1. Introduction

According to the World Bank estimates, more than a billion people—a fifth of humanity—lives on $1.25 per day, in what the UN and the World Bank classify as extreme poverty. Apart from the very poorest, there further exists an additional billion with incomes that are barely any larger: 2.4 billion people, about a third of the world population, are subsisting on less than $2 per day. These statistics, disheartening though they are, represent a significant improvement over the experiences in the past century. For instance, in 1981, 52 percent of world population was extremely poor; in 1990, that fraction decreased to 43 percent.[1]

Poverty occupies one of the central issues in the development literature, and for a good reason. The welfare implications of lifting billions out of poverty are staggering, and it is not surprising that the matter received unprecedented attention among many economists. Although the determinants of poverty are many and its enduring existence cannot be reduced to a single cause, over the last half-century we observed that the large reduction in worldwide poverty was also accompanied by significant concurrent increases in trade liberalization and economic integration across countries (see appendix Figure 1). The World Trade Organization (WTO) estimates show that merchandise trade between countries as a share of GDP increased from 18.1 percent in 1960 to 50.6 percent in 2012. This expansion of trade openness from the mid-20th century onward was to bear witness to the advent of globalization, a phenomenon that saw nations increasingly integrate their economies through trade and effacement of constraints on labor and capital mobility. Today, 159 out of 196 nations are members of the WTO, the global governing body in charge of supervision and further liberalization of international trade.