Can trade reduce poverty in Africa?

Trade liberalisation is being actively promoted as a key component of development strategies. Through greater efficiency in resource allocation, specialization in production, dissemination of knowledge and technological progress, and competition, trade liberalization should favor economic development and growth. How is this reflected in poverty?In theory, a more liberalized trade regime will make greater use of the factors of production that are most abundant, thus increasing their relative price. If poverty and relative low income stem from abundance of labor, greater trade openness should lead to higher prices for labor and a decrease in poverty. Hence, the removal of tariff and nontariff barriers (export and import bans, restrictive rules of origin), which remain particularly high in Africa, and improvements in trade facilitation have been recognized as a means for supporting Africa’s economic development.Recent attempts to consolidate trade integration within Africa - for example, the Common Market for Eastern and Southern Africa (COMESA), the East African Community (EAC), and the Southern African Development Community (SADC) - are testimony to African leaders’ willingness to ease trade restrictionsAlthough Africa’s participation in global trade remains limited, trade to and from Africa has significantly expanded. The continent is still one of the least open regions of the world. In 2011, African trade accounted only for 3.5 percent of global exports and imports (down from 5.3 percent in 1980), compared to about 6 percent for developing Latin American countries and 32 percent for Asia (figure 1).Exports from African countries have nevertheless accelerated, expanding annually, on average, by 2.6 percent in the 1980s, by 8 percent in the 1990s, and by 15 percent in the 2000s. Over the last decade, this rate of increase for Africa outpaced the world average of 9.7 percent. During the same decade, the average yearly growth rate of African imports reached about 17 percent. This increase in both exports and imports has resulted in greater trade openness in Africa, measured as the sum of exports and imports as a share of gross domestic product (GDP; figure 2).Yet, with almost 50 percent of the population living below US$1.25 a day, sub-Saharan Africa remains the poorest continent in the world. The large gains expected from opening up to international economic forces have, to date, not been realized in many African countries, especially for poor people. It seems that countries are not equally able to make use of the opportunities arising out of increased access to international markets.So, can trade actually reduce poverty in Africa? How could poor people in Africa benefit more from the economic opportunities offered by greater trade openness? Are there some complementary policies that could allow the benefits of trade to be more widely shared among the population?By Maëlan Le Goff and Raju Jan Singh, Economic Premise, World Bank

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Can trade reduce poverty in Africa?