Making Poverty A History (review)

The effect of trade on growth and poverty is simple and straightforward. By engaging in trade, a country will spur its economic growth which in the end will increase the standard of living. Making Poverty A History explores the empirical effects of trade on poverty in developing countries. This book is relevant with the condition of ASEAN, with an average export to GDP ratio reaching 70 per cent and some of its members intensely engaged in reducing poverty.

Thomas Lines, a freelance consultant in international agricultural markets who has worked in various countries and organizations, shares his extensive experience and arguments on why integration with the international market and export orientation is not working for some countries and even puts them in a worse state than ever before.

To explain how trade has affected poverty, Lines highlights the role of the World Bank and IMF in constructing a set of policy in the early 1980s, which was based on adopting free market and export orientation principles. The author illustrates how this policy created difficulties for primary-commodity producer countries, especially the Least Developed Countries (LDCs). One of the problems he emphasizes is the fallacy of composition: as more countries produced more tradable goods, the price of commodities fell, which shrank the income for the exporting countries. As export prices fall, LDCs have to export an extra quantity of goods in order to get the same value of imports. Between 1980-82 and 2001-03 LDCs' average export price fell by 35.2 per cent compared with the import prices. This increases the land needed to grow exportable commodities and reduces the use of land for food crops to meet domestic needs. Consequently, LDCs have to import more food and they have to export more to gain the financing needed.

Lines discusses sources of price disturbances such as seasonality and speculation in the commodity market. He also highlighted the Prebisch and Singer thesis which asserts that there is a long-term tendency of commodity prices to decline compared to manufactured goods.

On the demand side, the author points to the recent rise of power on the consumer's side as shown by how large retailers have the power to push suppliers to sell at lower price, which burdens poor farmers. Another example of the demand-side power reign is how consumers from developed countries impose high standards that are very difficult for exporters to fulfill.

The author offers several solutions to prevent trade from causing poverty. The number one policy he recommends is freedom for countries to determine their own policy. It is perhaps true that each LDC government understands its country's problems well, but it is hard to justify this recommendation since these thirty-one countries are prone to corruption as reflected in the rankings of the Corruption Perception Index in the Global Corruption Report 2008. For discretionary trade policy to work there must be some kind of mechanism to assure that the policy formulated by the individual government is indeed the best one for its people. Even if they are not corrupt, national policy-makers may be tempted to retreat behind protectionist walls. Rodrik (1997) states "Protectionism would be of limited help, and it would create its own social tensions. Policymakers ought instead to complement the external strategy of liberalization with an internal strategy of compensation, training, and social insurance for those groups who are most at risk."

The second recommendation delivered by the author is for some countries to end the export orientation policy that is not compatible with constant terms of trade and to replace it with staple food production and domestic agriculture. It is understandable that food security is crucial for developing countries. However, it is important to take into account that more liberalized trade will give more aggregate gains to a country as it offers a more efficient way to combat poverty which mostly occurs in rural agricultural areas. Anne Krueger (1983) argues it is the agricultural exporters who are the poorest in developing countries, so low trade taxes are...