Volume 43 | Number 2 Spring 2008
Making Trade Liberalization Work for the Poor: Trade Law and the Informal Economy in Colombia
Response: Comments on Kevin Fandl’s Article: Making Trade Liberalization Work for the Poor: Trade Law and the Informal Economy in Colombia by Juan Pablo Calderón Meza
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I. Introduction
The liberalization of domestic markets around the world to facilitate the transfer of goods and services across borders has been unprecedented in recent decades. The vast majority of developed and developing countries have lowered trade barriers, reduced restrictions on investment, and taken other important steps toward the goal of full and open trade with their global partners. Yet as the pace of this liberalization increases, it is imperative that we examine the effects this process has on the people living in the liberalizing countries. Rather than associating trade liberalization with the movement of goods and services alone, we must also consider the effects of these economic changes on the population enduring such changes.
Linkages between trade liberalization and poverty are certainly not a new concern. Development economists and policymakers, among others, have long considered the impact of trade policy on the everyday lives of citizens. Theories abound regarding the potential benefits and negative externalities associated with liberalization such that one could just as easily produce a well-reasoned argument in support of liberalization as one against it. In this Article, however, I will attempt to address a concern often overlooked by economists and policymakers alike, a concern that involves the potential collision of two speeding trains: the continuing expansion of trade liberalization and the growing informal economy in developing countries.
I selected Colombia as the case in point for this Article based on its outward orientation in trade liberalization coupled with its large and growing informal economy. Colombia has made substantial efforts in recent years to liberalize its economy and open its borders to international trade. While aggregate income in Colombia has grown in conjunction with its trade expansion, this growth has not created a corresponding reduction in poverty. The regional director of the United Nations Development Programme found that existing inequality is one of the reasons that increasing wealth is becoming less effective in fighting poverty in the region.1 Conversely, poverty is associated with unemployment as well as with underemployment—that is, employment primarily in the informal economy.
This is a qualitative study of the working conditions and income of informal workers in Colombia examined through the lens of legal change in the area of trade liberalization. I will begin by describing the informal economy in general and its composition in Colombia, and by showing the importance of this portion of the economy in fostering economic growth and development. I will go on to describe the changes in Colombian laws that have facilitated trade liberalization and opened the country to international commerce. Finally, I will illustrate the relationship between the opening of the Colombian economy to external trade and the size and income of the informal sector in Colombia.
All of the data used in this study was collected either from agencies and organizations working in Colombia, or directly as a result of my investigation while there as a Fulbright scholar. Where possible, distinctions have been made between state-gathered statistics and international organization data. My research team and I collected this data between August 2006 and June 2007.
A. Why This Study Was Undertaken
Trade liberalization has a positive role to play in raising the income of the poor in developing countries. Open trade has, albeit with several important caveats, reduced poverty in many countries. In Colombia, however, liberalization has not had the same positive effects on poverty reduction as anticipated. This study begins from that point and asks why the outward orientation of the Colombian economy brought economic growth without equivalent reductions in poverty and inequality.
Many developing countries are at a relative disadvantage to industrialized countries in the process of liberalizing trade. For instance, implementing changes in the law with the type of adherence evident in developed countries is often impossible in developing countries. Failure to enforce existing laws and a lack of respect for the judiciary can make necessary legal changes a challenge to implement. Additionally, internal structures which exist to facilitate increases in trade resulting from more open policies are less common in developing than in developed countries. Such structures include effective ports and customs services, adequate highway and internal transportation systems, and streamlined administrative procedures. Without such essential components in place, developing countries face hurdles to reach the anticipated benefits of their trade liberalization policies.
Despite these hurdles, developing countries push forward in opening their borders, reaching out for global economic growth of their own. These countries make necessary changes in the law, strive to enforce such changes, and encourage their own domestic businesses to utilize these changes for their own benefit. However, they fail to grow as expected.2 While some incomes increase and absolute poverty declines by a negligible degree, the goal of realizing sufficient economic growth to reinvest in domestic infrastructure or eliminate the need for World Bank and International Monetary Fund assistance continues to be out of reach. Why have the concerted efforts at liberalization not brought the requisite growth as expected?
One of the reasons is the existence of a large and growing informal economy. Two markets exist in developing countries—the formal market, which functions much like markets we would see in a developed country, and the informal market, consisting of workers that could not find or chose not to take work in the formal economy. The informal market also exists, albeit to a lesser extent, in developed countries, but generally with more sustainable incomes than that of developing countries. This informal economy, which can occupy more than half of the working population in developing countries, plays an important role in economic development, and as such, plays an equally important role in trade liberalization. In this Article, I contend that (1) trade liberalization policies can negatively impact the informal economy by failing to provide adequate domestic protection against foreign competition, and that (2) economic growth will remain below its full potential unless the informal economy is extended the same opportunities for global participation and technical assistance as those offered to the formal economy.
B. Approach to This Study
The study that this Article is based on was carried out by a team of researchers that I organized at the Universidad de Los Andes in Bogotá, Colombia, where I was a visiting professor of law in 2006–2007.3 Extensive quantitative data was collected by the Colombian National Statistics Agency, the DANE, including comprehensive studies of the informal sector in Colombia. In addition to these statistics, data was gathered from the World Bank, the Economist Intelligence Unit, and research conducted by the Center for the Study of Economic Development (CEDE) at the Universidad de los Andes.
Legal research was also conducted directly by the team through the investigation and sorting of laws and administrative changes made in furtherance of trade liberalization in Colombia. Included in this survey is a collection of major laws, decrees and administrative actions that had an impact or intended impact on the role of international trade in Colombia between 1980 and 2006. For clarity, the laws have been translated and summarized herein.