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1
The Economics of International Development
Trade and the Rise from Poverty
May 16, 2006
copies of this presentation can be found atwww.business.duq.edu/faculty/davies
2
Trade and Per-Capita Income
Conventional wisdom
Trade leads to a shift in wealth:
• from workers and consumers to multinational corporations, and• from developing nations to developed nations
Rationale
• Workers in developed countries become unemployed as their jobs move abroad where labor is cheaper.
• Income generated in lesser developed countries accrues to developed countries because multinational corporations are owned by residents of developed countries.
Example
McDonald’s is accused of preventing union formation and paying substandard wages in its restaurants abroad.
3
R2 = 0.56
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
$0 $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 $35,000 $40,000 $45,000
Per-capita Income (US$)
Per
-cap
ita
Tra
de
(US
$)
Source: International Financial Statistics, International Monetary Fund, December 2001
Greater per-capita income is associated with greater per-capita trade.
4
R2 = 0.59
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
$0 $500 $1,000 $1,500 $2,000 $2,500 $3,000 $3,500 $4,000 $4,500
Per-capita Income (US$)
Per
-cap
ita
Tra
de
(US
$)
Suriname
Lithuania
Samoa
Russia
ColombiaPeru
Guyana
Source: International Financial Statistics, International Monetary Fund, December 2001
For lower-middle and lower income countries, greater per-capita income is associated with greater per-capita trade.
5
Trade and Per-Capita Income
Data suggest
Higher levels of trade are associated with higher levels of per-capita income.
Supporting theory
Trade promotes specialization which results in• More jobs as workers are hired to produce goods which leverage the
country’s human, environmental, geographic, and resource strengths,• More available goods as currency earned via exports enables
consumers to import more goods, and• More infrastructure as foreigners see investment opportunities due to
population’s increasing purchasing power and productivity.
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Examples
Affiliates of US multinational firms pay a wage premium that ranges from 40% in high-income countries to 100% in low-income countries.
Workers in foreign-owned apparel and footwear factories in Vietnam rank in the top 20% of wage earners.
In 2000 at Nike factories abroad, annual wages were $670 compared with an average minimum wage of $134. In Indonesia, annual wages were $720 compared with an average annual minimum wage of $241.
In Mexico, firms that exported half of their product paid wages that were, at the low end, 11% higher than wages of non-export oriented firms. Firms that exported most or all of their product paid wages from 58% to 67% higher than wages of non-export oriented firms.
Source: Brown, Drusilla K., Alan V. Deardorff, and Robert M. Stern, “The Effects of Multinational Production on Wages and Working Conditions in Developing Countries,” discussion paper no. 483, School of Public Policy, The University of Michigan, August 2002.
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Distribution of Income
Conventional wisdom
Trade results in a concentration of income so that the few benefit disproportionately to the many.
Rationale
The consolidation of economic power by the multinationals results in a concentration of more and more income in the hands of fewer and fewer individuals.
Example
Bill Gates ($41 billion). Sam Walton ($25 billion in 1992).
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$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
15.0 20.0 25.0 30.0 35.0 40.0 45.0 50.0 55.0 60.0 65.0
Gini Coefficient (0 = equitable, 100 = inequitable)
Per
-cap
ita
Tra
de
(US
$)
65% of countries with above median trade have above median income distributions.
The figure is 62% for lower-middle and lower income countries.
median
median
Source: International Financial Statistics, International Monetary Fund, December 2001, and Measuring Income Inequality: A New Database, Deininger, Klaus, and Lyn Squire, World Bank, 2002
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$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
15.0 20.0 25.0 30.0 35.0 40.0 45.0 50.0 55.0 60.0 65.0
Gini Coefficient (0 = equitable, 100 = inequitable)
Per
-cap
ita
Tra
de
(US
$)
100% of countries with per capita trade of at least $7,700 have better than median income distributions.
$7,700
median
Source: International Financial Statistics, International Monetary Fund, December 2001, and Measuring Income Inequality: A New Database, Deininger, Klaus, and Lyn Squire, World Bank, 2002
10
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
15.0 20.0 25.0 30.0 35.0 40.0 45.0 50.0 55.0 60.0 65.0
Gini Coefficient (0 = equitable, 100 = inequitable)
Per
-cap
ita
Tra
de
(US
$)
Finland
Cyprus
There is an optimal income distribution
• Income too inequitable: Entrepreneurs will expect no gain despite effort and so will not incur entrepreneurial risk.
• Income too equitable: Entrepreneurs will expect gain regardless of effort and so will not incur entrepreneurial risk.
Source: International Financial Statistics, International Monetary Fund, December 2001, and Measuring Income Inequality: A New Database, Deininger, Klaus, and Lyn Squire, World Bank, 2002
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Distribution of Income
Data suggest
Higher levels of trade are associated with greater income equality within countries.
Supporting theory
More trade implies more economic opportunities:• Producers see more opportunity to sell on new export markets, and• Buyers are able to purchase at lower prices on new import markets.• More economic opportunities implies more entrepreneurship.
More entrepreneurship leads to greater income equality:• Entrepreneur creates jobs providing income for workers.• Entrepreneur creates investment opportunities providing income for
investors.
ExampleMicrosoft, Wal-Mart, Intel, Oracle, eBay, Dell
12
The Environment
Conventional wisdom
Trade is bad for the environment.
Rationale
Trade encourages firms in developed countries to exploit the environment in lesser developed countries.
Example
Rainforests.
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$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
-3.0% -1.0% 1.0% 3.0% 5.0% 7.0% 9.0%
Average Annual Rate of Deforestation (1990-1995)
Per-
cap
ita T
rad
e (U
S$)
Ireland
LebanonJamaica
Malaysia
Source: International Financial Statistics, International Monetary Fund, December 2001, and World Development Indicators, World Bank, 2002
median
median
73% of countries with above median trade have below median rates of deforestation.
The figure is 60% among lower-middle and lower income countries.
14
The Environment
Data suggest
Higher levels of trade are associated with better environmental conditions.
Supporting theory
There is some optimal level of environmental “use.” Under utilization of the environment can be as bad (i.e. living without power, transportation, etc.) as over utilization (i.e. dead oceans, barren land, etc.).
Examples
Cows and elephants. Christmas tree farms.
15
Gender Equality and Child Labor
Conventional wisdom
Because trade is founded on the premise of exploitation, gender inequality and child labor will worsen in the presence of trade.
Rationale
Politically and economically weak demographic groups are least able to resist the consolidation of power that accompanies increased trade.
16
R2 = 0.80
$1
$10
$100
$1,000
$10,000
$100,000
0.00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80 0.90 1.00
Gender Related Development Index (0 = low gender adjusted HDI, 1 = high gender adjusted HDI)
Pe
r-c
ap
ita
Tra
de
(U
S$
, lo
ga
rith
mic
sc
ale
)
Source: International Financial Statistics, International Monetary Fund, December 2001, and Human Development Report, United Nations Development Programme, 2002
GDI measures quality of life (longevity, education, literacy, income) for women relative to men.
Greater gender equality is associated with greater trade.
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$1
$10
$100
$1,000
$10,000
0.00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80 0.90
Gender Related Development Index (0 = low GDI, 1 = high GDI)
Per-
cap
ita T
rad
e (
US
$,
log
ari
thm
ic s
cale
)
Source: International Financial Statistics, International Monetary Fund, December 2001, and Human Development Report, United Nations Development Programme, 2002
For middle-lower and lower income countries, greater gender equality is associated with greater trade.
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Source: International Financial Statistics, International Monetary Fund, December 2001, and World Development Indicators, World Bank, 2002
$1
$10
$100
$1,000
$10,000
0 10 20 30 40 50 60
Children 10 to 14 in the Labor Force (as % of age group)
Per-
cap
ita T
rad
e (
US
$,
log
ari
thm
ic s
cale
)For middle-lower and lower income countries, reduced child labor is associated with greater trade.
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Gender Equality and Child Labor
Data suggest
Higher levels of trade are associated with greater gender equality.
Supporting theory
Because trade decentralizes power and augments competition, demographic groups that would seek to dominate others are disempowered. Economic and political power accrue to those who provide the innovation, goods, and services that others desire.
Example
Historically, oppressed demographic groups have gained greater freedoms coincident with general economic gains: slavery in the US ends as industrial revolution waxes; women in the US attain suffrage as technological advances from industrial revolution reach into the home; the most repressive Islamic countries today are also among the poorest.
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Summary
Premise behind Anti-Trade Position
Trade encourages the consolidation of economic and political power in the hands of a few. This consolidation of power results in the exploitation of the weak by the strong.
Premise behind Pro-Trade Position
Trade encourages the dissemination of economic and political power as entrepreneurs are freed to leverage their countries’ human, environmental, geographic, and resource strengths.
Data Suggest
Higher levels of trade are associated with a clear decentralization of economic and political power, both across and within countries.
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Summary
Example
The number of multinational firms (currently 40,000) is growing at twice the rate of the global economy over time, multinational firms are becoming less, not more, economically powerful.
The number of democracies has doubled in the last 10 years and quadrupled in the last 30 years over time, individuals are becoming more, not less, politically empowered.
Conclusion
In exercising political power, individuals vote by casting ballots. In exercising economic power, individuals vote by casting dollars.
Democracy puts political power in the hands of individuals so that they can pull themselves out of political poverty.
Trade puts economic power in the hands of individuals so that they can pull themselves out of economic poverty.
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The Economics of International Development
Trade and the Rise from Poverty
May 16, 2006
copies of this presentation can be found atwww.business.duq.edu/faculty/davies