth and competitiveness. But while ODA to social sectors has been on the rise, the amount of ODA going into improving productive capacity has shrunk.
Ready for export
Even developing nations with a diversified basket of competitive products face trade barriers. Tariffs, for example, range from 14% on agricultural goods and 8% on labour-intensive manufactures to 3% on industrial products. Another type of barrier is the stringent health and environmental standards imposed by developed countries on a range of developing-country exports. A well-known example is the woman entrepreneur from Mauritania who, despite substantial efforts and investments, was unable to export her camel cheese to the European Union because of strict regulations.
Subsidies paid by rich countries to their domestic producers create an even more formidable trade barrier by making developing-country exports of the same products uncompetitive on world markets. Cotton — its prices on world markets have plunged 15% so far this year — is a prime example. Rich-nation subsidies to domestic farmers totalling $4 billion caused Brazilian cotton farmers to lose $600 million in sales in 2001. In Africa, where 15 million people work in the cotton industry, farmers lose about $250 million yearly due to subsidies from the US alone, whose 25,000 cotton farmers control more than 40% of global cotton exports, according to the Wall Street Journal.
| "If the most forceful moral and political justification for subsidies is that they are needed to save the peasants", UNCTAD Secretary-General Rubens Ricupero told the UN’s Economic and Social Council in June 2003, "then the facts demonstrate they are not achieving their purpose. … Not only do farm subsidies cruelly fail to help the poor in the North, they also seriously harm poor peasants in the South. … In more than one sense, poor-country farmers are financing the social welfare doled out to rich-country farmers. … The farm support systems of OECD nations are seriously aggravating poverty and having an equally serious and direct impact on the prospects for poverty reduction to which the Millennium Development Goals (MDGs) aspire. … More than an economic or trade problem, cotton subsidies pose a moral dilemma for women and men of good will worldwide." |
On 27 April, the WTO ruled that US cotton subsidies distort world prices. The ruling was issued in response to a complaint filed by Brazil; the US will appeal.
Downloads [PDF]: | Trade and poverty (Issue note) | LDCs Report 2002 (Escaping the Poverty Trap) |