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The world economy has experienced unprecedented growth particularly in recent years. Different financial and economic international organizations as well as country specific annual economic reports revealed that millions of people have been lifted out of extreme poverty and many developing countries have also been able to make some progress towards achieving the Millennium Development Goals. This dynamic growth in developing countries has been stimulated by an intensification of globalization in the form of trade and investment flows.
Despite the impressive performance of developing countries as a whole in recent years, and the aggregate development progress achieved, millions of the rural poor in many countries, in particular the least developed and low-income economies, have not been able to benefit from this propitious environment.
The market economy theory suggested that people will be benefited in free and open global markets. The crucial issue here is that, do the rural poor really gain or lose from the current globalized world economy. If the global free markets in which buyers and sellers are free to contract on whatever terms they wish without the interference of the governmental “worked” as the theory suggests, then the answer would be yes they would gain. But in practice, they do not. There are many reasons why this is the case.
Globalization is the widening and deepening of international flows of trade, finance, and information in a single global market. It’s necessary corollary is, of course, the active pursuit of policies of market liberalization in all areas of the economy. Globalization offers opportunities such as access to third markets, enforceable rights and so on, as well as challenges to the livelihoods of the poor, which is arising out of obligations of poor countries to open their markets, follow WTO-rules and so on.
Markets matter for the poor in the sense that if they work they will produce incentives, opportunities, and rewards and they should be able to offer predictable access for the rural poor to sell their products and/or their labor in conditions of growing and stable demand at remunerative prices; and opportunities to acquire finance and obtain their input requirements and consumption needs at competitive non-disadvantageous prices.
If these two conditions are fulfilled, then the welfare of the rural poor is likely to be enhanced. Indeed, the situation described here provides the rationale for the assertion that liberalized markets and global trade together constitute the engine of growth for poor countries. As the World Bank in 2002 put it, integration into global markets offers the potential for more rapid growth and poverty reduction.
According to this view, if existing market barriers prevent poor countries from seizing these opportunities then the correct response would be greater efforts to have those barriers removed. For a variety of reasons however, these two conditions are rarely fulfilled in practice and the substantial, let alone full, removal of market barriers remains a very distant prospect. Six of these reasons are important. They are: the prevalence of trade manipulation; the nature of markets in poor countries; exceptions to neo-classical efficient market theory; theoretical and empirical inconclusiveness over the relation between open trade policies and growth; income inequality; and the institutional framework of global trade.
Traditionally, and up to today, politics, ideology, geo-political and geo-strategic concerns play the lead role in shaping global market outcomes. Irrespective of the legal standing of commitments to de-regulate trade, covert and overt control and manipulation of markets by governments and large firms is the rule rather than the exception in all the major global markets that impact on the livelihoods of the rural poor, whether the markets are agricultural commodities, raw materials, energy, transportation, manufactured equipment and tools, chemicals, communications, or services. The emerging literature on “rent-seeking” behavior in trade is an attempt to develop a theoretically plausible explanation for this phenomenon.
The general nature of markets in poor countries poses special difficulties that are not readily overcome. Intrinsically, all markets are networks for transactions between buyers and sellers and these networks are mediated through a number of institutions, including traders, dealers, financiers, and the courts. These flanking and support institutions mature very slowly. Historically, they have evolved through distinct development stages, with each stage broadly reflecting the overall condition of the economy.
In rural areas of poor countries, financial markets have not evolved to a mature level. In poor countries, in contradistinction to rich ones, rural markets typically suffer from incompleteness, asymmetry of information, the prevalence of moral hazard, weak incentives, ill-defined or undeterminable contractual limits, the absence of rules and enforcement mechanisms, weak organizational support, and minimal regulation and oversight.
As clearly indicated in many researches done on this issue, in such circumstances, markets have been aptly labeled as either imperfect, informal, localized or segmented. Very often, particularly in rural areas, crucial markets, such as rural credit, insurance, and futures markets are missing. In this context, if market failure occurs, as it frequently does, contagion is rampant and its negative effects aggravated by the significant inequality of income and assets that prevail in these communities.
The neo-classical economics efficient market theory, which provides the rationale for market liberalization, explained that resources are efficiently allocated if, and only if, each product’s price is equal to its marginal cost of production. If the price exceeds that, then the product will be “under produced;” if it were less, then the opposite would occur. Where this rule is violated, and in particular for reasons that are intrinsic to the nature of the product and its production process, market failure occurs and state involvement with its production is deemed consistent with economic rationality.
An irreversible dynamic favors trade liberalization under the WTO framework. To ensure that in this institutional setting global markets bring gains for the rural poor, a greater coherence between trade policies and development policies is required. As argued by many economists, neo-classical economic theory along with the modus operandi of the existing trade architecture assume a robust relation between open trade policies and development, which has not been satisfactorily established either at the theoretical, empirical or policy level.
Yet on this basis poor countries have had, mainly as a result of the World Bank prescribed and forcefully enforced structural adjustment programs, to introduce unilateral liberalization measures, despite the prevalence of distortions in world agricultural markets due to subsidies and other protection by the rich countries that could afford them. It is obvious that for the future, the relationship between the two policy spheres need to be continuously re-evaluated.
In particular there is a need for greater flexibility and national control of the timing and sequencing of trade policy measures; even with the WTO so well entrenched. Appropriate flanking and support policies to cope with related problems of supply side constraints, capacity building, and adjustment costs for poor countries, and so on, have to be put in place if global markets are to bring gains to the rural poor.
Unless this undertaking is given, other important calls for a phase-out of all tariff peaks and tariff escalation on agriculture products; a more liberalized environment for the treatment of “rules of origin” in developing countries; support by the developed countries for support measures to deal with the distributional and other consequences of the agricultural adjustment challenges in developing countries; and a fairer treatment of the phase-out of preferences and special market access will not be adequately addressed.
With the high levels of skepticism and distrust over these issues, none of this agenda will advance without an expression of good faith on the part of the developed countries. The contrast between globalization’s gainers and losers and deepening inequality over the past two decades has contributed to this outlook.