Would Freeing Up World Trade Reduce Poverty and Inequality? The Vexed Role of Agricultural Distortions
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Trade policy reforms in recent decades have sharply reduced the distortions that were
harming agriculture in developing countries, yet global trade in farm products continues to be
far more distorted than trade in nonfarm goods. Those distortions reduce some forms of
poverty and inequality but worsen others, so the net effects are unclear without empirical
modeling. This paper summarizes a series of new economy-wide global and national
empirical studies that focus on the net effects of the remaining distortions to world
merchandise trade on poverty and inequality globally and in various developing countries.
The global LINKAGE model results suggest that removing those remaining distortions would
reduce international inequality, largely by boosting net farm incomes and raising real wages
for unskilled workers in developing countries, and would reduce the number of poor people
worldwide by 3 percent. The analysis based on the Global Trade Analysis Project (GTAP)
model for a sample of 15 countries, and ten stand-alone national case studies, all point to
larger reductions in poverty, especially if only the non-poor are subjected to increased income taxation to compensate for the loss of trade tax revenue.