L. Alan Winters Neil McCulloch Andy McKay

1. Trade Liberalization and PovertyThe LinkagesInstitute of Development Studies and World Bank Jakarta L. Alan Winters Neil McCulloch Andy McKay

2. Background and Motivation • Globalisation creates many new opportunities • more open economies have better long-run prospects • access to new markets for producers and consumers • But also has some adverse effects • not everyone gains equally • some may lose, in short-run and even long-run • markets can be destroyed • Patchy evidence on trade and poverty • both trade and poverty difficult to measure • emphasis in trade literature on wage inequality

3. Heckscher-Ohlin & Stolper-Samuelson 2 factors; 2 countries; identical technologies; factor mobility within country; perfect competition etc. Countries export goods intensive in their abundant factor and the returns to the factor used intensively in a good benefiting from a relative price increase will rise This suggests that labour abundant developing countries as whole and the poor in particular should benefit from openness And it’s many variants putting in unskilled and skilled labour adding more than two countries skill-biased technological change costly adjustment and factor immobility oligopoly and intra-industry trade Theoretical linkages

4. Conceptual Framework

5. Price Transmission • transport costs • the competitive structure of the distribution sector • the way in which government institutions operate such as marketing organisations • how narrow or wide the domain of trade is. The impact of trade liberalisation depends upon how changes in border prices get translated into changes in the prices actually faced by households. Price transmission depends upon:

6. Enterprises • Trade liberalisation also affects households through its impact upon profits and thereby employment and wages. There are two opposite ways in which this may occur: • if prices are flexible and labour is fully employed then price changes caused by trade liberalisation will be reflected in changes in wages, with employment staying the same. • alternatively, if there exists a large pool of workers who move in or out of jobs when circumstances change then trade liberalisation will cause changes in employment. In reality both effects will occur – the balance between them will depend upon the relative flexibility of wages and employment.

7. Employment and Wages

8. Short Term Adjustment Costs Very little systematic evidence about the adjustment costs of the poor. However, a recent review of 50 studies shows that: • adjustment costs are typically small compared to the benefits of trade liberalisation • manufacturing employment typically increased within one year of liberalisation • adjustment costs are typically short term • duration is usually short • in many industries normal labour turnover exceeds dislocation from trade liberalisation

9. Taxes and Spending Trade liberalisation may affect poverty through changes in government revenues, taxation and spending. The key lessons here are: • liberalisation often does not have to lead to revenue cuts if tariff peaks and exemptions are also tackled • it is important to look at the poverty impact of alternative forms of taxation introduced to cover any shortfall - particularly consumption taxes. • it is generally possible to protect social and anti-poverty expenditures even if expenditures do decline • good macroeconomic management is needed to maintain social expenditures

10. Openness and growth • Models of endogenous growth suggest that openness should encourage growth • e.g. through embodied technology, input availability, technical assistance, reduced networking costs etc • Most empirical studies support a strong positive relationship between openness and growth • e.g. Dollar (1992), Sachs and Warner (1995), Edwards (1998), Frankel and Romer (1999) • BUT not all e.g. Rodriguez and Rodrik (1999), Harrison (1996), Harrison and Hanson (1999) • But complementary policies are essential • e.g. education, infrastructure, financial and macroeconomic policies

11. Growth and the Poor Source: ‘Growth is Good for the Poor’, David Dollar and Aart Kraay, Washington DC: World Bank

12. Who gets the growth? • Factor endowments and comparative advantage • Structure of asset ownership (especially land) • e.g. Ravallion (1998), Banerjee et al (2000), Birdsall and Londono (1997), Deininger and Olinto (2000) • Access to • inputs e.g. missing markets in Malawi • credit e.g. credit constraints in Mexico • markets e.g. transport costs in Zambia • information e.g. traders in Tanzania • knowledge e.g. education and extension services

13. Shocks, Risks and Vulnerability There are two ways in which households vulnerability might change due to trade liberalisation: • increasing the volatility of existingincome sources e.g. removal of a variable tariff or state producer monopsony • changes in the “portfolio” of activities which households do e.g. a switch to cash crops. But, if the new activities generate higher returns and the switch is voluntary, the change is not necessarily a welfare reduction.

14. Conclusions • Trade reform does affect poverty, but … • How trade reform affects poverty depends upon specific country circumstances and the situation of the poor - this needs serious analysis • and if serious harm is likely to result, then think about appropriate safety nets now • Also need to think about how trade reform can be used positively to promote pro-poor growth • and implement complementary policies to enable the poor to take advantage of the opportunities arising