What could broadly be called free market reforms represent one strategy for reducing poverty. For example, noted reductions in poverty in the 20th century have been in India and China, where hundreds of millions of people in the two countries grew out of poverty, mostly as a result of the abandonment of collective farming in China and the cutting of government red tape in India.This was critical in fostering their dramatic economic growth. However, UN economists argue that for the market reforms to work, good infrastructure is needed, and for that the role of a strong state is important.For example, today, China is investing in railways, roads, ports and rural telephony in various African countries as part of its international strategy.The Global Competitiveness Report, the Ease of Doing Business Index, and the Index of Economic Freedom are annual reports, often used in academic research, ranking the worlds nations on factors argued to increase economic growth and reduce poverty.Developing countries face a range of obstacles to trading competitively on international markets. Almost half of the budget of the European Union for example is directed to agricultural subsidies, which primarily benefit large multinational agribusinesses who form a powerful lobby. Japan gave 47 billion dollars in 2005 in subsidies to its agricultural sector,nearly four times the amount it gave in total foreign aid. The US gives 3.9 billion dollars each year in subsidies to its cotton sector, including 25,000 growers, three times more in subsidies than the entire USAID budget for Africa, although America contributes a sum far larger than the 3.9 billion dollars through other agencies.Critics argue that agricultural subsidies in the developed world drain taxation revenue, increase the end-prices paid by consumers, and discourage efficiency improvements, while retaliatory trade barriers unfairly undermine the competitiveness of agricultural and other exports in those industries in which developing countries would otherwise have a significant comparative advantages.
A now defunct theory for reducing poverty suggests that raising tariffs and import substitution leads to greater wealth by protecting the country from free trade. This theory was practiced highly between the 1950s and 1970s when it appeared to fail to develop wealth. The theory assumes a lack of trade barriers on incoming (often highly subsidized) goods from wealthier countries is also considered by some economists a driver of povertyMost countries have some history of import substitution and direct government protection of and investment in local industries. The theory claims that reducing tariff receipts can lower a major source of government revenue & spending, while raising tariffs may improve the terms of trade for the poor. However, practice has shown that high tariffs lead to a stagnation of economic growth and development and the costs of the tariffs are borne most heavily on the poor.