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.