International trade offers economic opportunities for a country to improve the lives of its citizens. However, trade can also pose significant challenges if not managed properly.
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How does trade impact poverty and how can trade benefit an economy?
International trade can potentially alleviate poverty through several different pathways
Spurring economic growth by increasing efficiency, enabling firms to lower costs and prices, diversify their sales into new markets, buy cheaper inputs, diffuse new technology, etc.
Urbanization accompanied by foreign direct investment (FDI) and infrastructure investment, can lead to “pulling” the poor out of unproductive rural activities into more productive urban employment, with better education and health services.
Knowledge transfers from interacting in international networks can lead to improvements in health and education.
Trade can benefit the poor through more competition and lower prices, access to higher quality new goods and services, new job opportunities, higher wages and income.
What challenges does trade pose for efforts to reduce poverty?
While often beneficial, disruptions to markets from trade can pose challenges
The impact of globalization on the poor depends on how it interacts with the rest of the economy. To disseminate the benefits of trade, policies need to support credit and technical assistance to farmers, good governance, rule of law, decent institutions, macro stability, flexible factor markets, etc.
More competition can lead to market dislocation for domestic firms, which can lead to greater unemployment in trade-exposed industries.
Trade exposes many countries to risk of financial crises, and when these crises have occurred, the poor are hurt disproportionally.
Globalization can produce both winners and losers among the poor. Poverty rates rise among those whose livelihood depended on trade protection and falls for those who benefit from export expansion.
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