Some General Considerations: Trade Liberalization and Poverty Reduction in the Post- Washington Consensus Environment

The policy environment after the Washington consensus has increasingly moved towards both consolidating and augmenting the first generation reforms (Kuczynski and Williamson 2003). As is well known, in 1989, John Williamson had dubbed a list of ten reforms in Latin America "the Washington consensus"(Williamson 1990). The appellation gained wide currency and some may say, even notoriety. It covered the following ten points:

1. Budget deficits … small enough to be financed without recourse to the inflation tax.
2. Public expenditures redirected from politically sensitive areas that receive more resources than their economic returns can justify… toward neglected fields with high economic returns and the potential to improve income distribution, such as primary education, health and infrastructure.
3. tax reform … so as to broaden the tax base and cut marginal tax rates.
4. Financial liberalization, involving an ultimate objective of market determined interest rates.
5. A unified exchange rate at a level sufficiently competitive to induce a rapid growth in nontraditional exports.
6. Quantitative trade restrictions to be rapidly replaced by tariffs, which would be progressively reduced until a uniform low rate in the range of 10 to 20 per cent was achieved.
7. Abolition of barriers that impede the entry of new firms or restrict competition.
8. Privatization of state-owned enterprises.
9. Abolition of regulations that impede the entry of foreign direct investment.
10. The provision of secure property rights, especially to the informal sector.

As Williamson himself admits, "…from the start, the term "Washington Consensus" evoked controversy". Moreover the mixed results in the decade of the 1990s and the financial crises in Latin America, Asia and Russia led to some recent rethinking and a proposal from some economists for an "Augmented Washington Consensus" (Rodrik 2002). The augmented list includes as "second generation" reform agenda a wide range of items from social safety nets and poverty reduction to anti-corruption policies and legal and institutional reforms. Some have pointed out that the expanded list sometimes expresses hopes and goals rather than specific policies. There is some truth to this. However, the expanded list does put the task of poverty reduction squarely on the agenda and raises important questions regarding whether and how the program loans and the conditionalities attached to them would lead to increased poverty reduction in the developing world.⁷

In this paper I focus on item no. 6 on Williamson’s list of "first generation" reforms. However, it should be acknowledged that the trade liberalization part of the reforms usually does not occur in isolation, but rather is part of a larger package of reforms. This has certainly been true in South Asia where budgetary retrenchments and other reforms have accompanied trade liberalization.

On the macroeconomic side, the indirect effects of policy reform including trade liberalization on poverty reduction are mainly expected to work through generating rapid growth( Berg and Krueger 2003, Srinivasan 2001, Quibria 2002). The growth-poverty elasticity is the crucial parameter here. We do have some evidence from a survey of the existing macro-models. In particular, the empirical relation between growth and poverty (Ravallion and Chen(1997), de Janvry and Sadoulet(1998), Agenor(2002)) estimated by using linear regressions where the change in the measured levels of poverty are explained by the growth of income or GDP/ capita and other variables can offer some useful policy guidance. The main lessons are that growth tends to reduce poverty, but the cross-sectional nature of this work makes it hard to apply it to any specific country.(see also Bourguignon(2002)). Hence the estimate in the cross-section that the poverty elasticity of growth is about 2, is not automatically operational for every case. Estimates for particular countries derived from plausible models using reliable econometric methodology are necessary.⁸ The postulation of an automatic trade-poverty reduction causality that works directly and rapidly is a hypothesis that needs to be tested, rather than to be accepted as an a priori axiom.

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