Would Freeing Up World Trade Reduce Poverty and Inequality? The Vexed Role of Agricultural Distortions

Trade policy reforms in recent decades have sharply reduced the distortions that wereharming agriculture in developing countries, yet global trade in farm products continues to befar more distorted than trade in nonfarm goods. Those distortions reduce some forms ofpoverty and inequality but worsen others, so the net effects are unclear without empiricalmodeling. This paper summarizes a series of new economy-wide global and nationalempirical studies that focus on the net effects of the remaining distortions to worldmerchandise trade on poverty and inequality globally and in various developing countries.The global LINKAGE model results suggest that removing those remaining distortions wouldreduce international inequality, largely by boosting net farm incomes and raising real wagesfor unskilled workers in developing countries, and would reduce the number of poor peopleworldwide 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 tolarger reductions in poverty, especially if only the non-poor are subjected to increased income taxation to compensate for the loss of trade tax revenue.