Poverty Impacts of the Doha Development Agenda

Thomas W. Hertel and

L. Alan WintersPurdue University and Development Research Group, The World Bank

2

Motivation• One of key goals of the Doha Development

Agenda is poverty reduction• Agriculture is central to DDA negotiations as

well as to poverty impacts:– Largest trade distortions remain in agriculture

Poorest households are heavily dependent on agr– Poor spend large share of income on food

• Yet credible assessments have proven difficult

3

Methodology • Establish new “policy benchmark”:

– Post-UR, including ATC quota elimination– Post-WTO accession for China and others– Post-EU enlargement

• Quantify the DDA scenario• Assess implications for world markets• Communicate them to national case studies• Implications for poverty in individual countries: 13 case

studies in Latin America, Africa and Asia • Near term vs. long run impacts

4

Elements of the DDA Scenariobased on July Framework Agreement

• Agriculture (Anderson and Martin, chp. 2):– Use non-linear (tiered) formula (as with progressive) income tax:

– For developed: marginal rates (45, 70 and 75%) change at 10, 90% tariffs– For developing: marg rates (35, 40, 50, 60%) change at 20, 60, 120% tariffs– LDCs: no cuts

– Definition of AMS leaves lots of wiggle room on domestic support, apply tiered formula: cuts of 60% and 75% developed, 40% developing, 0% LDC

– Export subsidies abolished• NAMA: 50% cuts in tariffs (33% developing, 0% LDC)• Also examine two alternative scenarios:

– Doha-All: fully reciprocal tariff cuts by developing and least developed countries

– Product exemptions: special and sensitive products• 2% of tariff lines for sensitive products permitted • Add’l 2% of tariff lines for special products in developing countries• Chosen based on tariff/trade flow combination at HS-6 digit level• Subjected to minimal (15%) tariff cuts• Erodes two-thirds of the cuts in developed country agriculture protection

5

Impact Of Trade Reforms On World Exports

(percentage change in volume)

0

20

40

60

80

100

120

140

rice beef sugar oil/fats apparel autos

Full-Lib DDA

6

Impact Of Trade Reforms On World Prices

(percentage change in average price)

-5

0

5

10

15

20

25

cotton oseeds cgrns dairy apparel autos

Full-Lib DDA

7

Conceptual Framework for Country Case Studies (Winters)

Pass through, competition

Taxes, regulation,distributors, procurement

Distribution, taxes,regulation, co-ops

Co-operatives, technology, random shocks

World pricesand quantities

Border price

Wholesale price

Tariffs,QRs

Retail price

Exchangerate

Household welfarePrices, wages,endowments,

profits, other income

elderly

young

males

females

Enterprises

ProfitsWages

Employment

Tariff revenue

Taxes

Spending

8

Country Case StudiesPrice Transmission:• Mexico: Nicita• Mozambique: Arndt• Vietnam: Roland-Holst

Disaggregated HHld Incidence:• Brazil: Ferreira-Filho and Horridge• Zambia: Balat and Porto• China: Kuiper and van Tongeren

Labor Markets:• Brazil: Bussolo et al.• China: Zhai and Hertel• Indonesia: Robilliard and Robinson

Tax Replacement:• Cameroon: Emini et al.• Philippines: Cororaton et al.

Trade, Growth and Poverty:• Russia: Tarr et al.• Bangladesh: Annabi et al.• van der Mensbrugghe et al. (global)

Cross-country Comparison: • Ivanic (15 countries)

• Red = discussed today

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Conceptual Framework: Price Transmission to HHlds

Pass through, competition

Taxes, regulation,distributors, procurement

Distribution, taxes,regulation, co-ops

Co-operatives, technology, random shocks

World pricesand quantities

Border price

Wholesale price

Tariffs,QRs

Retail price

Exchangerate

Household welfarePrices, wages,endowments,

profits, other income

elderly

young

males

females

Enterprises

ProfitsWages

Employment

Tariff revenue

Taxes

Spending

10

Incomplete price transmission yielded unequal gains from Mexican trade reforms in 1990’s

Source: Nicita, 2004.

11

Doha impacts on poorest rural households in Mexico also influenced by price transmission (Nicita, 2005)

0

0.5

1

1.5

2

2.5

Doha Doha+ Doha++

BorderNorthCenter South

Doha+ = Doha and Productivity enhancementDoha++ = Doha+ and enhanced price transmission

% c

hang

e re

al in

com

e

12

Marketing institutions can be key: Cotton reforms in Zambia

• Prior to 1994, cotton sector was heavily regulated• In 1994, marketing board privatized; entry of firms:

– Initially, market segmented geographically– Introduced out-grower schemes: have gradually been refined

to get credit, seed and fertilizer into the hands of poor farmers– As a consequence, cotton has become a more important source

of income for the poor• Balat and Porto examine the potential for gains as a

result of higher cotton prices for:– Cotton producers– Subsistence producers who have potential to switch to cotton

13

Av. share of income derived from cotton has increased for poor in wake of

marketing reforms

Solid line = 1998, Dashed line = 1996

Inco

me

shar

e: 3

pro

vinc

es

14

Complementary reforms can greatly enhance poverty gains

• Consider subsistence hhlds with same characteristics as cotton growers; consider gains from switching to cotton as opportunities improve

• Switch boosts income 20%• Higher cotton prices add 1%• Improved extension services

boost productivity by 8.4%• Total income gains to hhld

could be nearly 30%• Also improved LR nutritional

status of children0

5

10

15

20

25

30

cotton subsist

chg-crop+prices+extens

Real income gains to farm households in Zambia

15

Focus on Household ImpactsTrade Policy and Poverty – Causal Connections

Pass through, competition

Taxes, regulation,distributors, procurement

Distribution, taxes,regulation, co-ops

Co-operatives, technology, random shocks

World pricesand quantities

Border price

Wholesale price

Tariffs,QRs

Retail price

Exchangerate

Household welfarePrices, wages,endowments,

profits, other income

elderly

young

males

females

Enterprises

ProfitsWages

Employment

Tariff revenue

Taxes

Spending

16

Disaggregated Household Impacts of Doha on Poverty in Brazil (Ferreiro-Filho and Horridge)

• The controversy: Brazil has been shown to be a big winner from OECD agricultural reform: Will all of these benefits accrue to the big commercial farms – thereby worsening Brazil’s income distribution?

• This study examines impact on 263,938 adult members of 112,055 hhlds spread over 27 regions

• Economic activity, employment and poverty vary widely by region

• Households diversified in earners and employment – account for impact of job gains/losses on poverty

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Poverty Headcount by Region in Brazil

Amazonas Para

MtGrosso

MinasG

Bahia

MtGrSul

Goias

Maranhao

RGSul

Tocantins

SaoPaulo

Piaui

Rondonia

Roraima

Parana

Acre

Ceara

Amapa

StaCatari

Pernambuco

Paraiba

RGNorte

EspSanto

RioJaneiro

Alagoas

Sergipe

DF

0.14 (minimum)

0.24

0.35 (median)

0.51

0.58 (maximum)

Proportion below poverty line

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Doha boosts employment in relatively poorer regions thereby reducing poverty

-1.5

-1

-0.5

0

0.5

1

1.5

2

2.5

Current Headct delEmply delPvty

SaoPaoloRioBrazilTocantinsMaranhao

National headcnt falls by 236,000(Proportion

of pop.)(Percentage change)

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Number of households leaving poverty, by region. Different scenarios.

-100000

-50000

0

50000

100000

150000

1 Rondonia

2 Acre

3 Amazonas

4 Roraim

a

5 Para

6 Amapa

7 Tocantins

8 Maranhao

9 Piaui

10 Ceara

11 RG

Norte

12 Paraiba

13 Pernam

buco

14 Alagoas

15 Sergipe

16 Bahia

17 MinasG

18 EspS

anto

19 RioJaneiro

20 SaoP

aulo

21 Parana

22 StaC

atari

23 RG

Sul

24 MtG

rSul

25 MtG

rosso

26 Goias

27 DF

Doha Fullib

Doha1 = 235,886 persons

Fullib = 481,988 persons

N

NE

SE SCW

Poverty impact across 27 regions in Brazil

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Country Studies Summary: Near Term Poverty Impacts of Trade Reform are Mixed

-8-7-6-5-4-3-2-1012

DohaFull-Lib

Perc

e nta

ge c

hang

e i n

he a

dcou

nt

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Long Term Poverty Impacts of Trade Reform are Uniformly Favorable:

(these studies add impact on investment)

-5-4.5

-4-3.5

-3-2.5

-2-1.5

-1-0.5

0

Bdsh Brazil China World

DohaFull-Lib

Perc

e nta

ge c

hang

e i n

he a

dcou

nt

Note: LR results only available for 4 countries and world

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Insights from Cross-Country Analysis

• Maros Ivanic’s cross-country study (chapter 15): – Brazil, Chile, Colombia, Mexico, Peru,

Venezuela, Uganda, Malawi, Mozambique, Zambia, Bangladesh, Thailand Indonesia, Philippines, Vietnam

• Single global model with households disaggregated (7 strata * 20 vingtiles = 140 hhlds/country)

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Impacts of Doha and Full-Lib Compared

• Doha is less poverty friendly than Full-Lib• Operate on same instruments, but differing degrees

– We assume Doha will eliminate export subsidies, and developing country applied tariffs will be barely reduced

– But while export subsidy reforms lower poverty amongst agricultural hhlds, they raise poverty amongst other groups; so national poverty rises in many cases

– On the other hand, fully reciprocal cuts in developing country tariffs (Doha-All) would lower poverty in most of the sample

• Conclusion: Engagement by developing countries in liberalizing their trade regimes would make Doha more poverty friendly

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Conclusions I

• DDA must be ambitious to affect development • Near-term poverty impacts mixed; on balance

poverty reduced under DDA; more so in LR• Admitting special and sensitive products in

agriculture (2%) would effectively eliminate any poverty reducing potential from the DDA

• Poverty impacts could be enhanced with deeper cuts in developing country bound tariffs

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Conclusions II

• To have a significant near term poverty impact, complementary domestic reforms are required -- enabling hhlds to take advantage of new market opportunities

• Sustained long term poverty reduction depends on economic growth:– Impact of the DDA on investment is critical– Trade reforms need to be far reaching -- reducing barriers

to services trade and investment, in addition to merchandise tariffs

• For more information: www.worldbank.org/trade then click on Topics > Poverty and Trade