Efforts to liberalize world trade are increasingly focusing on strengthening the links between low-income countries’ trade policies and their development strategies. However, although greater trade openness promises faster growth for poor countries, it also presents risks to those with small and undiversified economies. This pamphlet explores research by Fund staff into the nature and magnitude of these risks and proposes targeted policy solutions to ease adjustments and encourage developing countries to choose fuller participation in the world trading system.
Since the Uruguay Round ended in 1994, a growing number of economic studies have emphasized that developing countries would benefit more from better access to export markets and from reforming their own trade policies than from increases in aid. Evidence from a variety of sources (cross-country and panel growth regressions, industry- and firm-level research, and case studies) suggests that trade is an engine of growth, and that growth is necessary for poverty reduction.