1. Trade Liberalization and Poverty The Linkages Institute of Development Studies and World Bank Jakarta L. Alan Winters Neil McCulloch Andy McKay

2. Background and Motivation zGlobalisation creates many new opportunities ymore open economies have better long-run prospects  access to new markets for producers and consumers zBut also has some adverse effects ynot everyone gains equally ysome may lose, in short-run and even long-run ymarkets can be destroyed zPatchy evidence on trade and poverty yboth trade and poverty difficult to measure yemphasis in trade literature on wage inequality

3. Theoretical linkages zHeckscher-Ohlin & Stolper- Samuelson y2 factors; 2 countries; identical technologies; factor mobility within country; perfect competition etc. yCountries export goods intensive in their abundant factor yand 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 z And it’s many variants yputting in unskilled and skilled labour yadding more than two countries yskill-biased technological change  costly adjustment and factor immobility yoligopoly and intra-industry trade

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 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. 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: 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 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 Trade liberalisation may affect poverty through changes in government revenues, taxation and spending. The key lessons here are:

10. Openness and growth zModels of endogenous growth suggest that openness should encourage growth ye.g. through embodied technology, input availability, technical assistance, reduced networking costs etc zMost empirical studies support a strong positive relationship between openness and growth ye.g. Dollar (1992), Sachs and Warner (1995), Edwards (1998), Frankel and Romer (1999) yBUT not all e.g. Rodriguez and Rodrik (1999), Harrison (1996), Harrison and Hanson (1999) zBut complementary policies are essential ye.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? zFactor endowments and comparative advantage zStructure of asset ownership (especially land) ye.g. Ravallion (1998), Banerjee et al (2000), Birdsall and Londono (1997), Deininger and Olinto (2000)  Access to yinputse.g. missing markets in Malawi ycredite.g. credit constraints in Mexico ymarketse.g. transport costs in Zambia yinformatione.g. traders in Tanzania yknowledgee.g. education and extension services

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

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