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Foreign Policy In Focus (FPIF)

Thinking outside the box about trade, development, and poverty reduction

Thomas I. Palley

Foreign Policy In Focus (FPIF) Discussion Paper

18 January 2006

SARPN acknowledges the Foreign Policy In Focus (FPIF) as the source of this document: http://www.fpif.org
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Abstract

Mainstream policy economics has been gradually lowering its claims about the positive impact of trade on development and poverty reduction. The new approach is a compassionate agenda that says if trade liberalization is to reduce poverty, it must be flanked by public investment in infrastructure and human capital. However, this new agenda raises numerous questions about how to finance public investments, whether these investments should be sequenced in advance of liberalization, and whether trade liberalization is desirable if the investments are not made. Most importantly, the new agenda still does not address the systemic critique that trade liberalization hinders development by eliminating important policy tools.

This policy paper proposes an alternative framework for thinking about trade, development, and poverty reduction. That framework emphasizes domestic commerce promotion and strategic valuechain analysis that focuses on how developing countries can capture more of the value they create. The paper also argues for incremental policy change rather than grand liberalizations. In a world of uncertainty, optimal decision theory advises “Go slow if you don’t know.” Finally, the paper proposes a tropical-products trade round that can produce a win-win outcome for both North and South.



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