Trade and Poverty in India

What happened to poverty in India
when the country moved to freer trade?

After independence from Great Britain,

trade policy in India turned
in the direction of high tariffs

and protectionism.

The goal was that things consumed
in India would be made in India.

It was even quite difficult to get
a hold of an American Coca-Cola

in India during this period.

As of 1990,

the average tariff in India
was about 80%

which, of course, is very high.

That meant higher prices
for consumers;

for instance, consumers who
wanted to buy soft drinks;

and it also meant that India was
investing a lot of its resources

producing goods and services

when maybe it wasn't the most
efficient or effective producer

of those goods and services.

Reform did come to India --

and, in 1991, India started a process of
opening itself up to the global economy.

So, whereas the average tariff
had been at 80% in 1990,

by the time we get to 1996,

the average tariff is
at a lower rate of 37%.

It's also the case that --

the standard deviation of tariffs
dropped by about 50%

during the same time period.

What that means is that
those extremely prohibitively high tariffs

of about 300% or 400%;

for the most part,
those were done away with.

So, tariffs were both lower

and the most extremely high
tariffs were eliminated.

In this new situation, India both
imported more and exported more.

So, for instance, in the 1980s, --

the ratio of total trade and
manufacturers to GDP

was at about 13%.

By the time we get to
the year 2000, it's at about 19%,

much higher of course.

The question under consideration is:
What did this change do for poverty?

Well, when we think about
how trade affects poverty,

there are a few major effects.

The first simply is that by being
more open to foreign trade,

a country achieves lower prices
by having more competition

and by having more access
to cheap imports.

A second effect is that by being
more open to trade,

a country exports more

and this produces jobs at home,

and it raises real wages,
and it's overall good for the economy.

There is, however,
a potential negative effect.

When a country becomes
more open to foreign trade,

its previous businesses,
which were doing well,

now have to face more foreign competition.

Some of those businesses
will now do less well,

some of them may go under altogether,

and, of course, that will eliminate
some jobs and also lower some wages.

The net effect of trade
on poverty will depend upon

how these major effects
and some others all fit together.

In most cases in world history,
trade has done more to remove poverty,

and, when we look at the data for India,
this is exactly the same result we see.

For instance, it is found that,

for every one percentage point
reduction in the tariff rate,

there is a 0.57% reduction
in the rate of poverty.

If we look at the overall reduction
in poverty across the time period,

1987 to 2004,

when poverty in India really
did go down quite a bit,

it has been found that 38%
of this reduction in poverty

can be attributed to India's
greater openness to foreign trade.

That is quite a significant effect.

It's not that everyone was better off,

but the gains really did
significantly outweigh the losses.

To read more on this topic
and to take a closer look

at where these numbers come from,

I would recommend that
you google to the first source listed.

There is also a very good book
by Bhagwati and Panagariya,

but that, unfortunately, is
not available online for free.

It's called India's Reforms.