Trade and economic development:

Relationship between trade and development &

Effect of trade in erradicating poverty in
developing countries

Carlos Vallejo Maroto

Summer semester 2022/2023

Briefly characterize the relationship between trade and development. Does (and
how) trade can contribute to eradicating poverty in developing countries?

Trade and development are tightly related, having a relationship of mutual benefit
with the ability of boosting economic growth and raising living standards, as trade is
a growth engine that generates employment, reduces poverty and increases
economic opportunities.

International trade can be an important source of growth and development, leading

countries to specialize in the most profitable industries for each of them, as well as it
allows the access to new, bigger and more diverse markets, uncovering new
opportunities and a potential higher number of consumers. By exporting products
and services in which companies specialize, countries generate income and
employment, boosting economic growth. The existence of trade usually implies the
existence of competition, leading companies to increase their productivity, quality
and lower prices to adapt and survive to global markets, what benefits the consumer
and general economy.

The exchange of goods and services throughout the whole world makes possible the
exchange of knowledge, technologies and industrial techniques with other countries,
stimulating innovation and adoption of most efficient techniques, driving economic
growth in a long term.

Investments can come from within the country as well as from abroad, foreign
investment, which is the investment done by foreign companies in a country. This
investment supposes the generation of employment, transfer of technology and
techniques, improvement of the infrastructure and increase in production capacity,
contributing to the economic growth.

On the other hand, economic development can contribute to the promotion of trade,
as larger economic development may suppose a raise in the demand of goods and
services, generating more internal commerce. Under the vision of international
trade, larger development can improve infrastructure and financial system, leaving
the country in a better position for its participation in international trade.

Although trade and development are tightly linked, their relationship is not linear
and the existence of one of them not always implies the existence of the other, as
there are many factors that can influence, as trade policies, institutions, human
capital and global economic conditions. To enjoy the positive effects that trade has
in the economy and society is important to apply the right policies, promote fair
practices, invest in infrastructure, protect intellectual property rights and develop
solid institutions, that ensure a fair and sustainable trade, as well as the equitable
distribution of benefits.

International trade can also have a negative part, as risks and negative effects are
linked: trade can aggravate economic inequalities inside the country and between
nations, since richer countries benefit more from international trade while
developing countries find more difficulties to compete in global markets, enlarging
the economic gap between them because of the unequal distribution of wealth and
opportunities. The less powerful nations can suffer from dependence to the exports
of basic goods (agriculture, mineral extraction…), hindering the development of
other industries, what can limit the economic growth and development in the long
term. In cases in which we find commercial opening, less developed countries are at
risk of deindustrialization if national companies can not compete with imports, what
may lead to closure of industries, therefore, job loss.

Trade liberalization can suppose a threat to national sovereignty, by limiting the

capacity of governments to adopt policies in benefit of their nations. This is caused
because of the signing of international trade agreements, which usually include
clauses that limit the capacity of governments to take decisions over industrial and
trade policies.

In the case of developing countries, the effect that trade has on the economic
development and growth can be differential in the fight to eradicate poverty. Trade
supposes an income increase, both at public and private level, allowing the
government to allocate a larger budget in policies against poverty, and raising living
standards of the general people. Commercial opening allows nations to export to
richer countries, being able to sell at prices that could not be sold in national
markets, supposing a higher income. These exports lead to employment creation, as
the increase of the demand requires bigger labour, creating jobs that suppose income
to people and give them a way out of poverty. As mentioned before, trade usually
implies competition, which leads to innovation, higher quality, increased variety of
goods and lower prices, which benefits lower classes by making high-quality
products more accessible.

Trade cannot eradicate poverty by itself, so the application of policies which allow
to take the most advantage of it is necessary. These policies consist of policies that
promote economic integration, improve infrastructure, promote education and
formation and provide social safety nets, guarantying the access to basic goods and
services to the lower classes, which participation in the development of society must
be prioritized. An equal distribution of the income is essential, as the unequal
distribution would enlarge the gap between higher and lower classes, without having
a full positive effect on eradicating poverty.

Examples of nations where trade has supposed an important progress in the

reduction of poverty could be China, where poverty has massively reduced since the
opening to international trade and promotion of exports in 2004. That supposed the
rise of manufacturing industries, where millions of jobs were created. Other example
is Bangladesh, country that attracted the textile industry because of its low cost, with
the foreign investment that it supposes. As a result, millions of jobs were created,
allowing lower classes (especially women) to increase income, giving them a way
out of poverty.

On the other hand, we can find nations where, despite having a big trade index,
poverty has not reduced as expected and differences between higher and lower
classes increase day by day. Examples of this are South Africa or India, where most
of the wealth is concentrated in few people, while most of the population live in
precarious conditions.

Another example is Brazil, although we can find a middle class. Despite being one
of the biggest South American economies, 8% of Brazilian population lives in
favelas, living marginalized under precarious conditions. In the last years, middle
class has suffered a large increase, although economic and social differences
continue being enormous.

In summary, trade and development are tightly linked and work as a boost for each
other if the correct policies accompany them. Trade is a growth engine, which helps
with development and raise of living standards, contributing to eradicate poverty.
International trade can suppose huge contributions to economic development and
growth by allowing the access to international markets, with new opportunities. On
the other hand, many risks and threats appear, threating the economic dependence,
national sovereignty and enlarging the gap between the richest and more powerful
nations and the less developed ones if the approach is not the adequate.