Trade is good for your health, especially if you are poor

Anti-globalisation protestors were again positioned outside the recent World Economic Forum in Davos, Switzerland, supposedly acting on behalf of the world’s poor. History, though, has demonstrated that the best way to move from poverty to prosperity is to reduce barriers to trade. This is why organisations such as the World Bank and the International Monetary Fund (IMF) regularly promulgate advice based on the belief that openness generates predictable and positive consequences for economic growth. As a result, many countries have voluntarily undertaken reform programmes to reduce their trade restrictions and improve the livelihoods of their citizens. Recent evidence by two economists Ann Owen and Stephen Wu writing in the Review of International Economics has reinforced this idea.

Owen and Wu in their paper Is trade good for your health? examine the relationship between a country’s openness to international trade and several health outcomes. In general, the paper finds that “increased openness is associated with lower rates of infant mortality and higher life expectancies, especially in developing countries”. Their paper presents preliminary evidence suggesting that part of the explanation for the positive relationship between trade and health emanates from the knowledge spillovers facilitated by increased trade. Intuitively this makes sense; technologies developed by more prosperous and technically advanced economies can only be transferred to developing economies that are open to trade.

Openness provides developing economies the opportunity to ‘piggy-back’ off of technologies and ‘leap-frog’ up the developmental ladder. For example, developing countries may benefit from vaccines produced and manufactured in developed countries or from pharmaceutical drugs and devices - provided they allow them to enter the country without being delayed by bureaucratic procedures and other obstacles.

Moreover, Owen and Wu note that, with regard to health outcomes, the poorest countries have the most to gain from trading with those that are more technically advanced, whereas developed countries gain little or nothing from trading with other advanced nations. The authors state, “Increased trade is associated with improved health outcomes but these gains vary by country. In particular, these benefits are enjoyed primarily by poorer countries, while the benefits to more developed nations are much smaller, or even non-existent”.

In addition to the technological spillovers that occur from having more open trade environments, Owen and Wu suggest that openness is associated with sound economic policies, which may increase health outcomes. The authors state, “One of the reasons that trade and health are positively correlated is simply because “good” government provides policies that are conducive to both trade and better health outcomes”.

The results from the Owen and Wu paper largely support the findings of a paper in which I participated, entitled Tariffs, Corruption and Other Impediments to Medicinal Access in Developing Countries, that was published in 2006. In this paper we examined the effects that tariffs, domestic taxes, and regulatory requirements have on access to essential medicines in developing countries. We conclude that although efforts to reform the current system of government revenue generation through tariff collections may meet resistance in many developing countries, especially those featuring systemic corruption and those with domestic production; those governments that take steps to eliminate tariffs could in fact expedite health care delivery and consequently improve the well-being of their people.

We note that the ill effects of tariffs are further exacerbated by the impact of value added taxes (VAT) since this tax imposes an unnecessary burden on sick people and particularly the poorest of the poor. Governments impose import duties, either to protect local manufacturers from imports and competition, or to raise revenue, but charge VAT on completed pharmaceutical drugs and medical devices purely to raise revenue. These taxes are regressive. They harm the poorest and sickest members of society and work against the goal of building a healthy and productive workforce.

Integration into the world economy has proved to be the most powerful tool for countries to promote economic growth and development; one need only look at India and China for proof of this. For African countries struggling with enormous public health challenges, the route should be clear. Removing tariffs in general and specifically those on medical products should be an urgent priority for any developing country wishing to see the wealth and health of its citizens improve.

Author: Jasson Urbach is an economist with the Free Market Foundation and a director of Africa Fighting Malaria. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author's and are not necessarily shared by the members of the Foundation.

FMF Feature Article / 25 March 2008 - Policy Bulletin / 06 October 2009

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