Trade Liberalization and Trade Liberalization and PovertyPoverty

The evidence so FarThe evidence so Far

L.Alan Winters Neil McCulloch Andrew McKayL.Alan Winters Neil McCulloch Andrew McKay

Luiz Gustavo Packer Hintz Ahmed Hussein Saleh Al-Ruba Luiz Gustavo Packer Hintz Ahmed Hussein Saleh Al-Ruba Ruiwen Kong Ruiwen Kong

Group 2

TOPIC LITERATURE PRESENTATION

Research TopicResearch Topic Examine the evidence whether developing Examine the evidence whether developing

countries’ own trade liberalization have countries’ own trade liberalization have reduced or increased povertyreduced or increased poverty

Analytical framework Analytical framework Economic growth and stabilityEconomic growth and stability Behavior of households and marketsBehavior of households and markets Wages and employment Wages and employment Government revenue and spendingGovernment revenue and spending

Economic Growth and StabilityEconomic Growth and Stability

Does liberalization stimulate grDoes liberalization stimulate growth and relieve poverty?owth and relieve poverty?

Does trade liberalization boost pDoes trade liberalization boost productivity?roductivity?

Are open economy less stable?Are open economy less stable?

It is widely accepted that It is widely accepted that the key to sustained poverty the key to sustained poverty alleviation is economic alleviation is economic growth.growth.

Households and MarketsHouseholds and Markets

Do border price shocks get transmitted to Do border price shocks get transmitted to poor households?poor households?

Are markets created or destroyed?Are markets created or destroyed? How well do households respond?How well do households respond? Do the spillovers benefit the poor?Do the spillovers benefit the poor? Does trade liberalization increase Does trade liberalization increase

vulnerability?vulnerability?

Wages and EmploymentWages and Employment

Does liberalization Does liberalization raise wages or raise wages or employment?employment?

Is transitional Is transitional unemployment unemployment concentrated on the concentrated on the poor?poor?

Government Revenue and Government Revenue and

SpendingSpending Does liberalization actually cut Does liberalization actually cut

government revenue?government revenue? Do falling revenues from trade taxation Do falling revenues from trade taxation

hurt the poor?hurt the poor?

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Trade liberalization enhance Trade liberalization enhance growth and hence alleviate growth and hence alleviate poverty?poverty?

From opening to growthFrom opening to growth The potential positive forces include The potential positive forces include access to technology and to appropriate intermediate and access to technology and to appropriate intermediate and

capital goodscapital goodsThe benefits of scale and competitionThe benefits of scale and competitionThe flexibility induced by relying on market signalsThe flexibility induced by relying on market signalsThe constraints on government incompetence and The constraints on government incompetence and

corruptioncorruption Conclusion: It requires combination with other policies Conclusion: It requires combination with other policies

( encourage investment; allow effective conflict ( encourage investment; allow effective conflict resolution; promote human-capital accumulation)resolution; promote human-capital accumulation)

From growth to povertyFrom growth to poverty Economic growth generally reduce povertyEconomic growth generally reduce poverty Growth does not have identifiable systematic effects on Growth does not have identifiable systematic effects on

income distributionincome distributionBack

Trade liberalization and Trade liberalization and productivityproductivity The openness and trade liberalization The openness and trade liberalization

have a strong influence on total factor have a strong influence on total factor productivity (especially access to foreign productivity (especially access to foreign knowledge)knowledge)

If higher productivity reflects declining If higher productivity reflects declining inputs rather than increasing outputs, its inputs rather than increasing outputs, its short-term effect could be to reduce short-term effect could be to reduce employment and hence exacerbate employment and hence exacerbate povertypoverty

In the long run it is a necessary part of In the long run it is a necessary part of any viable poverty-reduction strategyany viable poverty-reduction strategy Back

Are open economies less stable?Are open economies less stable? More open capital markets should be associated with More open capital markets should be associated with

smoother consumption but more volatile investment; smoother consumption but more volatile investment; more open goods markets should be associated with more open goods markets should be associated with greater output volatilitygreater output volatility

The supply of primary product is relatively price The supply of primary product is relatively price inelastic, fluctuations in world demand will make inelastic, fluctuations in world demand will make primary commodity prices more volatile than those of primary commodity prices more volatile than those of manufactures. If trade liberalization encourages manufactures. If trade liberalization encourages specialization towards primary commodities, this specialization towards primary commodities, this suggests that it will increase the volatility of suggests that it will increase the volatility of developing countries’ terms of tradedeveloping countries’ terms of trade

If trade liberalization could promote financial If trade liberalization could promote financial development; financial development is often claimed to development; financial development is often claimed to be an important input to growthbe an important input to growth Bac

k

The transmission of border-price The transmission of border-price shocksshocks In any economy there are several steps of In any economy there are several steps of

transmission between changes in border prices transmission between changes in border prices following external liberalization and price changes following external liberalization and price changes experienced by producers or consumers at local levelexperienced by producers or consumers at local level

The extent of transmission may be limited by a The extent of transmission may be limited by a number of factors including transport costs and the number of factors including transport costs and the other costs of distribution; the extent of competition other costs of distribution; the extent of competition between traders and the functioning of markets more between traders and the functioning of markets more generally; and infrastructure, domestic taxes and generally; and infrastructure, domestic taxes and regulationsregulations

Price transmission is likely to be particularly Price transmission is likely to be particularly ineffective for poor people living in remote rural areas ineffective for poor people living in remote rural areas (the rural roads raise the transaction costs above (the rural roads raise the transaction costs above viable levels)viable levels)

The transmission of price shocks to local levels is The transmission of price shocks to local levels is related to the degree of market integrationrelated to the degree of market integration

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Are markets created or destroyed?Are markets created or destroyed?

The trade reform are often associated with the creation or The trade reform are often associated with the creation or destruction of markets ( greater openness can result in a destruction of markets ( greater openness can result in a wider variety of commodities being available, or create newider variety of commodities being available, or create new opportunities for production; some other markets may w opportunities for production; some other markets may cease to exist due to the effects of increased import compcease to exist due to the effects of increased import competition on a local market)etition on a local market)

When trade liberalization destroys markets, households cWhen trade liberalization destroys markets, households can become completely isolated from the market and suffean become completely isolated from the market and suffer substantial income lossesr substantial income losses

In an environment of trade liberalization, policy interventIn an environment of trade liberalization, policy intervention can help to create markets that would be viable for the ion can help to create markets that would be viable for the poor but otherwise not formpoor but otherwise not form

(the effects of reform depend on the effects of the policies (the effects of reform depend on the effects of the policies that it is undoing )that it is undoing ) Bac

k

How do households respond?How do households respond?

To what extent are agents in general and the poor To what extent are agents in general and the poor in particular able to protect themselves against any in particular able to protect themselves against any potential adverse impacts and to take advantage of potential adverse impacts and to take advantage of potentially favorable effects?potentially favorable effects?

The production and consumption responses of The production and consumption responses of households are importanthouseholds are important

The ability to respond varies across households, so The ability to respond varies across households, so there will often be an important role for there will often be an important role for complementary policies in helping to ensure that complementary policies in helping to ensure that the poorer as well as richer households are able to the poorer as well as richer households are able to respond appropriately by, for example, enhancing respond appropriately by, for example, enhancing access to key input, markets or infrastructure. access to key input, markets or infrastructure.

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Do the spillovers benefit the poor?Do the spillovers benefit the poor? Even if the poor don’t benefit directly from Even if the poor don’t benefit directly from

increased demand generated by trade increased demand generated by trade liberalization, they may do indirectly. One of the liberalization, they may do indirectly. One of the main advantages of stimulating agriculture is that main advantages of stimulating agriculture is that it strongly increases the demand for goods and it strongly increases the demand for goods and services produced by the poor.services produced by the poor.

Growth linkages distinguish production linkages Growth linkages distinguish production linkages and expenditure linkages. For policy purposes it is and expenditure linkages. For policy purposes it is useful to know which sector yield the largest useful to know which sector yield the largest growth linkages.growth linkages.

The effectiveness of linkages in raising the incomes The effectiveness of linkages in raising the incomes of the poor also depends upon local businesses of the poor also depends upon local businesses being able to respond to increased demand.being able to respond to increased demand.

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Does trade liberalization increase Does trade liberalization increase vulnerability?vulnerability? Vulnerability is a key element of poverty and a Vulnerability is a key element of poverty and a

major concern of the poor.major concern of the poor. Trade liberalization will typically affect both the Trade liberalization will typically affect both the

means and variances of a household’s source of means and variances of a household’s source of income, and affect the household vulnerability in income, and affect the household vulnerability in four ways: changes in mean incomes; changes in four ways: changes in mean incomes; changes in the portfolio of activities undertaken by the portfolio of activities undertaken by households; changes in the variability of existing households; changes in the variability of existing income sources; and poverty traps.income sources; and poverty traps.

One can certainly identify circumstances where One can certainly identify circumstances where this can happen (e.g. where effective this can happen (e.g. where effective mechanisms of social protection are absent), but mechanisms of social protection are absent), but there is no evidence about how widespread such there is no evidence about how widespread such outcomes are in practice.outcomes are in practice.

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Does liberalization raise wages or Does liberalization raise wages or employment?employment? An important mechanism by foreign shocks are An important mechanism by foreign shocks are

translated into poverty impacts is through factor translated into poverty impacts is through factor markets, especially labor markets.markets, especially labor markets.

Traditional international trade theory assumes that Traditional international trade theory assumes that factor supplies are fixed and wages are flexible; in factor supplies are fixed and wages are flexible; in developing countries labor is available in perfectly developing countries labor is available in perfectly elastic supply, and wage will be fixed exogenously by elastic supply, and wage will be fixed exogenously by what labor can earn elsewhere and the adjustment will what labor can earn elsewhere and the adjustment will take place in terms of employment. take place in terms of employment.

The labor markets may be segmented for legal or The labor markets may be segmented for legal or institutional reasons. The formal sector may pay a institutional reasons. The formal sector may pay a minimum or conventional wage at above what we might minimum or conventional wage at above what we might loosely think of as “poverty levels”, and at which there loosely think of as “poverty levels”, and at which there is excess supply, while the subsistence or informal is excess supply, while the subsistence or informal sector pay wages below “poverty levels”.sector pay wages below “poverty levels”.

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Is transitional unemployment Is transitional unemployment concentrated on the poor?concentrated on the poor?

There is always a possibility of temporary There is always a possibility of temporary unemployment as a liberalizing economy unemployment as a liberalizing economy adjusts to new prices.adjusts to new prices.

Evidence is available on the relationship Evidence is available on the relationship between public sector job loss and poverty. between public sector job loss and poverty. But the majority of the poor are not likely to But the majority of the poor are not likely to be directly affected by retrenchment be directly affected by retrenchment because they are not working in the formal because they are not working in the formal sector.sector.

In local labor markets, large loss of In local labor markets, large loss of employment can have negative multiplier employment can have negative multiplier effects on income.effects on income.

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Government revenue and spendingGovernment revenue and spending

Trade reforms potentially reduce revenues, Trade reforms potentially reduce revenues, especially for low income countries, which could especially for low income countries, which could unbalance the government budgetunbalance the government budget

But in many cases it can also increase the But in many cases it can also increase the revenue if the initial tariff level exceeds its revenue if the initial tariff level exceeds its revenue maximizing level, replace quantitative revenue maximizing level, replace quantitative restrictions by tariff or improve collection restrictions by tariff or improve collection efficiency.efficiency.

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Do falling tariff revenue hurt the Do falling tariff revenue hurt the poor?poor?

To seek alternative non-trade sources of revenue To seek alternative non-trade sources of revenue or to cut public expenditureor to cut public expenditure

Social expenditures need to be relatively Social expenditures need to be relatively protected, especially that oriented towards the protected, especially that oriented towards the poor, compared with capital expenditurepoor, compared with capital expenditure

If liberalization assists economic growth, this If liberalization assists economic growth, this should become easier than it was in the face of should become easier than it was in the face of decline and crisis.decline and crisis.

ConclusionConclusion

There can be no simple general conclusion about the There can be no simple general conclusion about the relationship between trade liberalization and povertyrelationship between trade liberalization and poverty

Theory provides a strong presumption that trade Theory provides a strong presumption that trade liberalization will be poverty-alleviation in the long run liberalization will be poverty-alleviation in the long run and on averageand on average

Trade liberalization necessarily implies distributional Trade liberalization necessarily implies distributional changes; it may well reduce the well-being of some people changes; it may well reduce the well-being of some people (at least in the short term), and some of these may be poor(at least in the short term), and some of these may be poor

Although trade liberalization may not be the most Although trade liberalization may not be the most powerful or direct mechanism for addressing poverty in a powerful or direct mechanism for addressing poverty in a country, it is one of the easiest to changecountry, it is one of the easiest to change

The impact of trade liberalization on poverty will depend The impact of trade liberalization on poverty will depend on the environment in which it is carried out, including on the environment in which it is carried out, including the policies that accompany it. There will be an important the policies that accompany it. There will be an important role for complementary policies to strengthen social role for complementary policies to strengthen social protection for losers and to enhance the ability of poorer protection for losers and to enhance the ability of poorer household to exploit potentially beneficial changes.household to exploit potentially beneficial changes.

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