The analysis of the relationship between international trade and poverty is as old as the economics profession. Adam Smith himself argued that growth would contribute to reducing poverty, and to the extent that trade can be characterized as the ‘engine of growth’ – a twentieth-century metaphor – the positive association between trade and poverty reduction has been an issue of ‘faith’ for most market-oriented economists. In contrast, those who perceived the growing integration of the world economy as a mechanism for the extension of capitalism had a much dimmer view of the role of trade in promoting poverty reduction. This dimension of the debate lost most of its stridency with the collapse of communism. Still other aspects of the trade–poverty nexus remain controversial.

The controversy is mainly associated with conflicting views on the implications of trade policy prescriptions for poverty. In short, to what extent does trade liberalization (as a mechanism to expand trade) reduce or increase poverty? Different answers to this question can be envisaged with the help of the 2x2 matrix below where views about the ‘time horizon’ of the analysis and presumed ‘market structure’ are identified. The signs in the cells indicate the expected impact on poverty of a trade-liberalizing reform.

For those that believe that markets operate efficiently and economic agents have limited market power, static efficiency should guide resource allocation. In this view of the world, trade liberalization will improve productivity, fostering economic growth and contributing over the medium to long term to poverty reduction.