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. …