Lessons for design of international business reform
Clarke Ricks School of Business,
Liberty University
BUSI 690: Policy and Strategy in Global Competition
Dr. Hicks
April 9, 2022
Lessons for design of international business reform
A natural question to ask is whether there are ways of liberalizing trade restrictions that
might be more friendly to the poor. One first and obvious suggestion is to pay attention to the
way liberalization might affect the most vulnerable members of society. In practical terms, this
means developing diagnostic tools that can help policymakers identify who the losers from
trade liberalization might be. Based on this analysis, compensatory policies can be designed to
help the poor to deal with the transition costs of adjustment and to benefit from the new, open
trade regime. In addition, trade reform and complementary economic policies can be
implemented so as to ease the plight of the poor.
Broad-based liberalization.
The importance of broad-based liberalization (that is, of lowering trade barriers across the
board) follows from the economy-wide adjustment to trade liberalization. The wider the
domain of trade that is being liberalized, the more individual sectors or groups (including the
poor) will be able to perceive the benefits of liberalization (not only from cheaper inputs or
consumption goods but also from economy-wide effects such as lower transportation costs). In
addition, if liberalization is broad-based, the costs of adjustment will be spread more widely
among different sectors.
Exchange rate flexibility.
Exchange rate flexibility will not only reduce the output costs of terms of trade shocks but
also help a country adjust to trade liberalization. The classic policy prescription for substantial
trade liberalization under a fixed exchange rate regime is for a onetime devaluation just before,
or in conjunction with, reform. If there is nominal wage rigidity (that is, if wages tend not to
decrease when the demand for labor decreases), having some exchange rate flexibility, which
will dissipate the shock of trade reform throughout the economy, will be better than requiring
adjustment to take place entirely through increased unemployment in the most affected
industries. This is especially important if the poor depend on these industries.
Complementary reforms.
Trade reform cannot succeed in promoting growth in isolation from other reforms.
Complementary reforms enhance the flexibility of markets (which reduces the costs of
adjustment) and facilitate the creation of markets that will benefit the poor. Some of the more
important complementary reforms are discussed below (see Winters, 2000).
Infrastructure development.
Better roads and cheaper transportation will give the poor better access to the
principal markets for their products and let them benefit from opportunities that might
develop as a result of trade liberalization.
Development of markets.
Encouraging the development of markets involves their deregulation and the removal
of monopolies (such as state trading monopolies) that could adversely affect the poor or
prevent them from receiving the benefits of trade liberalization. But perhaps more
important for the poor are the technical assistance, extension services in agriculture, and
training in up-to-date business practices. that they may need to receive if they are to take
advantage of new market opportunities. Developing credit markets is also an important way
of facilitating the provision of important inputs to encourage market activities.
Labor mobility and training.
Rigidities in the labor market can also make it difficult for the poor to move into other
occupations and take advantage of new market opportunities and to minimize the costs of
trade liberalization. Worker training and other forms of assistance can also help the poor
who lose jobs in sectors that suffer from trade liberalization to find jobs in sectors that
benefit from it.
Sequencing and credibility.
Although the broad-based liberalization advocated above can bring considerable benefits,
it may be necessary to sequence liberalization at different speeds across sectors to ameliorate
the costs of adjustment. This may be true for sectors or markets where liberalization has a very
large effect on prices or where adjustment is likely to be very difficult and to take a long time. In
addition, trade reform may be phased in gradually if people need more time to adjust to the
new policy environment. For example, under the North American Free Trade Agreement
(NAFTA), the maize sector was liberalized over a much longer period than other sectors
because of the importance of maize farming for Mexico's rural poor. An important condition for
implementing long adjustment periods for liberalizing sensitive sectors, however, is the credible
commitment of the government to trade reform, often enhanced by its entering into
international agreements (either regional or multilateral).
Social safety nets.
Even the best-designed trade reform will create winners and losers. In order to mitigate
the possible adverse effects of transitory, short-term adjustment costs on the poor, developing
countries need to have well-functioning social safety nets to ease the tension between
implementing trade reforms and alleviating poverty. They also need to quantify the budgetary
costs of offsetting some of these adverse effects—this can be done in the context of the
participatory process of the poverty reduction strategy papers for countries that have IMF- and
World Bank-supported programs. Given the substantial long-term benefits of trade reforms, the
absence of appropriate safety-net policies should not unduly delay trade liberalization, because
the sequencing and phasing of reforms can be designed to mitigate the transitional costs for
the poor.
References:
Geoffrey J. Bannister and Kamau Thugge, 2001, "International Trade and Poverty
Alleviation," IMF Working Paper No. 01/54 (Washington: International Monetary Fund).
David Dollar and Aart Kraay, 2001, "Trade, Growth and Poverty," Development Research Group,
World Bank (Washington); see also the authors' article of the same title in the September 2001
issue of Finance & Development.
Francisco Rodriguez and Dani Rodrik, 1999, "Trade Policy and Economic Growth: A Skeptic's
Guide to the Cross-National Evidence," NBER Working Paper No. 7081 (Cambridge,
Massachusetts: National Bureau of Economic Research).
L. Alan Winters, 2000, "Trade Liberalization and Poverty," paper prepared for the United
Kingdom's Department for International Development (Brighton, United Kingdom: University of
Sussex).
