This Background Paper for the Second International Forum on Trade Facilitation, (May 2003) investigates the income distribution impact of trade facilitation in developing countries and makes a number of findings. Among them:

• Trade facilitation has an impact on income distribution and poverty in developing countries through its effects on international trade, economic growth and government revenue.

• Small and medium sized enterprises (SMEs), the dominant actors in developing countries, are the main beneficiaries of trade facilitation, since trade transactions costs fall disproportionately on small firms.

• While trade facilitation may or may not reduce income inequalities within developing countries, trade facilitation can enhance trade-induced growth, which increases average incomes providing more resources with which to tackle poverty. Trade facilitation measures applied within a closed (or at least less liberal) trade environment can still have a positive impact on exports and foreign investment.

• Trade facilitation may increase employment which may help some move out of poverty.

• Improvements in infrastructure allow the poor to trade more easily and profitably in domestic as well as in international markets.

• Trade facilitation can increase government revenue which can benefit the poor if used to finance social expenditures

3. A number of policy recommendations can be made if trade facilitation measures are to benefit the poor. In particular:

• To reduce income inequalities in developing countries trade facilitation measures should be targeted at lowering trade transactions costs in those sectors where employment of the poor is concentrated.

• The provision of effective safety-nets may be necessary if alternative forms of employment are not rapidly available for any displaced workers.

• Increases in government resources brought about by trade facilitation should be used to support pro-poor or social expenditures.

• SMEs need access to capital, trade information systems and capacity-building to comply with international standards under trade facilitation programmes if they are to trade efficiently.

• Infrastructure can be particularly beneficial for the poor if they are actively employed in its development.