Poverty and Trade

The adjective ‘left-wing’ is about as broad a term as you can get when categorising political and economic philosophies. It covers a wide range of beliefs about the world and how human affairs should be managed. Its meaning has also changed over the years, varies from place to place, and even from person to person. People have told me that Hugo Chavez is left-wing, but so is Barack Obama. That Green Left Weekly is left-wing, but so is The Economist. However, despite the breadth of the category, there are some aspects that are common to all those with a left-wing viewpoint.

One of the traditional self-defining features of left-wing thinking is a concern for the poor and disadvantaged. In fact, it could be described as the core principle from which the majority of their social prescriptions are derived. It is used as a justification for all sorts of nominally remedial government action, from unemployment benefits to restrictions on how we trade with other nations, which is the area I want to touch on this time.

Poverty comes in two flavours – relative, and absolute. Both are fuzzy sets, meaning there is no hard and fast rule about whether someone is relatively poor or absolutely poor. By convention, and for the purposes of this post, relative poverty is what we get in developed nations – falling beneath a certain standard of living. This is often expressed as a large fraction of average income, such as the Henderson Poverty Line. Absolute poverty, on the other hand, is the kind found in developing countries – people with little or no access to the basics, struggling just to survive.

Ask an Australian who identifies as left-wing about which kind of poverty is more important to alleviate, and they will respond with the obvious – the poorest should take priority. Yet if you then ask how they feel about trading with them, most likely they will give the standard left-wing answer that there should be restrictions on how that is done, that free trade is not acceptable.

Before examining the standard reasons for that position, and why it is a contradiction, let’s have a quick recap of why trade creates wealth, for those readers who would object to that simply being taken for granted. Let’s say I have 10 apples to eat today and you have 10 oranges. That’s a pretty boring diet, and we would like to vary it, so we swap 5 pieces of fruit each. There’s still the same amount of fruit overall, but the simple act of exchange has made each of us better off – the trade has created wealth, broadly speaking. If we specialise in doing one thing and exchange the fruits of our labour (no pun intended), we can make more stuff for the same total effort – thus the division of labour (effectively trade in services) also creates wealth.

So, since trade creates wealth and therefore lifts people out of poverty, why does the left-wing person object to maximising trade? If they are worried about local unemployment, then they have put themselves at odds with their stated objective by prioritising the relatively poor in Australia over the absolutely poor overseas. That sort of argument is made all the time, and I don’t know how they deal with the cognitive dissonance in doing so, but we can leave that one to the side because another argument supercedes that one – that free trade doesn’t actually help the absolutely poor. This is also a claim that can be examined empirically, so is more amenable to discussion than the ethical question of whose problems are more important.

I won’t keep you in suspense – free trade does help the poor. More specifically, and of greater relevance to discussion about Australia’s economic policy, dropping import tariffs (and subsidies to local producers) is of tremendous benefit to poor countries. It also provides a net benefit to the relatively poor within the country, despite any adjustments in affected industries. Let’s look at the basis for these conclusions.

The simplified theory goes like this – reducing the tax on an imported good will reduce the price to the consumer, who will then prefer to buy that good. Countries with a comparative advantage in supplying that good will expand their output, thus increasing their companies’ profits. Increasing profits means more investment, more jobs, and more capital. It raises the overall level of productivity in an economy and hence its ability to support a higher standard of living. How does this happen? Trade liberalisation shifts labour and capital to those activities with the highest potential for productivity growth while drawing resources away from those with the least potential. Through competition and access to new markets, and the related spill-overs in terms of technology and knowledge, countries are able to specialise more and raise output, driven by the prospect of larger markets. The upshot is a higher overall level of productivity: instead of producing 100 goods the old way for smaller markets, firms produce 1,000 goods with lower unit costs and improved quality. Labour is more skilled, technology is better, management techniques are sharper, and markets are more accessible. This dynamic creates more wealth. It also means more revenue for government through taxation, so more and better services can be provided to those missing out on the above gains.

The real world is more complicated than that, but many studies have been carried out over the decades that support the theory. The World Bank has a large database of such research, for example. Time and again, the conclusions are that trade liberalisation helps the poor. They estimate welfare gains to developing countries from full liberalisation of merchandise trade would be $200 billion per annum and about 127 million people – more than 10% of the world’s very poor – would be lifted out of extreme poverty. For those readers who think that the World Bank is biased in this respect, you don’t have to take their word for it. Just ask the developing countries themselves – they unanimously want rich countries to drop the tariffs on poor countries’ products. The G-20, a trade negotiations bloc of developing nations, in their 2007 Communique said they are “committed to working with our trade authorities to reach a rapid and successful conclusion to Doha, to promote open and rules-based trade and investment regimes, improve productivity, create jobs, alleviate poverty and spur competition. We noted the critical importance of trade liberalisation and Aid for Trade for global poverty reduction.”

Or consult the NGOs, not generally known for their support of “neo-liberalism”, “imperialist economics”, or whatever derogatory term is currently fashionable to describe globalisation and trade liberalisation. Referring to the recent failure of the WTO Doha Development Round of negotiations for liberalising global trade, Oxfam said that “Rich countries should have shown the political leadership to deliver trade reform that reduced poverty.” A previous hiatus in the Doha round they called “a catastrophe for the millions of poor people round the world who stood a chance to trade their way out of poverty”.

The ideal of eliminating absolute poverty is a worthy and noble goal, one that should be among our highest priorities as a species. There are some people who say the left-wing care the most about poverty and poor people. That may or may not be true, but for anyone who really wants to do something about it – left-wing or otherwise – logic and evidence say you should support free trade. So write a letter to the editor of your favourite newspaper and spread the good word. Go along to the next Socialist Alliance “day of action” and this time protest against tariffs and subsidies. Contact your local MP and demand they drop Australia’s import tariffs as a matter of social justice. Or better yet, support the only Australian political party that has unilateral free trade as part of its platform – the Liberty and Democracy Party.