Trade, Growth, and Poverty

A key issue today is the effect of globalization on inequality and poverty. We first identify a group of developing countries that are participating more in globalization. Since China, India, and several other large countries are part of this group, well over half of the population of the developing world lives in these globalizing economies. The post-1980 globalizers have seen large increases in trade, and significant declines in tariffs over the past 20 years. Their growth rates have accelerated from the 1970s to the 1980s to the 1990s, even as growth in the rich countries and the rest of the developing world has declined. The post-1980 globalizers are catching up to the rich countries while the rest of the developing world is falling farther behind. We next ask how general these patterns are, through regressions that exploit the within-country variation in trade and growth. We find a strong positive effect of trade on growth after controlling for changes in other policies and addressing endogeneity with internal intruments. Finally we examine the effects of trade on the poor. Since there is little systematic evidence of a relationship between changes in trade volumes (or any other globalization measure we consider) and changes in income share of the poorest, the increase in growth rates that accompanies expanded trade leads to proportionate increases in incomes of the poor. The evidence from individual cases and from cross-country analysis supports the view that globalization leads to faster growth and poverty reduction in poor countries. Views expressed are those of the authors and do not necessarily reflect official views of the World Bank or its members countries. We thank Sergio Kurlat and Dennis Tao for excellent research assistance. An earlier draft of this paper was presented at the conference on “Poverty and the International Economy,” sponsored by Globkom (Parliamentary Commission for Swedish Policy on Global Development) and the World Bank, October 20-21, 2000, Stockholm, Sweden. We thank Jeff Williamson, Dani Rodrik, and seminar participants for helpful comments on the initial draft.