How are the poor affected by international trade in India: An empirical approach

The growing volumes of international trade and lowering of tariff barriers have triggered continuing debate and analysis on the impact of international trade on poverty. On the one hand, there are scholars, policymakers and international organizations who argue that international trade provides opportunities to developing and least developed countries by expanding their markets, infusing new technologies and improving productivity, which leads to their overall growth. On the other hand, others have pointed out the complexities involved in the mechanism through which international trade may alleviate poverty.

It has been argued that international trade may not necessarily lead to growth, and even if it does, the trickledown effect from growth to poverty reduction is based on the assumption that economic growth is distribution-neutral, which may not be true in many cases. In the alternative, some argue that the more inequitable the distribution of incomes, the higher the growth will be.

The United Nations has identified eradication of poverty – especially of extreme poverty – as its number one Millennium Development Goal (MDG). It has further underlined that global partnership, including through international trade (MDG 8), can contribute to promoting development and eradicating poverty.

In the context of the existing debate, this study takes an alternative approach to the issue of impact of international trade on poverty. Instead of estimating the net impact of international trade on poverty, an attempt has been made to assess how the poor are affected by international trade. The poor constitute the low-income group. International trade may produce both winners and losers. This approach does not attempt to arrive at the net impact of international trade on poverty. It may not be desirable to compare the gains to losses, as losses may occur to relatively poorer sections of society and gains to relatively well-off sections, or vice versa.

The framework of the study involves tracing the role played by international trade in influencing the four facets of human development, namely empowerment, productivity, equity and sustainability. An extensive exploration is conducted in each of these issues to trace the role played by international trade in the livelihoods of the poor.

Key messages of the study:

  • Exports have generated additional employment and incomes in the economy, but these gains have not trickled down to the poor. For the poor to benefit from international trade, it is important to increase their participation in the sectors that are expanding on account of trade. One plausible way of directly linking the poor to trade could be to identify the products produced by the poor or those that have greater numbers of poor people involved, and enhance their exports so that the benefits go directly to the poor.

  • The unorganized sector in India acts as a safety valve for absorbing excess employment in the economy. The impact of trade on wages and employment in the unorganized sector can have farreaching implications for how the poor are affected by trade. In order to absorb excess labour through higher exports and to minimize displacing labour through higher imports, it becomes vital to develop strong linkages between the organized and unorganized sectors in the economy.

  • The pro-poor impact of international trade in terms of higher wages and employment of unskilled labour is more prominent in the organized manufacturing sector as compared to the unorganized sector. Minimum wages and rigid firing policies in the organized sector have, to some extent, enabled unskilled workers to benefit from trade. However, in order to increase the gains of the poor from trade, it is important to improve their skills and bargaining power. It is also important to keep a check on increasing wage inequality between white-collar and blue-collar workers.

  • For all sections of the economy to benefit equitably from trade, it is important to have genderequitable distribution of the gains of trade. Export-oriented policies can be an important instrument in the hands of policymakers for gender empowerment. However, for this to happen, gender sensitization of trade policy is required. Gender-sensitive products need to be identified and a cautious approach should be adopted with respect to promoting exports of these products and ensuring that imports do not displace domestic production of these products. Higher education for women, and enhancement of their skills, can help women in gaining a greater share of trade-generated employment.