Trade Liberalisation and Poverty: What do we know?

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Trade Liberalisation and Poverty What do we know?

• L Alan Winters
• Development Research Group (DECRG)

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Trade Liberalisation

• generally stimulates growth
• and through it poverty alleviation
• BUT
• it creates losers
• some of whom may be or become poor

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Conceptual Framework
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Households and Markets

• Do border price shocks get transmitted to poor
  households?
• Are markets created or destroyed?
• How well do households respond?
• Do the spillovers benefit the poor?
• Does trade liberalisation increase vulnerability?

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Wages and Employment

• Does liberalisation raise wages or employment?
• Is transitional unemployment concentrated on the
  poor?

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Government Revenue and Spending

• Does liberalisation actually cut government
  revenue?
• Do falling tariff revenues hurt the poor?

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Growth

• If the reform is broad and systemic, will any
  growth it stimulates be particularly
  unequalising?
• Will the reform imply major shocks for particular
  localities?
• Will transitional unemployment be concentrated on
  the poor?

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Dollar-Kraay Growth is Good for the Poor
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D-K Increased Trade vs Changes in Inequality
15
10
coefficient
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Gini
-0.4
-0.2
0.2
0.4
Change in
-5
-10
-15
Change in trade to GDP
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Trade liberalisation to Growth

• Conceptual issues
• Variety
• Productivity
• Volatility

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Households and Markets

• first order approximation of the welfare effect

Barrett and Dorosh (1996) Sahn and Sarris
(1991) Thomas et al (1999)
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The Transmission of Border-Price Shocks
Pw is the world price r the exchange rate tm the
proportional tariff or tax and ?m the transaction
costs on importables
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Are markets created or destroyed

• Romer (1994)
• - New technologies
• - Variety of productive activities and
  commodities
• Consumers also benefit from increased
  availability
• Discontinuous change
• de Janvry, Falchamps and Sadoulet (1991)
• - Non-tradabilities

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How do households respond I

• Affects magnitude not sign
• Production
• - Farm level data show major constraints
• - Absence of key productive assets
• - Capital inputs
• - Less educated
• - Poorer quality land
• - Complementary policies

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How do households respond II

• Consumption and Labour Supply
• Friedman and Levinsohn (2002)
• Subsistence activities, wage employment, self
  employment and consumption jointly determined
• But separability cannot be rejected

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Do the spillovers benefit the poor?

• Growth linkages
• Locally produced non-tradeables are important
• - Services
• - Bulky starch items
• - Perishable foods
• - Locally processed foods

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Does trade liberalisation increase vulnerability?

• Portfolio choice
• - From subsistence to cash crops
• - Risk aversion
• - Fully informed decisions?
• Variability of existing income sources or prices
• - Can go up or down with openness
• - Poor less well insured
• Poverty traps

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Wages and Employment

• Stolper-Samuelson Theorem
• Reserve Army Model
• Segmented labour markets
• Common feature
• Apparently small wage and employment effects

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Is transitional unemployment concentrated on the
poor?

• Parallel with OECD countries not valid
• Little evidence for developing countries
• Transitional unemployment may be quite long
  lasting
• Adjustment costs greater
• - The more protected the sector
• - The greater the shock

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Public Policy How many
winners compensate for one loser?

• The hypothesis There are no losers is
  intellectually uninteresting
• All judgements are quantitative

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Dont Do It

• Openness is good for average income
• measuring trade stances
• other policies
• Growth is good for poverty alleviation
• On average one-for-one
• No suggestion that growth harms the poor
• Inequality is a different matter

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Dont Do It All

• Every country has exceptions, so ..
• Capture The poor are weak politically
• Uniform Tariffs are less prone to lobbying
• Monitor effects of exceptions
• Plan to remove exceptions

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Dont Do It Now

• But plan and announce it now
• credible end point
• sensible phasing
• Is slower adjustment better?

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Compensatory Policies

• Specific
• are shocks related to trade?
• why trade?
• General - Safety nets
• identifying poor
• existence value
• administrative challenges

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Complementary Policies

• Good development policies
• Trade oriented
• infrastructure
• market institutions
• credit markets
• labour mobility
• establishing businesses

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Pre-requisites for Reform?

• Is a reform postponed a reform pre-empted?
• Transition periods must be used well
• adjust
• put policies in place
• clear end-date assists complementary reforms

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Public Policy Conclusions

• proceed with liberalisation
• predict poverty impact
• possibly pre-empt them
• protect the poor with general anti-poverty
  policies