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A Critique of Dollar and Kraay on "Trade, Growth, and Poverty

Authors:
Dollar and Kraay on “Trade, Growth, and Poverty”: A
Critique
Howard L. M. Nye1, Sanjay G. Reddy2, and Kevin Watkins3
August 24, 2002
In their paper, “Trade, Growth, and Poverty,”4 Dollar and Kraay claim to present
evidence that trade liberalisation leads to faster growth in average incomes, and that this
growth in average incomes in turn increases the incomes of the poor “proportionately”.
The paper suggests that one of the surest ways for less developed countries to alleviate
poverty is therefore to pursue policies of trade liberalisation. We argue, however, that the
arguments and evidence presented by Dollar and Kraay are flawed and unconvincing.
Dollar and Kraay attempt to show on the basis of empirical evidence that: (1) Post-1980
‘globalisers,’ or developing countries that undertook greater shifts in favor of a more
open trade regime than others in the period from the early 1980’s to the late 1990’s, have
experienced greater increases in growth of per capita incomes than others (2) More
generally, growth of the share of trade in gross domestic product (henceforth, trade
volume) is positively associated with increases in the growth in average incomes; and (3)
there is no systematic tendency for the share of national income captured by the bottom
quintile of the income distribution to change as per capita national income grows. The
first two claims are each intended to support the view that “trade liberalisation leads to
higher growth of average incomes” while the third claim is intended to support the view
that “growth of average incomes increases the incomes of the poor proportionately.” We
1 Columbia University, hln3@columbia.edu
2 Dept. of Economics, Barnard College, Columbia University, sr793@columbia.edu
3 Oxfam, kwatkins@oxfam.org.uk
2
argue that both the findings of Dollar and Kraay as well as their interpretation of their
results are plagued by a number of serious problems. We critically examine below the
claims of Dollar and Kraay.
1. The Identification and Relative Growth Performance of ‘Globalisers’
The first conceptual problem concerns the identification of a group of ‘globalisers’ and
the evaluation of the growth performance of the members of this group in comparison to
that of other developing countries. As Dollar and Kraay themselves note, trade
liberalisation often occurs at the same time as many other reforms (see also Rodriguez
and Rodrik (2000)). Thus, identification problems plague inferences that differences in
growth rates are due to differences in trade policy. Differences in growth rates between
countries identified according to their trade policies may be due to other policy changes
that also differentiate these groups of countries.
How should globalizing countries, or “countries that have significantly opened up to
foreign trade” be distinguished from non-globalizing ones, or “countries that have
remained more closed”5? An obvious possibility is to differentiate countries by
measures that indicate the extent of the obstacles to trade that they erect, such as tariff
and non-tariff barriers. However, Dollar and Kraay assert that such direct measures of
trade policies (such as the average level of tariff rates) capture poorly the extent of actual
openness6. Instead, they use changes in trade volumes as a percentage of GDP as a
“proxy” for the extent of trade liberalisation.
4 See http://www.wider.unu.edu/conference/conference-2001-1/dollar%20and%20kraay.pdf . We comment
on the version dated March 2001.
5 See Dollar and Kraay (2001), page 7 for these descriptions of what it means for countries to be
‘globalisers’ or ‘non-globalisers’.
6 In support of this view, Dollar and Kraay cite reasons such as that there may be unobserved ‘non-tariff’
barriers to trade, that average tariff rates may not accurately capture the obstructions created by tariffs, that
the level of enforcement of tariffs may vary across countries, and that trade-weighted measures of tariffs
give little or no weight to commodities for which trade is low or non-existent precisely because tariffs are
high.
3
Is this a reasonable strategy for distinguishing globalisers and non-globalisers? Clearly,
many factors other than policies affect the volume of trade (such as geography, country
size, technological and organizational capabilities, domestic institutions, and the attitudes
of potential trading partners). Dollar and Kraay recognize that this dependence of trade
volumes on multiple factors makes it difficult to make inferences that trade volumes are
due to trade policies alone. As we argue below, the dependence of trade volumes on
multiple factors also makes it difficult to make credible inferences that changes in trade
volumes are due to changes in trade policies, as Dollar and Kraay wish to do.
A related issue is that there are many reasons that causal inferences about the relation
between trade volumes and growth can be mistaken. First, it is possible that higher
growth rates cause a country to have higher volumes of trade relative to GDP. This is
both because growth in incomes typically leads to growth in import demand, and because
income growth may lead to faster export growth. There are many reasons that more rapid
export growth may be triggered by income growth. For a variety of reasons, firms may
achieve more competitive costs on international markets as national income increases.
For example, higher incomes may make possible the overcoming of the asset, liquidity
and credit constraints that had previously limited firms from investing adequately in their
export capacity.7
Second, factors unrelated to trade policy that cause countries to have higher growth rates
may also cause countries to have higher trade volumes relative to GDP, creating a
correlation between these two factors despite the absence of any direct causal connection.
For instance, investment in domestic infrastructure (in transportation and marketing, for
instance) may facilitate domestic market development (and therefore growth) while
7 This is only one example. More generally, growth in GDP as the result of the development or structural
change of a country’s economy might be associated with lowered unit costs for a wide variety of reasons:
Higher national income may permit greater investment in infrastructure (such as roads and ports), which in
turn may reduce transport costs and other costs of trade. Domestic markets for many products may also
expand, allowing firms to become more productive due to the presence of economies of scale.
Development may also increase the competitiveness of domestic market environments, forcing firms to
reduce ‘X-inefficiency’ and to approach the “frontier” of potential productivity that is given by existing
technological and organizational capacities. Finally, development may be associated with advances in
technology and in entrepreneurial capabilities, enhancing firms’ productivity and allowing firms to expand
the “frontier” of efficient production possibilities itself.
4
simultaneously reducing the costs of bringing domestically produced goods to
international markets and international goods to domestic markets, thereby increasing the
share of exports and imports in GDP. Since higher growth may be the cause of higher
trade volumes (rather than the other way), and since there may exist unidentified third
factors that are causes of both increased growth and trade volumes, the inferences made
by Dollar and Kraay are suspect.8
Recognizing some of the possible shortcomings of using trade volumes as the primary
selection criterion for globalisers, Dollar and Kraay identify two other sets of
‘globalisers’: one consisting of countries that had the greatest reductions in average tariffs
and one consisting of countries that were both among those that saw the greatest
increases in trade volumes and among those that saw the greatest reductions in average
tariffs. Dollar and Kraay claim that for all three groups of ‘globalisers’ (i.e. those which
had the largest increase in trade volumes, those which had the largest reductions in
average tariffs, and those which were on both of the prior lists), globalisers saw greater
increases in growth rates than non-globalisers. These claims are superficially plausible,
but as we discuss below, do not withstand scrutiny.
Inconsistent Criteria:
Because very little tariff data was available before 1985, Dollar and Kraay use tariff
reduction data from the period 1985-89 to the period 1995-97, whereas the trade volume
data they use is from 1975-79 to 1995-97. Because the construction of the group of
globalisers using reductions in average tariffs is based only on reductions in average
tariffs from the 1985-89 period to the 1995-97 period, the comparison of the performance
8 While Dollar and Kraay do recognize the problems with the use of trade volumes as a proxy for trade
policies and attempt (as we discuss below) to deal with some of these problems in the context of their cross
country growth regressions, they make no attempt to correct for these problems in the current context (the
comparison of the growth performance of groups of countries classified as ‘globalisers’ and ‘non-
globalisers’). It is interesting to note that the use of changes in trade volumes relative to GDP as a proxy
for changes in trade policy leads to a number of the problems we identify. These problems could in many
instances have been avoided if changes in tariffs had been used instead, although if this had been done the
authors’ conclusions would also have been different.
5
of this group of ‘globalisers’ with that of non-globalisers before the 1985-89 period has
no meaningful interpretation9. It is true that each group of ‘globalisers’ saw greater
increases in growth from the 1975-79 period to the 1995-97 period than did ‘non-
globalisers’. However, it is not the case that all three groups of ‘globalisers’ saw greater
increases in growth than non-globalisers during the meaningful period for such
comparisons, which in the case of globalisers selected on the basis of reductions in tariffs
is only the period from 1985-89 to 1995-97. Dollar and Kraay’s own Table 3 (reproduced
in part in our Table 1) shows that for the group of globalisers and non-globalisers
constructed on the basis of reductions in average tariffs from 1985-89 to 1995-97, non-
globalisers saw increases in growth rates of 1.7% for the weighted average (going from –
0.6% in the 1985-89 period to 1.1% in the 1995-97 period) and 1.3% for the unweighted
average (going from –0.4% in the 1985-89 period to 0.9% in the 1995-97 period) as
against increases in growth rates for the globalisers of 1.3% for the weighted average
(going from 3.6% in the 1985-89 period to 4.9% in the 1995-97 period) and 1.1% for the
un-weighted average (going from 1.0% in the 1985-89 period to 2.1% in the 1995-97
period). Thus, for the only period in which it is meaningful to compare the performance
of globalisers and non-globalisers selected on the basis of reductions in average tariffs
(from 1985-89 to 1995-97), non-globalisers actually outperformed globalisers in terms of
increases in the growth rate of GDP!
Dollar and Kraay state that “Given the problems of measuring trade liberalisation that we
have discussed, there cannot be a definitive list of recent liberalisers: any one of our three
groups of countries constitutes a reasonable candidate set of ‘globalisers.’”10 If it is
believed, as Dollar and Kraay appear to, that increases in trade volumes relative to GDP,
reductions in tariffs (and the combination of both) are all plausible selection criteria for
‘globalisers’ (or countries that have pursued rapid trade liberalisation) then applying
these criteria over meaningful comparison periods must lead to the conclusion that the
relative growth performance of globalisers and non-globalisers presents a mixed record.
9 In order to meaningfully compare the performance of globalisers versus non-globalisers from 1975-79
and 1995-97, one would need to select globalisers on the basis of those that had reduced tariffs the most
from 1975-79 and 1995-97, but as Dollar and Kraay point out it is impossible to construct such a group, as
they only have tariff data from the 1985-89 period to the 1995-97 period.
6
Globalisers identified on the basis of changes in trade volumes relative to GDP from
1975-79 to 1995-97 saw greater increases in growth over this period than non-globalisers,
while globalisers identified on the basis of reductions in average tariffs from 1985-89 to
1995-97 actually saw smaller increases in growth over this period than non-globalisers.11
Tariffs vs. Trade Volumes:
As we have seen, the use of changes in tariffs as the criterion for the selection of
globalisers leads to the inference that liberalisation is linked to lower growth.
Dollar and Kraay may be overly eager to reject the use of average tariffs as a measure of
the openness of trade policy, and to favor the use of trade volumes as an alternative.
Rodrik (2000) argues that while average tariffs may not accurately capture the degree of
protection of relatively more important commodities or the extent of non-tariff barriers,
they are nevertheless an important means of capturing the degree of overall openness or
restrictivity of trade policy regimes. This is both because average tariffs tend to be highly
correlated with the extent of protection of the most important commodities and because
countries tend to employ similar levels of tariff and non-tariff barriers to trade. Rodrik
presents a table of countries with the highest and lowest average tariffs, and argues that
none of the countries in these groups would be badly misclassified as possessing more
restrictive or open trade regimes, respectively. Tariff data is an important source of
information on trade policy openness. However, the selection of globalisers on the basis
of tariff data leads to results contrary to those claimed by Dollar and Kraay.
Openness: Levels vs. Changes:
10 Dollar and Kraay (2001), 8.
11 There is some evidence that even the result that globalisers identified on the basis of trade volumes had
greater increases in growth rates is somewhat dependent upon the period examined. As Rodrik (2000) has
noted, using changes in trade volumes relative to GDP from the 1985-89 period to the 1995-97 period leads
to the selection of a very different group of ‘globalisers,’ and one whose growth rates are significantly
lower than that obtained by Dollar and Kraay. In particular, the group obtained by Rodrik using the same
data but using the same base year for both tariffs and trade volume shows higher growth rates before the
1980’s and 1990’s than after, which would suggest, if anything, that globalisation had been detrimental in
the later period.
7
Dollar and Kraay refer to the countries with the largest reductions in tariffs or increases
in trade volumes in the period that they study as globalisers. Strikingly, however, the
countries with the largest reductions in tariffs are those that retain the highest tariffs, and
the countries with the largest increase in trade volumes are those with the lowest trade
volumes12. In what sense are Dollar and Kraay’s ‘globalisers’ really globalisers then?
As we mentioned above, ‘globalisers’ selected on the basis of reductions in average
tariffs from 1985-89 to 1995-97 had lower increases in growth rates over this period. It
is true, however, that ‘globalisers’ selected on this basis had higher levels of growth than
‘non-globalisers’ in both the 1980s and the 1990s. But ‘globalisers’ selected on the basis
of reductions in average tariffs from the 1985-89 period to the 1995-97 period also
actually had higher levels of average tariffs than ‘non-globalisers’ in both the 1980s and
1990s. The countries with higher levels of average tariffs in the 1980s undertook greater
cuts in tariffs from 1985-89 to 1995-97, but still had higher levels of average tariffs after
the cuts (in the 1990s). The greater cuts in average tariffs were associated with lower
increases in growth, while the higher levels of average tariffs in both the 1980s and
1990s were associated with higher levels of growth in both decades. Dollar and Kraay’s
own data thus seems to suggest, if anything, that when it comes to tariffs, countries with
the least open trade regimes perform the best in terms of the growth rate of average
income, and that countries that open their trade regimes the least perform the best in
terms of increases in the growth rate of average income!
Similarly, as we saw above, the only groups of ‘globalisers’ selected by the authors that
outperform ‘non-globalisers’ over a meaningful period of comparison are those selected
on the basis of having the greatest changes in trade volumes. However, the countries
with the greatest change in trade volumes happen to be those with the lowest initial and
final ratios of trade volumes to GDP. It is rather surprising in this context to refer to
these countries as ‘globalisers’. It is possible that countries with higher initial levels of
trade volumes initially had rather open trade regimes and simply did not further liberalise
their trade policies over the period in question, while countries with lower initial levels of
trade volumes were initially more closed and only began to liberalise their trade policies
12 See Figures 1 and 2 and Table 3 (reproduced in part in our Table 1) in Dollar and Kraay (2001).
8
during this period. If this is the case, while it might be true that the latter group had
“significantly opened up to foreign trade” over the period, it would be misleading to
characterize the former group as those “that have remained more closed”, as Dollar and
Kraay do. If the purpose of the selection and evaluation of the growth performance of
‘globalisers’ and ‘non-globalisers’ is to gain insight into the efficacy of trade
liberalisation, it would be important to look not only at how much a country liberalised its
trade policy over a given period, but at how liberalised that country’s trade policy was at
the beginning and the end of the period. Dollar and Kraay’s results suggest that countries
that had the greater increases in trade volumes saw the greater increases in growth, but
that countries with greater levels of trade volumes saw lower levels of growth. This
would seem to suggest that the effects of trade liberalisation on growth are mixed.13 In
Dollar and Kraay’s sample, ‘globalisers’ selected on the basis of changes in trade
volumes relative to GDP are found to have higher increases in growth. However, it is
also true that the countries with more open economies (in level terms) had lower
increases in growth!14
What Type of Liberalisation?
Bearing in mind the problems with the use of changes in trade volumes relative to GDP
as a proxy for changes in trade policy, there are further questions concerning the
13 If anything this pattern might suggest an ‘inverse-U-shaped’ relation between openness and growth. In
this case there might be an ‘optimal’ level of openness. In particular, a country possessing a trade regime
more closed than this ‘optimal’ level would increase growth by liberalising, but a country possessing a
trade regime more open than this ‘optimal’ level it would see lower levels of growth.
14 It is entirely possible (as indeed Dollar and Kraay argue) that levels of trade volumes may be more
influenced by variables not related to trade policy (such as geography and institutional factors) than
changes in trade policy. We concede that the inference that the level of a country’s trade volume is due to
its trade policy is more problematic than the inference that the change in the country’s trade volumes is due
to change in its trade policy. However, it is nevertheless the case that trade policies are among the
determinants of the level of trade volumes and (as we argue elsewhere) that there are non-trade policy
determinants of changes in trade volumes. For both of these reasons, Dollar and Kraay’s inferences are
misplaced. In particular, we wish only to point out the anomaly that countries with greater increases in
trade volumes had lower initial and final levels of trade volumes, while countries with smaller increases in
trade volumes had higher initial and final levels of trade volumes, and to raise the possibility that this could
be due to the fact that the countries in the former group began and ended the period with more closed trade
policies while the countries in the latter group began and ended the period with more open trade policies.
In this case, it would not be correct to infer that more open trade policy increases growth, as it may be that
the more open trade policy of countries with already high trade volumes that is the cause of their lower
growth .
9
relevance of such knowledge. The existence of a positive relationship between trade
volumes and growth does not by itself illuminate what combination of liberalising
policies actually promotes growth. Trade liberalisation episodes differ in the speed of
liberalisation, the level of openness achieved at the end of liberalisation episodes, and in
the pattern of the protection that is retained.15
In fact, while countries like China, South Korea, Taiwan and Vietnam all succeeded to
varying degrees in tapping the potential gains offered by successful integration into the
global economy, they combined a strong export orientation with other less orthodox
policies: restrictions on foreign investment, export subsidies, local content requirements,
and relatively high levels of tariff and non-tariff barriers. It is instructive to take a brief
look at the history of the liberalisation of trade policy in China and Vietnam. The
increase in China's growth actually started in the late 1970s with the introduction of the
household responsibility system. During the 1980s, import liberalisation proceeded
slowly. The emphasis was firmly on export liberalisation. It was only in the 1990s that
import liberalisation gained strength, and even now it is proceeding on cautious terms.
'Openness' in the conventional sense was a late - and partial - arrival. Vietnam has
followed a broadly similar path. By far the most radical liberalisation measures have
taken place in domestic marketing and export promotion. Ironically, while Dollar and
Kraay praise Vietnam for its credentials as a strong globaliser, others in the World Bank
have criticized the country for its protectionist tendencies. As one recent country review
puts it: "Vietnam's current trade system is restrictive with very high levels of protection
to a broad range of sectors" (sic).
Claims regarding other countries also merit closer scrutiny. Much has been made of
Uganda's credentials as a leading ‘globaliser’. More careful study of Uganda’s
experience would be merited before coming to conclusions about the role of external
liberalisation in its successes, however. Uganda has achieved per capita growth rates of
over 4 per cent per annum between 1992-1996. Once again, however, liberalisation on
15 See the analysis of the different performance of countries according to these distinct criteria (using the
IMF Trade Restrictiveness Index) in chapter five of the Oxfam report ‘Rigged Rules, Double Standards’
10
the export side appears to have been the most important factor. The removal of the
export tax on coffee farmers has boosted the farm-gate price of coffee, creating new
incentives and boosting incomes. The observation that poverty in coffee growing areas
has fallen at rates far above the national average and that staple food producers have
fared far worse highlights the differential effects of trade policies.16
2. Cross-Country Relationships Between Changes in Trade Volumes
and Average Incomes
The authors’ second exercise is a cross-country regression analysis of the effects of trade
liberalisation on growth, using changes in trade volumes as a proxy for changes in trade
policy. The authors begin by reviewing many of the problems with the existing literature
on this subject. They revisit the difficulties involved in measuring trade policy either
directly through tariffs or indirectly through trade volumes. They also note the issue
(raised prominently in Rodriguez and Rodrik (2000) and Rodrik (1997)) that causal
inferences based on statistical associations found in such regressions are plagued by the
possible presence of omitted variables. The ‘true’ causes of higher growth may be
empirically correlated with changes in trade policy (or more specifically with changes in
trade volumes) for entirely contingent reasons. For example, macroeconomic stabilization
or institutional changes (such as clearer definition of property rights) often take place
alongside trade liberalisation, although there is no inherent reason for them to do so. If
they are omitted from the analysis, then their effect will be misattributed to trade policy.
The authors claim that they have taken measures to avoid this problem. In particular,
they claim that their focus on the relationship between changes in trade volumes and
changes in growth rates allows them to control for the effect of unchanging factors such
as geography and settled institutions on the level of trade volumes. Unfortunately, the
approach of Dollar and Kraay is still prone to such problems of omitted variables. One
(already mentioned) reason for this is that the effect of omitted country-specific factors
available on www.maketradefair.com .
16 Oxfam country experience and data.
11
that do change over time and that influence growth and trade (such as institutions and
infrastructure) will be misattributed to trade by this procedure. The authors claim that
their focus on changes in trade volumes controls for the effect of omitted variables that
lead to both growth and trade policy (or trade volumes) and that do not change over time.
By their own admission, therefore, the effect of such variables that do change over time
will be picked up and mis-attributed to trade. Dollar and Kraay suggest that institutions
probably do not change much over time, but since their sample spans decades, there is no
reason to assume this.17 Similarly, (as we mentioned above in our discussion of Dollar
and Kraay’s use of changes in trade volumes as a selection criterion for ‘globalisers’)
there are numerous reasons to believe that higher growth may cause higher trade volumes
(rather than the other way around), or that there may exist overlooked third factors
unrelated to trade policy (such as the development of domestic infrastructure and the
productivity of firms) that are simultaneously the causes both of increased growth and of
increased trade volumes.
The second reason is that unchanging non-trade-policy factors (such as geography or
institutions) may have different effects on trade volumes at different points in time, either
because of structural changes in the national or world economy (and therefore of the
pattern of causal relations that determine trade volumes) or because of ‘interaction
effects’ in which the effect of unchanging factors depends on the effects of changing
ones. Changes in the global economic system may have made certain unchanging
features of countries (such as their geography) more or less relevant over time to
explaining the impact of other causal factors (including trade policy) on growth [For
instance, lower communications and transportation costs might make geography a
decreasingly significant determinant of trade volumes]. These effects will not be
adequately accounted for simply by including time as an explanatory variable in the
regression analysis, as the authors do. There exist additional reasons to question the
authors’ econometric methodology and results, related for instance to their other attempts
17 In particular, Rodrik (2000) lists Chile, Korea, and China as counter examples.
12
to control for the presence of omitted variables18, and to the possibility that increases in
growth are the cause of increases in trade volumes rather than the other way around.19
3. The Relationship Between Growth in Average Incomes and the
Income of the Bottom Quintile
To support their third claim, Dollar and Kraay make reference to their previous paper,
Dollar and Kraay (2000), which presents an econometric argument that there is no
systematic tendency for the share of income possessed by the bottom quintile of the
income distribution in countries to change as countries grow. However, this is very
different from the claim made by the authors that in any given country an “increase in
growth rates…leads to proportionate increases in the incomes of the poor” (italics
added). Although across countries the factor of proportionality between the growth of
average incomes and the average income of those in the bottom quintile of the income
distribution may on average be one, this does not imply (indeed it is not the case!) that in
most countries the factor of proportionality actually is one. Indeed, for many countries in
the Dollar and Kraay sample, the factor of proportionality relating the incomes of the
bottom quintile and average incomes was either significantly less than or significantly
more than one; few saw incomes of the bottom quintile rise exactly (or even nearly) one
18 Dollar and Kraay also attempt (p.17) to avoid omitted variable bias by including a number of relevant
variables. They argue that changes in the variables they choose (government consumption, inflation, and
the ‘average number of revolutions’ and a measure of ‘contract-intensive money’ supply (bizarrely
described as ‘rule of law’) are less correlated with changes in trade openness than levels of these variables
are correlated with the level of trade volumes. However, for a number of the variables examined this is
not markedly true, and in at least one instance is simply untrue (see the comparison between correlation in
levels and correlation in changes for government consumption/ GDP and for log (1+inflation rate) in Dollar
and Kraay’s Table 5).
19 Dollar and Kraay attempt (p.18) to control for ‘endogeneity’ (the possibility that growth influences trade
rather than vice-versa) by using the level of trade volumes in the 1970s as an ‘instrument’ for trade
openness. This strategy makes use of the assumption that trade volumes in the 1970s could not have been
‘caused’ by changes in growth in the 1990s, and the observation that change in trade volume in the 1990s is
correlated with the level of trade volumes in the 1970s. This is a puzzling strategy as there is no obvious
economic rationale as to why later changes in trade volumes should be correlated positively with the initial
level of trade volumes. Moreover, the authors do not account for the possibility that both the level of trade
volumes in the 1970s and the changes in growth in the 1990s might be caused by common factors operating
over a very long period on the level of trade and on the path growth, such as institutional quality and
entrepreneurial capabilities.
13
for one with income. The average result is the consequence of the co-presence of cases
in which the income of the bottom quintile rises more than proportionately with average
income and cases in which it rises less than proportionately with average income.20
Dollar and Kraay are therefore incorrect when, in considering the possible consequences
of growth in aggregate income in a specific country (as they do with Burma), they claim
that “based on other countries’ experiences, there is no reason to expect any large change
in household income inequality.”21 Because the majority of countries in the Dollar and
Kraay sample did see deviations from ‘one-for-one’ movements between aggregate
income and the income of the bottom quintile, if anything it can be expected that Burma
would see a change in household income inequality that could be quite substantial.22 The
direction and magnitude of this change would obviously depend upon the structural
specificities of Burma’s economy. It would be necessary to enquire into these
specificities to determine exactly what effects might reasonably be anticipated.
There is little evidence that the income of the bottom quintile will increase ‘one for-one’
with average incomes in any given country (or even in most), as suggested by Dollar and
Kraay. Moreover, just what would it mean if this was true? As Ravallion (2001) points
out, it would not mean that growth in average income raises the income of the bottom
quintile “by about as much as it raises the incomes of everybody else.”23 A “one-for-
one” relation between average income and the bottom quintile as described by Dollar and
Kraay implies only that the income of the bottom quintile will increase by the same
proportion as does aggregate income, but because the incomes of the poor are smaller
than average incomes, the absolute income gain to the bottom quintile will be smaller
20 Ravallion (2001) presents evidence from a sample of 47 developing countries that in 46 percent of the
cases inequality rose with changes in income, while in 53 percent of case inequality fell with changes in
income.
21 Dollar and Kraay (2001), 6.
22 As one can see from a look at Dollar and Kraay’s figure 4, the deviations from ‘one-for-one’ movement
between aggregate income and the income of the bottom quintile in the Dollar and Kraay data are in many
cases quite substantial. Figure 4 shows that there is a sizable number of cases in which aggregate income
increased but the income of the bottom quintile actually decreased.
23 Description of the Dollar-Kraay results in The Economist, May 27, 2000, p.94; taken from Ravallion
(2001).
14
than that to the non-poor. In particular, the rich will capture a larger share of any given
increment to national income than will the poor. As Ravallion (2001) notes: “For
example, the income gain to the richest decile in India will be about four times higher
than the gain to the poorest quintile; it will be 19 times higher in Brazil. The fact that, on
average, the rich will tend to capture a much larger share of the increment to national
income from growth than the poor is directly implied by the empirical results in the
literature, including Dollar and Kraay.” The initial distribution of income determines the
amount of income received by the bottom quintile, even if its income rises ‘one-for-one’
(in Dollar and Kraay’s sense) with average income. This can be illustrated by a simple
contrast. Under existing patterns of income distribution, a country like Brazil would have
to grow at something like five times the rate of Vietnam to achieve the same increase in
the average income of the poorest 20 per cent.
Another way to think about the efficacy of growth in terms of poverty reduction under a
scenario in which the incomes of the poor rise “one-for-one” with average incomes
would be to consider how effective aggregate growth is from the point of view of
targeting. If the objective of a policy-maker is to increase the income of the bottom
quintile by a certain amount, a completely targeted policy would identify members of this
group and increase their incomes by that amount. A completely untargeted alternative
would increase the incomes of everyone by the same amount, incidentally increasing
those of persons in the bottom quintile in the process. If targeting is costless or
inexpensive, then the first policy is a more efficient means of attaining the objective than
the second. However, from this standpoint aggregate growth would under the ‘one-for-
one’ assumption be even less efficient than a completely untargeted policy: in an unequal
society, it would increase the incomes of the non-poor by more than those of the poor!
Further, what does any of this concern about the bottom quintile of the income
distribution have to do with poverty? If what is meant by poverty is the possession of
inadequate resources with which to attain a relevant set of elementary capabilities, then
the income of the bottom quintile is not a very reliable measure of it. As Foster and
Szekely (2001) point out, using the bottom quintile of income distribution as the measure
15
of poverty will overstate absolute poverty in wealthy countries (since many in the bottom
quintile will have sufficient access to the material preconditions of basic capabilities) and
understate it in poorer countries (since many people with income above that of those in
the bottom quintile still will not possess elementary capabilities).
It is also widely recognized that it is necessary to account not only for the extent of
deprivation (just how many poor people there are) but also for the depth of deprivation
(just how poor the poor are). To address this concern, Foster and Szekely adopt a family
of measures they call “general means”. These measures aggregate the wealth of each
person in a society, but give a person progressively less “weight” in the aggregate the
more wealth the person has. Such measures are ‘absolutist’ in that they focus on the
absolute level of real incomes, but do not employ an arbitrary poverty line, and
incorporate concern for the depth of poverty by giving more weight to a person the
poorer the person is. Using a set of 144 household surveys from 20 countries over 25
years, Foster and Szekely examine the relationship between average incomes and poverty
as measured by the class of “general means.” They find that poverty as measured by
general means that are sufficiently sensitive to the bottom of the income distribution
decreases significantly less than ‘one-for-one’ with increases in average income.
Moreover, they find that the more sensitive to the lowest incomes a ‘general mean’
measure of poverty is, the less it increases with increases in average income (i.e. the
lower the factor by which the general mean measure will increase for a given increase in
average income). Thus, if a measure of poverty that is sensitive to the bottom of the
income distribution is used, it does appear that there is a systematic discrepancy between
the rate of growth of average incomes and the rate of poverty reduction, and moreover
that growth is less effective at reducing poverty the more weight one gives to the very
poorest people.
Dollar and Kraay do not present convincing evidence that increased trade liberalisation
leads to growth in average incomes or that growth in average incomes reduces poverty
‘one-for-one’ in a sense that is relevant to policy selection. The authors’ strategy of
16
identifying a group of ‘globalisers’ that supposedly experienced both more trade
liberalisation and more growth is dogged by problems. The criteria adopted to select
‘globalisers’ are deeply flawed. ‘Globalisers’ selected by the authors on the basis of their
reductions in average tariffs from the period 1985-89 to the period 1995-97 actually
performed slightly worse in terms of increases in growth than non-globalisers over this
period; it is only by selecting globalisers on the basis of changes in trade volumes (a
suspect criterion, particularly because of its weak relationship to trade policy) or by
undertaking an inappropriate comparison over mismatched time periods, that Dollar and
Kraay come to their conclusions. Countries with large increases in trade volumes often
have low levels of trade, casting doubt on whether they can really be characterized as
‘globalisers’. The authors’ focus on changes in trade volumes moreover is unhelpful
from a policy perspective, as it offers no insight into the comparative impact of particular
liberalisation policies or of the speed of liberalisation. Liberalisation is not a single
phenomenon. Several countries that combined trade liberalisation with success in terms
of growth performance seem to have liberalised somewhat slowly, and to have pursued
export liberalisation far more aggressively than import liberalisation.
The cross-country regression analysis of changes in growth in relation to changes in trade
volumes fails adequately to isolate the effect of trade liberalisation on growth. Many
factors other than trade policy affect the size of trade volumes. The use of changes rather
than levels of trade volumes does not avoid this problem, as it neither controls fully for
the influence of time-invariant factors that influence trade volumes in a varying way over
time, nor for important omitted variables (such as the quality of infrastructure and
institutions) that do change over time.
In conclusion, consider the authors’ claim that trade-induced growth will reduce poverty
because, on average across countries, the income of the bottom quintile of the population
rises in the same proportion as does average income. The jump from this proposition to
the conclusion that poverty reduction strategies should focus heavily on producing
growth in aggregate incomes is unjustified. Even if proportionate changes in the income
of the bottom quintile were on average the same as proportionate changes in average
17
income, this fact would have no policy implications for any specific country. Further,
even if this were true in a particular country, it would not imply that the bottom quintile
benefits to the same extent as does the rest of the nation from an increase in national
income. There is also evidence that the incomes of poor (as distinguished from those of
the bottom quintile of the income distribution) do grow at a slower rate than do average
incomes. In particular, there is some evidence that the factor of proportionality between
growth in average incomes and growth in the incomes of the poor becomes progressively
smaller as poorer people are considered. Finally, the entire distribution of possible
outcomes is of importance to decision-makers. It is insufficient to know the mean
outcome resulting from a particular policy choice in order to justify making that choice.
The variance of outcomes and other features of the distribution are also of relevance in
any decision-making process. For this reason, Dollar and Kraay's result concerning the
factor of proportionality between the growth of average income and the income of the
bottom quintile of the income distribution would be of rather limited value, even if it was
known to hold. However, as we have argued above, there is in fact reason to think that
the link between the incomes of the poor and average incomes is much weaker than
suggested by Dollar and Kraay.
The relations between trade, growth, and poverty are real, but our understanding of the
links is not advanced by the supposition that these links are simple.
18
REFERENCES:
Foster, James E., and Miguel Szekely, “Is Economic Growth Good for the Poor?
Tracking Low Incomes Using General Means,” Presented at the WIDER conference on
Growth and Poverty, Helsinki, May 25-26, 2001.
Ravallion, Martin, “Growth, Inequality, and Poverty: Looking Beyond the Averages,”
Presented at the WIDER conference on Growth and Poverty, Helsinki, May 25-26, 2001.
Rodriguez, Francisco, and Dani Rodrik, “Trade Policy and Economic Growth: A
Skeptic’s Guide to the Cross-National Evidence,” Macroeconomics Annual 2000, Ben
Bernanke and Kenneth Rogoff, eds., MIT Press for NBER.
Rodrik, Dani, “Trade Policy and Economic Performance in Sub-Saharan Africa,”
manuscript, Prepared for the Swedish Ministry for Foreign Affairs, November 1997.
Rodrik, Dani, “Comments on ‘Trade, Growth, and Poverty,’ by D.Dollar and A. Kraay,”
manuscript, October 2000.
Table 1
Performance of ‘Globalisers’ vs. ‘Non-Globalisers’ According to
the Various Selection Criteria Employed by Dollar and Kraay
Criterion 1: Criterion 2: Criterion 3:
Top One-Third of Developing Countries With Greatest
Increases in the Ratio of Trade Volumes Relative to
GDP Between the 1975-79 Period and the 1995-97
Period
Top Third of Developing Countries With the Greatest
Declines in Average Tariffs Between the 1985-89
Period and the 1995-97 Period
Top Third of Developing Countries With both the
Greatest Increases in the Ratio of Trade Volumes
Relative to GDP Between the 1975-79 Period and the
1995-97 Period and the Greatest Declines in Average
Tariffs Between the 1985-89 Period and the 1995-97
Period
Average Trade Volumes Average Tariffs Average Trade Volumes
1970s 1980s 1990s Change, Change, 1970s 1980s 1990s Change, Change, 1970s 1980s 1990s Change, Change,
1970s-1990s
1980s-1990s
1970s-1990s
1980s-1990s
1970s-1990s
1980s-1990s
Globalisers Simple Average 37.9% 47.7% 72.4% 34.5% 24.7% NA 44.3% 23.4% NA -20.9% 25.6% 31.0% 45.8% 20.2% 14.8%
Globalisers Weighted Average 16.0% 24.7% 32.6% 16.6% 7.9% NA 57.6% 34.7% NA - 22.9% 14.2% 22.5% 27.8% 13.6% 5.3%
Non-Globalisers Simple Average 71.7% 68.2% 63.9% -7.8% -4.3% NA 21.0% 16.5% NA -4.5% 63.8% 60.8% 71.0% 7.2% 10.2%
Non-Globalisers Weighted Average 59.9% 51.8% 49.1% -10.8% -2.7% NA 21.0% 17.3% NA -3.7% 56.6% 52.8% 58.5% 1.9% 5.7%
Average Growth in GDP per Capita Average Growth in GDP per Capita Average Tariffs
1970s 1980s 1990s Change, Change, 1970s 1980s 1990s Change, Change, 1970s 1980s 1990s Change, Change,
1970s-1990s 1980s-1990s
1970s-1990s 1980s-1990s
1970s-1990s
1980s-1990s
Globalisers Simple Average 3.1% 0.5% 2.0% -1.1% 1.5% 1.8% 1.0% 2.1% 0.3% 1.1% NA 51.4% 24.4% NA -27.0%
Globalisers Weighted Average 2.9% 3.5% 5.0% 2.1% 1.5% 2.8% 3.6% 4.9% 2.1% 1.3% NA 61.3% 36.6% NA -24.7%
Non-Globalisers Simple Average 2.4% 0.1% 0.6% -1.8% 0.5% 3.1% -0.4% 0.9% -2.2% 1.3% NA 27.3% 19.6% NA -7.7%
Non-Globalisers Weighted Average 3.3% 0.8% 1.4% -1.9% 0.6% 4.2% -0.6% 1.1% -3.1% 1.7% NA 32.6% 22.6% NA -10.0%
Average Growth in GDP per Capita
1970s 1980s 1990s Change, Change,
1970s-1990s
1980s-1990s
Globalisers Simple Average 2.3% 1.4% 3.8% 1.5% 2.4%
Globalisers Weighted Average 2.8% 3.8% 5.4% 2.6% 1.6%
Non-Globalisers Simple Average 2.8% -0.1% 0.8% -2.0% 0.9%
Non-Globalisers W eighted Average 3.9% 0.8% 1.8% -2.1% 1.0%
DID THE 'GLOBALISERS' YES YES CANNOT NO CANNOT YES
GROW FASTER?
COMPARE COMPARE
*Drawn from Dollar and Kraay (2001), Table 3
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Trade Policy and Economic Performance in Sub-Saharan Africa," manuscript, Prepared for the Swedish Ministry for Foreign Affairs
  • Dani Rodrik
Rodrik, Dani, "Trade Policy and Economic Performance in Sub-Saharan Africa," manuscript, Prepared for the Swedish Ministry for Foreign Affairs, November 1997.