Income Distribution Impact of Trade Facilitation in Developing Countries

1. Income Distribution Impact of Trade Facilitation in Developing Countries Adrian Hewitt & Ian Gillson

2. Effects of Trade Transactions Costs in Developing Countries SMEs are dominant actors but face asymmetric costs: • Customs compliance costs per consignment are higher; • Small firms lack human resources to complete trade procedures; • Lack of predictability & information of foreign markets hits small firms hardest. Since small firms bear heaviest burdens, developing countries likely to gain most from TF

3. Income Distribution Impact of TF TF efficiency, incomes, resources to tackle poverty But TF may adversely affect some groups Impact on income distribution via effects on: • Growth; • International Trade; • Government revenue & expenditure.

4. TF & Growth • Large literature suggests openness to trade boosts growth • But depends on how openness is defined • If strictly limited to tariff liberalisation, effects are ambiguous • When openness includes TF measures (e.g. effective infrastructure) then +ve effect on growth • TF enhances the ability of individuals & firms to participate in trade • Assuming ‘trickle down’ +ve effect on growth should benefit the poor

5. TF & International Trade • TF can lower the price of imports & cost of producing exports • Effects on the poor depends on whether they are net producers or consumers of the goods affected by TF-induced price changes • If TF increases demand for exports in which the poor are intensively employed, demand for labour & wages are likely to rise • But TF could increase income inequality if benefits focus on sectors in which the poor are employed less intensively • The poor gain if they are consumers of imports, whose price has fallen as a result of TF

6. TF: Government Revenue & Expenditure • TF can benefit the national economy by increasing collection of import duties though increased efficiency & reduced corruption in customs • Impact on the poor depends on how increased revenues are spent => social expenditures

7. Other Factors • Some TF measures (e.g. infrastructure) can help the poor market their production in domestic as well as international markets • Implementation of labour-intensive TF measures (e.g. road construction) may actively employ the rural poor

8. Policy Recommendations • TF should be focussed on sectors in which employment of the poor is concentrated • Provision of safety nets for any displaced workers • Increases in gov revenues as a result of TF should support pro-poor or social expenditures • SMEs need to be able to access capital, information systems and & capacity building to comply with international standards if they are to trade efficiently • Infrastructure can be especially beneficial for the poor if they are employed in its development