The Power of the Poor
 
Benefits of Trade Hernando de Soto believes in the power of trade. He worked very hard to help get the US-Peru Free Trade Agreement passed and regularly speaks out in favor of giving the poor access to wider markets. That brings us to de Soto’s biggest problem with the global trade status quo: the majority of the world’s population has no access to the global market and must work on a playing field that is decidedly not level.

The Institute for Liberty and Democracy has found that only 2 percent of Peruvians, for example, can actually trade with the US — or even nationally within Peru. Globalization as it currently exists can only globalize the elites. In developing countries, the costs of entry are high, so elites are the only ones who can afford to gain access. Open markets and increased trade are keys to eliminating poverty, but just as critical is empowering the power with the legal and communication tools to enter wider markets.

The ILD has gathered ample evidence that once the poor enter the legal system and have the access they need, they prosper. (See, for example, an interview with Lima entrepreneur Mauro Gutierrez Quispe, who was able to build a thriving international business once he gained access to global markets and could work with modern business tools.)

Trade has many overall benefits. The law of comparative advantage says that even less productive countries will benefit from trade with more productive countries because stronger producers can trade in order to free up resources that will enable them to specialize (which creates even more value). If you could sum it up, the rule of thumb for comparative advantage would be “Do what you do best and trade for the rest.” The result will be more productivity and more economic benefit for everyone. Consumers, for example, benefit from the lower prices that specialization and economies of scale engenders.

We need not take this on faith, however. Free trade tends to generate economic growth and closed or protected markets tend to stagnate. The CATO Institute’s Economic Freedom of the World reports, which measure economic freedom in 123 countries, consistently show that the per capita gross domestic product in nations with the most restricted trade is many times smaller than those countries with open trade policies.

This is especially true in sub-Saharan Africa. In a 2006 article, the CATO institute’s Marian Tupy wrote:

Under the World Trade Organization’s ‘special and differential treatment’ rule, many sub-Saharan African countries have been permitted to retain significantly higher import tariffs than rich countries. Combined with ‘preferential treatment’ of their goods in rich countries’ markets, sub-Saharan African producers enjoy a substantial advantage over other foreign competitors.

Result? According to the World Bank, Africa’s share of world exports declined from 3 percent in 1970 to less than 2 percent in 2003. About 50 percent of sub-Saharan African exports come from a single country, South Africa. (It is worth noting South African import tariffs are substantially lower than those of other sub-Saharan African countries.)1

Economist Arvind Panagariya wrote in a paper “Miracles and Debacles: Do Free-Trade Skeptics Have a Case?”:

On the poverty front, there is overwhelming evidence that trade openness is a more trustworthy friend of the poor than protectionism. Few countries have grown rapidly without a simultaneous rapid expansion of trade. In turn, rapid growth has almost always led to reduction in poverty.2
References:
1 Tupy, Marian, “Free Trade Benefits All”, The Washington Times, January 3, 2006.
2 Panagariya, Arvind, Miracles and Debacles: Do Free-Trade Skeptics Have a Case? August 2003.