Globalisation, Employment and Poverty Reduction: A Case Study of Ghana, 2005 Aryeetey (ed.)Page 210 CHAPTER SEVEN OPENNESS, INCOME DISTRIBUTION AND POVERTY William Baah-Boateng and F. Ebo Turkson 7.0 Introduction There is a growing consensus in empirical studies that greater openness to international trade has a positive impact on per capita incomes and on the income of the poor. This is consistent with economic theories about the effects of globalisation and international trade on income distribution and poverty. In fact international trade theory in its abstract formulation postulates that increased openness to trade and foreign direct investment (FDI) through its impact on economic growth should make income distribution more equal and thereby reduce poverty in poor/developing countries. For instance it is widely agreed in economic theory that openness to trade allows an economy to make better use of its resources by allowing imports of goods and services at a lower cost than they could be produced domestically. In particular, openness to international trade enables developing countries to import capital equipment and intermediate inputs that are critical to long run growth and poverty reduction, but which would be expensive or impossible to produce domestically. Also, in promoting more intense competition, which obliges local firms to produce efficiently, and greater access to new foreign ideas and technologies (i.e. international technology transfer) openness to trade and FDI ensures increased production both quantitatively and qualitatively thereby improving welfare. Many empirical studies have suggested that without trade a country’s production possibilities are limited by its own natural endowments while consumption opportunities are also limited to the economy’s production possibilities. However, trade can extend these possibilities, thus leading to growth and development. The dynamic forces that trade bring along increases competition and forces domestic producers to become competitive and more efficient, often through the adoption of new technologies. Countries that engage in trade can obtain capital goods embodying the latest technology, which the domestic industry cannot develop. Thus, international trade has the potential of leading to the invention of profitable areas of investment in countries and resultant capital flows represent foreign direct investment (FDI). The whole world is moving towards a more liberalised trading system epitomized by the World Trade Organisation (WTO), and this is expected to bring about growth and development. During the last decade the issues of globalisation in terms of openness to trade and FDI on income distribution and poverty has received huge attention