Poverty Impacts of the Doha Development Agenda

1. Poverty Impacts of the Doha Development Agenda Thomas W. Hertel and L. Alan Winters Purdue University and Development Research Group, The World Bank

2. Motivation • One of key goals of the Doha Development Agenda is poverty reduction • Trade reform is also one of the avenues for reaching the Millennium Development Goals • Largest trade distortions remain in agriculture, which is also critical for the poor: • 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 models • Implications for poverty in individual countries: 13 case studies in Latin America, Africa and Asia • 3 described by authors today • Supplement with 2 global studies; draw conclusions

4. Elements of the DDA Scenariobased on July Framework Agreement • Agriculture (Anderson and Martin, chp. 2): • Extensive binding overhang: • Nearly 2 for industrial, 2.4 for developing, 5 for LDCs • Tariff cuts must be deep to have impact on trade flows • 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 • By varying marginal rates across tiers, avoid tariff discontinuities • 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)

5. Variants on the DDA Scenario • Doha-All: fully reciprocal cuts in tariffs by developing and least developed countries • Special and sensitive products: • 2% of tariff lines permitted (4% developing) • Chosen based on tariff/trade flow combination (tariff revenue at HS-6 digit level) • Subjected to minimal (15%) tariff cuts • Erodes two-thirds of the cuts in developed country agriculture protection

6. Assessing Global Impacts • GTAP data base, supplemented by CEPII/ITC protection data base: MAcMap • Comprehensive treatment of preferences • Estimation of a.v. equivalent of specific tariffs • Build up tariff cuts from HS-6 level: • Bound vs. applied rates • Assess impact in modified version of GTAP model: GTAP-AGR (Keeney and Hertel)

7. Impact Of Trade Reforms On World Exports(percentage change in volume)

8. Impact Of Trade Reforms On World Prices(percentage change in average price)

9. Communicating Global Results to National Models • More complicated than appears at first glance: • Global model has its own representation of the national economies – don’t want to do domestic reforms twice! • Two views of focus country supply of products to world mkt • We live with inherent inconsistency: national model has preferred representation of export supply curve • Communicate changes in international markets as changes in cifimport prices and vertical export demand shifts • Omits national reforms when eliciting global market effects, but includes them, along with world price/demand shifts, when national model is simulated

10. Conceptual Framework for Country Case Studies (Winters) World pricesand quantities Exchangerate Tariffs,QRs Tariff revenue Pass through, competition Border price Taxes, regulation,distributors, procurement Enterprises Taxes Wholesale price Distribution, taxes,regulation, co-ops Spending Profits Wages Employment Retail price Co-operatives, technology, random shocks Household welfare males elderly Prices, wages, endowments, profits, other income females young

11. Price 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) Green = discussed Red = presented today Country Case Studies

12. Conceptual Framework: Price Transmission to HHlds World pricesand quantities Exchangerate Tariffs,QRs Tariff revenue Pass through, competition Border price Taxes, regulation,distributors, procurement Enterprises Taxes Wholesale price Distribution, taxes,regulation, co-ops Spending Profits Wages Employment Retail price Co-operatives, technology, random shocks Household welfare males elderly Prices, wages, endowments, profits, other income females young

13. Incomplete price transmission yielded unequal gains from Mexican trade reforms in 1990’s Source: Nicita, 2004.

14. Doha impacts on poorest rural households in Mexico also influenced by price transmission (Nicita, 2005) % change real income Doha+ = Doha and Productivity enhancement Doha++ = Doha+ and enhanced price transmission

15. Focus on Household Impacts Trade Policy and Poverty – Causal Connections World pricesand quantities Exchangerate Tariffs,QRs Tariff revenue Pass through, competition Border price Taxes, regulation,distributors, procurement Enterprises Taxes Wholesale price Distribution, taxes,regulation, co-ops Spending Profits Wages Employment Retail price Co-operatives, technology, random shocks Household welfare males elderly Prices, wages, endowments, profits, other income females young

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

17. Poverty Headcount by Region in Brazil

18. Doha boosts employment in relatively poorer regions thereby reducing poverty National headcnt falls by 236,000 (Proportion of pop.) (Percentage change)

19. Poverty impact across 27 regions in Brazil

20. Brazil summary • Gainers/losers: • Households with lowest skill level workers gain most due to the job creation effect • Followed by commercial farmers growing export products • Small farmers also gain • Households relying on higher skill workers in Sao Paolo & Rio are hurt due to job loss in heavy industry • Inequality falls in wake of trade reforms

21. Focus on Labor Markets Trade Policy and Poverty – Causal Connections World pricesand quantities Exchangerate Tariffs,QRs Tariff revenue Pass through, competition Border price Taxes, regulation,distributors, procurement Enterprises Taxes Wholesale price Distribution, taxes,regulation, co-ops Spending Profits Wages Employment Retail price Co-operatives, technology, random shocks Household welfare males elderly Prices, wages, endowments, profits, other income females young

22. Educational attainment influences functioning of labor market and enhances poverty reduction • Intersectoral labor mobility is key to poverty reduction, and education is key to farm-nonfarm mobility in China (Zhai and Hertel): • One add’l year of schooling boosts probability of obtaining non-farm job by 14% • Education also boosts productivity – particularly off-farm • Yet rural ed expenditures lag urban areas by 16% per capita • Consider impact of equalizing ed’l spending at same time as Doha implemented (paid for from combination of taxes and private spending): • Doha alone: 5 million poverty reduction • Doha + Rural Education: 50 million reduction in poverty

23. Focus on Growth Trade Policy and Poverty – Causal Connections World pricesand quantities Exchangerate Tariffs,QRs Tariff revenue Pass through, competition Border price Taxes, regulation,distributors, procurement Enterprises Taxes Wholesale price Distribution, taxes,regulation, co-ops Spending Profits Wages Employment Retail price Co-operatives, technology, random shocks Household welfare males elderly Prices, wages, endowments, profits, other income females young

24. Bangladesh Case Study (Annabi et al.) • Expected to lose from Doha scenario: • Although not from preference erosion • Due to net agr importer status (cotton, grains & oils) • Apparel a key industry: • Accounts for more than 2/3’s exports • Employs many low income workers (esp. women) • Global trade remains quite distorted • Bracing for fallout from abolition of quotas • Examine SR vs. LR effects • Contrast with impact of own-liberalization

25. Long term impacts of trade reform in Bangladesh: aggregate welfare

26. Country Studies Summary: Near Term Poverty Impacts of Trade Reform are Mixed Percentage change in headcount

27. Long Term Poverty Impacts of Trade Reform are Uniformly Favorable:(LR studies incorporate impact on investment) Percentage change in headcount Note: LR results only available for 4 countries and world

28. 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)

29. 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

30. 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

31. 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 go to International Trade, then click on Topics > Poverty and Trade