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The original and continuing fundamental of economic internationalization is trade. Trade can link together geographically distant producers and consumers,often establishing a relationship of identification as well as interdependence between them.The British taste for tea, for example, could not have been cultivated in that damp little island had it not been able to export its cheap textiles to Southern Asia, albeit to sell them in captive colonial markets, along with common law, cricket and railways.
Despite the collapse of colonialism, the cultural ties remain. Equally, under current circumstances, wearing Armani fashions or grilling food on a hibachi barbecue provides an opportunity for commonality of lifestyle across the globe. Indeed, the trans-national relationships that are established by means of trade can undermine or at least circumvent inter-state relations. To complement this, Karl Marx once said that “the working men have no country”.
Even as the forces of market liberalization and globalization sweep across the world, it seems the jury is still out on whether market reforms have benefited the poor. While people know that markets can be good for the poor by creating productive economic opportunities, little consensus exists on the actual impacts of past market reforms on the poor. For example, in the case of the agriculture sector, the emerging consensus suggests that while reforms did improve market efficiency and price transmission, the supply response has been mixed. Interestingly, studies that directly examine the poverty impacts in terms of changes in producers’ terms of trade and changes in price volatility, results point to negative or at best mixed outcomes associated with reform.
The mixed success of reforms has fueled extensive debates in the past decade. It has underpinned a shift beyond the “getting the prices right” paradigm to an agenda that focuses on the institutional features required for a well-functioning market. Pundits argues that improving the poor’s outcomes associated with market participation requires going beyond “getting markets to work,” but to understanding how dimensions of poverty can impact access to and returns from market participation.
A recent literature has emerged around the notion of “pro-poor markets”. Embedded in the idea of pro-poor markets is the concept that market outcomes should disproportionately benefit the poor. This concept is problematic, however, since it is not clear how market processes, in and of themselves, would accrue gains in a disproportionate manner to a relatively less-endowed segment of the population. Well-functioning markets and market structures do not imply equitable outcomes. This view has theoretical underpinnings in the fundamental theorems of welfare economics, which show that competitive and complete markets yield efficient outcomes, but say nothing about distributional outcomes.
The concept of making markets work for the poor is not simply about improving the functioning and efficiency of the market, as has been the focus for much of reform efforts in past decades. Rather, the basic thesis is that if people are concerned about markets and the poor, they have to consider how dimensions of poverty impact access to markets and returns accruing from market activity.
While well-functioning markets in and of themselves do not imply equitable distributional outcomes, the development of markets is nevertheless important for the poor. In all developing economies, the poor rely on formal and informal markets to sell their labor and products, finance investment, and insure against risk. Well-functioning markets can provide productive opportunities for the poor, and impact households through multiple channels.
This includes three basic principles. The first is facilitating access to assets. Human, financial, social, physical, and natural assets e.g. land, wells, cattle, tools, houses, skills, health, roads, etc. are crucial to the welfare of the poor. Markets can facilitate the poor’s access to assets and enable them to use those assets to generate livelihoods and to reduce their vulnerability.
The second principle is improving the productivity and returns on assets. Markets also provide a mechanism to generate monetary returns to assets as well as increase the productivity of assets already owned by the poor. Markets assign value and prices to assets owned by the poor, including their labor and land, and to the goods and services they produce. Markets thus permit the generation of income and livelihoods for the poor. Depending on the sources or nature of growth that takes place, markets can increase the demand for and return on the assets of the poor.
The third principle is meeting basic consumption needs. Poor households usually rely on markets to secure their basic subsistence consumption basket. The role that markets can play in generating allocative efficiency, as well as incentives for productivity enhancements, has guided much of reform efforts in the past decades. Reforms have aimed to liberalize and deregulate markets and to promote private entrepreneurship. Here, the rationale is that economic opportunities created through reform can be critical in enabling the poor to escape from poverty.
The actual experience of reforms, particularly their impacts on the poor, however have had mixed successes. One of the lessons learned based on past experience is that the impact of market reforms on the poor varies and is impacted by a number of factors, including pre-reform initial conditions. A major feature of the pre-reform environment is the extent to which the poor and smallholder producers were taxed or subsidized. For example, in pre-reform West Africa smallholders were taxed heavily. Reform led to an initially positive, although limited, impact on production.
In contrast, in Eastern and Southern Africa, market reforms have removed input and credit subsidies. The effects of which have not been offset by the gains from lower cost, private distribution systems. The second lesson is that characteristics of the poor, such as their location (rural vs. urban) and market position relative to the sectors undergoing reform (net buyer vs. net seller), will affect the outcomes from reform. According to the World Bank, in the case of Malawi, for example, the losers from market reforms were the net food buyers among smallholder farmers, low-income urban consumers, and remote smallholders, while the winners from reform were net food sellers among smallholders, and traders.
Similarly, structural adjustment reforms in Malawi did not benefit the rural poor disproportionately. Although liberalization provided new income opportunities for relatively better-off households in terms of expanded tobacco and maize sales, the poorest 25 percent of rural households studied by the World Bank research experienced a relative worsening of income and food security.
The third lesson is that outcomes and supply responses have varied depending on whether the crops produced are export or cash crops. Supply response has been stronger for export crops than for food crops, mainly because liberalization has moved relative prices in favor of tradables, and the use of imported inputs such as fertilizer has become more profitable for export crops than for food crops. Evidence indicates that the most responsive sectors have been the cash crop sectors such as cotton in Benin and Mali, cashew nuts in Mozambique, and coffee in Ethiopia and Uganda.
In some instances, because of resource constraints such as land scarcity and seasonal labor shortages, a relative price shift in favor of one crop may result in a shift of resources into that crop at the expense of another resulting in no increase in overall agricultural production. Again according to the World Bank, in countries such as Benin and Burkina Faso, where cotton inputs are available on credit through the government, input use has increased and has had positive spill-over effects on food production. Because of the complementary nature of food and export crop production in many areas, the returns generated from export production can be used to buy inputs for food production.
Fourth, the impact of reform is also contingent on the level of market development. Among the issues are the developments of market supporting institutions for contract enforcement and property rights, reducing the legal and bureaucratic barriers that confront entrepreneurs, and developing strong public administration and judicial systems to promote governance. In recent years, practitioners have been paying extensive attention to the prerequisite institutional and policy environment necessary for well functioning markets.
The above lessons learned point to the fact that the impact of market reforms on the poor is contingent on a set of factors, which includes the pre-reform environment, position of the poor relative to sectors undergoing reform, and levels of market development. While getting markets to function well can have important beneficial effects for all segments of the population, an interest in the poor warrants a specific examination of how dimensions of poverty impact access to, and outcomes associated with, market participation.