The Economics of International Development
Trade and the Rise from Poverty
May 16, 2006
copies of this presentation can be found at
www.business.duq.edu/faculty/davies
1
Trade and Per-Capita Income
Conventional wisdom
Trade leads to a shift in wealth:
• from workers and consumers to multinational corporations, and
• from developing nations to developed nations
Rationale
• Workers in developed countries become unemployed as their jobs move abroad
where labor is cheaper.
• Income generated in lesser developed countries accrues to developed countries
because multinational corporations are owned by residents of developed countries.
Example
McDonald’s is accused of preventing union formation and paying substandard
wages in its restaurants abroad.
2
$40,000
Greater per-capita income is associated with greater per-capita trade.
$35,000
Per-capita Trade (US$)
$30,000
R2 = 0.56
$25,000
$20,000
$15,000
$10,000
$5,000
$0
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
$45,000
Per-capita Income (US$)
Source: International Financial Statistics, International Monetary Fund, December 2001
3
$3,500
For lower-middle and lower income countries, greater per-capita income is
associated with greater per-capita trade.
$3,000
Suriname
Per-capita Trade (US$)
$2,500
R2 = 0.59
Lithuania
$2,000
Samoa
$1,500
Guyana
$1,000
Russia
Peru
$500
Colombia
$0
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
$4,000
$4,500
Per-capita Income (US$)
Source: International Financial Statistics, International Monetary Fund, December 2001
4
Trade and Per-Capita Income
Data suggest
Higher levels of trade are associated with higher levels of per-capita income.
Supporting theory
Trade promotes specialization which results in
• More jobs as workers are hired to produce goods which leverage the country’s
human, environmental, geographic, and resource strengths,
• More available goods as currency earned via exports enables consumers to import
more goods, and
• More infrastructure as foreigners see investment opportunities due to population’s
increasing purchasing power and productivity.
5
Examples
Affiliates of US multinational firms pay a wage premium that ranges from 40% in
high-income countries to 100% in low-income countries.
Workers in foreign-owned apparel and footwear factories in Vietnam rank in the
top 20% of wage earners.
In 2000 at Nike factories abroad, annual wages were $670 compared with an
average minimum wage of $134. In Indonesia, annual wages were $720
compared with an average annual minimum wage of $241.
In Mexico, firms that exported half of their product paid wages that were, at the
low end, 11% higher than wages of non-export oriented firms. Firms that
exported most or all of their product paid wages from 58% to 67% higher than
wages of non-export oriented firms.
Source: Brown, Drusilla K., Alan V. Deardorff, and Robert M. Stern, “The Effects of Multinational Production on Wages and Working Conditions in
Developing Countries,” discussion paper no. 483, School of Public Policy, The University of Michigan, August 2002.
6
Distribution of Income
Conventional wisdom
Trade results in a concentration of income so that the few benefit
disproportionately to the many.
Rationale
The consolidation of economic power by the multinationals results in a
concentration of more and more income in the hands of fewer and fewer
individuals.
Example
Bill Gates ($41 billion). Sam Walton ($25 billion in 1992).
7
$40,000
median
$35,000
65% of countries with above
median trade have above median
income distributions.
Per-capita Trade (US$)
$30,000
The figure is 62% for lower-middle
and lower income countries.
$25,000
$20,000
$15,000
$10,000
$5,000
median
$0
15.0
20.0
25.0
30.0
35.0
40.0
45.0
50.0
55.0
60.0
65.0
Gini Coefficient (0 = equitable, 100 = inequitable)
Source: International Financial Statistics, International Monetary Fund, December 2001, and Measuring Income Inequality: A New Database, Deininger, Klaus,
and Lyn Squire, World Bank, 2002
8
$40,000
median
$35,000
100% of countries with per capita
trade of at least $7,700 have better
than median income distributions.
Per-capita Trade (US$)
$30,000
$25,000
$20,000
$15,000
$10,000
$7,700
$5,000
$0
15.0
20.0
25.0
30.0
35.0
40.0
45.0
50.0
55.0
60.0
65.0
Gini Coefficient (0 = equitable, 100 = inequitable)
Source: International Financial Statistics, International Monetary Fund, December 2001, and Measuring Income Inequality: A New Database, Deininger, Klaus,
and Lyn Squire, World Bank, 2002
9
$40,000
There is an optimal income distribution
• Income too inequitable: Entrepreneurs
will expect no gain despite effort and
so will not incur entrepreneurial risk.
$35,000
Per-capita Trade (US$)
$30,000
• Income too equitable: Entrepreneurs
will expect gain regardless of effort and
so will not incur entrepreneurial risk.
$25,000
$20,000
$15,000
Finland
$10,000
$5,000
$0
15.0
Cyprus
20.0
25.0
30.0
35.0
40.0
45.0
50.0
55.0
60.0
65.0
Gini Coefficient (0 = equitable, 100 = inequitable)
Source: International Financial Statistics, International Monetary Fund, December 2001, and Measuring Income Inequality: A New Database, Deininger, Klaus,
and Lyn Squire, World Bank, 2002
10
Distribution of Income
Data suggest
Higher levels of trade are associated with greater income equality within countries.
Supporting theory
More trade implies more economic opportunities:
• Producers see more opportunity to sell on new export markets, and
• Buyers are able to purchase at lower prices on new import markets.
• More economic opportunities implies more entrepreneurship.
More entrepreneurship leads to greater income equality:
• Entrepreneur creates jobs providing income for workers.
• Entrepreneur creates investment opportunities providing income for investors.
Example
Microsoft, Wal-Mart, Intel, Oracle, eBay, Dell
11
The Environment
Conventional wisdom
Trade is bad for the environment.
Rationale
Trade encourages firms in developed countries to exploit the environment in lesser
developed countries.
Example
Rainforests.
12
$30,000
Ireland
median
$25,000
73% of countries with above median trade
have below median rates of deforestation.
The figure is 60% among lower-middle and
lower income countries.
Per-capita Trade (US$)
$20,000
$15,000
$10,000
Malaysia
$5,000
Lebanon
Jamaica
median
$0
-3.0%
-1.0%
1.0%
3.0%
5.0%
7.0%
9.0%
Average Annual Rate of Deforestation (1990-1995)
Source: International Financial Statistics, International Monetary Fund, December 2001, and World Development Indicators, World Bank, 2002
13
The Environment
Data suggest
Higher levels of trade are associated with better environmental conditions.
Supporting theory
There is some optimal level of environmental “use.” Under utilization of the
environment can be as bad (i.e. living without power, transportation, etc.) as
over utilization (i.e. dead oceans, barren land, etc.).
Examples
Cows and elephants. Christmas tree farms.
14
Gender Equality and Child Labor
Conventional wisdom
Because trade is founded on the premise of exploitation, gender inequality and
child labor will worsen in the presence of trade.
Rationale
Politically and economically weak demographic groups are least able to resist the
consolidation of power that accompanies increased trade.
15
$100,000
Per-capita Trade (US$, logarithmic scale)
GDI measures quality of life (longevity, education,
literacy, income) for women relative to men.
$10,000
Greater gender equality is associated with greater
trade.
R2 = 0.80
$1,000
$100
$10
$1
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
1.00
Gender Related Development Index (0 = low gender adjusted HDI, 1 = high gender
adjusted HDI)
Source: International Financial Statistics, International Monetary Fund, December 2001, and Human Development Report, United Nations Development
Programme, 2002
16
Per-capita Trade (US$, logarithmic scale)
$10,000
For middle-lower and lower income countries,
greater gender equality is associated with greater
trade.
$1,000
$100
$10
$1
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
Gender Related Development Index (0 = low GDI, 1 = high GDI)
Source: International Financial Statistics, International Monetary Fund, December 2001, and Human Development Report, United Nations Development
Programme, 2002
17
Per-capita Trade (US$, logarithmic scale)
$10,000
For middle-lower and lower income countries, reduced
child labor is associated with greater trade.
$1,000
$100
$10
$1
0
10
20
30
40
50
60
Children 10 to 14 in the Labor Force (as % of age group)
Source: International Financial Statistics, International Monetary Fund, December 2001, and World Development Indicators, World Bank, 2002
18
Gender Equality and Child Labor
Data suggest
Higher levels of trade are associated with greater gender equality.
Supporting theory
Because trade decentralizes power and augments competition, demographic groups
that would seek to dominate others are disempowered. Economic and political power
accrue to those who provide the innovation, goods, and services that others desire.
Example
Historically, oppressed demographic groups have gained greater freedoms coincident
with general economic gains: slavery in the US ends as industrial revolution waxes;
women in the US attain suffrage as technological advances from industrial revolution
reach into the home; the most repressive Islamic countries today are also among the
poorest.
19
Summary
Premise behind Anti-Trade Position
Trade encourages the consolidation of economic and political power in the hands of a
few. This consolidation of power results in the exploitation of the weak by the strong.
Premise behind Pro-Trade Position
Trade encourages the dissemination of economic and political power as
entrepreneurs are freed to leverage their countries’ human, environmental,
geographic, and resource strengths.
Data Suggest
Higher levels of trade are associated with a clear decentralization of economic and
political power, both across and within countries.
20
Summary
Example
The number of multinational firms (currently 40,000) is growing at twice the rate of
the global economy  over time, multinational firms are becoming less, not more,
economically powerful.
The number of democracies has doubled in the last 10 years and quadrupled in the
last 30 years  over time, individuals are becoming more, not less, politically
empowered.
Conclusion
In exercising political power, individuals vote by casting ballots. In exercising
economic power, individuals vote by casting dollars.
Democracy puts political power in the hands of individuals so that they can pull
themselves out of political poverty.
Trade puts economic power in the hands of individuals so that they can pull
themselves out of economic poverty.
21
The Economics of International Development
Trade and the Rise from Poverty
May 16, 2006
copies of this presentation can be found at
www.business.duq.edu/faculty/davies
22