Free Trade and Poverty

Is globalization a leading cause of rising inequality? Or does it help reduce poverty? These questions are at the heart of the major economic and social challenges confronting both high income and developing countries today. For developed industrial nations, the answers are bound to determine the outcome of the currently troubled Doha Round of trade talks—and possibly the future direction of the global multilateral trading system itself. But the stakes are no less high for developing countries. Finding the right balance between open trade and national investment-and-growth policies will affect the future of millions of people currently existing on the margins of the global economy.

Substantial numbers of those marginalized people live in Latin America. The answers to those questions are shaping the political and economic debates and
uture of the region.

A number of global trends are clear. The integration of developing countries with international markets, as measured by trade protection, the share of imports and/or exports in GDP, and the magnitude of capital flows, has increased substantially in the last two decades. At the same time, increases in income inequality have appeared in both emerging and mature economies over the past 20 years. Nevertheless, the two previous trends have coincided with an impressive global reduction in poverty. The major reductions, it should be noted, have been concentrated in East Asia.

These trends raise some fundamental issues for Latin America. What causes rising inequality? Is there a link between globalization and inequality and poverty? Does the experience vary across countries and, if so, why?...