Trade Liberalisation and Poverty: What do we know?

1. Trade Liberalisation and Poverty: What do we know? L Alan Winters Development Research Group (DECRG)

2. Trade Liberalisation • generally stimulates growth • and through it poverty alleviation • BUT • it creates losers • some of whom may be or become poor Bank Poverty Course

3. Conceptual Framework Bank Poverty Course

4. 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? Bank Poverty Course

5. Wages and Employment • Does liberalisation raise wages or employment? • Is transitional unemployment concentrated on the poor? Bank Poverty Course

6. Government Revenue and Spending • Does liberalisation actually cut government revenue? • Do falling tariff revenues hurt the poor? Bank Poverty Course

7. 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? Bank Poverty Course

8. Growth in per capita income of the poor 20% 10% Growth in per capita income -20% -10% 10% 20% -10% y = 1.17x - 0.00 2 R = 0.52 -20% Dollar-Kraay: Growth is Good for the Poor Bank Poverty Course

9. D-K: Increased Trade vs Changes in Inequality 15 10 coefficient 5 Gini -0.4 -0.2 0.2 0.4 Change in -5 -10 -15 Change in trade to GDP Bank Poverty Course

10. Trade liberalisation to Growth • Conceptual issues • Variety • Productivity • Volatility Bank Poverty Course

11. Households and Markets • first order approximation of the welfare effect Barrett and Dorosh (1996) Sahn and Sarris (1991) Thomas et al (1999) Bank Poverty Course

12. The Transmission of Border-Price Shocks Pw is the world price r the exchange rate tm the proportional tariff or tax and γm the transaction costs on importables Bank Poverty Course

13. 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 Bank Poverty Course

14. 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 Bank Poverty Course

15. 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 Bank Poverty Course

16. Do the spillovers benefit the poor? • Growth linkages • Locally produced non-tradeables are important • - Services • - Bulky starch items • - Perishable foods • - Locally processed foods Bank Poverty Course

17. 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 Bank Poverty Course

18. Wages and Employment • Stolper-Samuelson Theorem • Reserve Army Model • Segmented labour markets • Common feature • Apparently small wage and employment effects Bank Poverty Course

19. 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 Bank Poverty Course

20. Public Policy: How many winners compensate for one loser? • The hypothesis ‘There are no losers’ is intellectually uninteresting • All judgements are quantitative Bank Poverty Course

21. Don’t 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 Bank Poverty Course

22. Don’t 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 Bank Poverty Course

23. Don’t Do It Now • But plan and announce it now • credible end point • sensible phasing • Is slower adjustment better? Bank Poverty Course

24. Compensatory Policies • Specific • are shocks related to trade? • why trade? • General - Safety nets • identifying poor • existence value • administrative challenges Bank Poverty Course

25. Complementary Policies • Good development policies • Trade oriented • infrastructure • market institutions • credit markets • labour mobility • establishing businesses Bank Poverty Course

26. 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 Bank Poverty Course

27. Public Policy Conclusions • proceed with liberalisation • predict poverty impact • possibly pre-empt them • protect the poor with general anti-poverty policies Bank Poverty Course