PSIA: Key Issues in Trade Policy PSIA: Key Issues in Trade Policy ReformReform
or How to Measure the Linkages between or How to Measure the Linkages between Trade Growth and PovertyTrade Growth and Poverty
March 2006
Maurizio BussoloDECPG
The World Bank
Based on the PSIA note on Trade Policy reform authored by Maurizio Bussolo and Alessandro Nicita.
Intro
Assessing the sign and the strength of the trade and poverty links is a complex task
No clear consensus/generalization has yet emerged, thus we should not push one-size-fits all policy advice
However important lessons are being learned: Distributional effects need to be addressed Country specific detailed studies are useful Trade policy can only play a part in a comprehensive
development strategy
Trade and Poverty Links: an overview
Trad e P o lic y
In com e leve l an d g row th
P overty
In com e d is trib u tion F is ca l is su es , R is k , V o la tility
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1st group of studies: the growth-inequality-poverty regression approach
Many recent studies [de Janvry and Sadoulet (1995,2001), Ravallion and Chen (1997), Dollar and Kray (2000)] focused on the statistical relationship between growth and poverty across countries and time periods
Main conclusion: growth strongly reduces poverty, Ravallion and Chen find an ε of 3;
Policy implication: if the ε is sufficiently high, poverty reduction strategies based mainly on growth may be justified.
The regression approach: some refinements
This approach postulates a constant ε across countries/time periods
Such an approach entails a naïve model that does not take into account the existence of an identity that links poverty reduction with growth and changes in the income distribution
A graphical representation…
Poverty-growth-income distribution
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Reduction due to Reduction due to Growth Growth
Reduction due to Reduction due to distribution change distribution change
ZZ
Trade and Poverty Links: an overview
Trad e P o lic y
In com e leve l an d g row th
P overty
In com e d is trib u tion F is ca l is su es , R is k , V o la tility
11 22
4433
Trade Reforms Reduction of protection of domestic markets by
elimination of quantitative restrictions (quotas), by lowering tariff rates, and regulate the use of Non Tariff Barriers (NTBs)
Typology: Multilateral liberalization (WTO negotiations) Unilateral liberalization Discriminatory liberalization (regional, bilateral
agreements) Different institutional arrangements and
different effects
Income distribution implications of Multilateral and Regional liberalizations, an example for
Nicaragua
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.4.6
Prob
abili
ty d
ensit
y
-5 0 5 10percentage gain
Full CAFTA
Kernel Distribution of Gains for Nicaraguan households for a multilateral (full) and a CAFTA liberalization scenarios
Trade and Poverty Links: more detailsa. goods prices (expenditure channel)b. factor prices, employment (income channel)c. government fiscal position (transfers, tariff
revenues, other taxes)d. Investment/productivity changes (long term growth)e. Short run adjustment costs (volatility, risk)f. Other external shocks (global lib., TOT)
Standard small country H-O-S model main predictions (focus on a. and b., magnification effect, type of lib.)
2 other groups of studies +1a. partial equilibrium / cost of living analyses (detailed micro)b. general equilibrium (macro top-down approach)c. micro-macro synthesis
These are all quantitative studies, data requirements can be a limitation in their implementation
Partial equilibrium / cost of living analyses: intro
Based on real households rather than representative ones
Have a central equation of this form:
The change in welfare is function of: a) the change in output prices, b) inputs prices, c) factor prices and d) consumption goods prices
cconscf
wfk
inputkj
outputj pwppW
W
Partial equilibrium analyses: advantages/disadvantages
the ’s are household specific: full heterogeneity is included
Key characteristics of the poor inform the analysis Examples: Ethiopia export/food crops regional
segmentation, and own consumption in Nicita Olarreaga (2003); Madagascar booming textile in Nicita Razzaz (2003)
Problems: price changes are partial equilibrium no substitutability (i.e. no quantity response)
Extensions (panels, ex-post studies: Winters on Vietnam, McCulloch on China’s province)
General equilibrium analyses: advantages/disadvantages
Based on representative households, disaggregated in many groups as to minimize the intra-group income heterogeneity
Generate GE consistent prices, accommodate different degrees of resource mobility and substitution, perfect identification
Many studies, starting Adelman and Robinson (1978) for Korea, up to a recent one for Brazil (Harrison, Rutherford and Tarr 2003) Main result: poorest household earn 4 times more than richer
households Decomposition exercises; test different type of liberalization
Problems: Within group variance is fixed No heterogeneity across the poor Perfect price transmissions
Micro-Macro synthesis
Top-down sequential approach Inclusion of the full household sample in the CGE
model Feed-back full models
Top-Down sequential approach: an example
Macro model is a global multi-sectoral CGE model Link variables are commodity and factor prices
(from CGE model to micro data) For the incidence analysis we use four household
surveys—Brazil, Chile, Colombia and Mexico Two policy experiments: FTAA and multilateral
global liberalization
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Brazil Chile Colombia
Global trade reform can reduce poverty more than proportionately(Poverty elasticities generated by household micro-simulation linked to global trade reform scenario)
Distributionally neutral elasticity
Low labor mobility
High labor mobility
Source: Staff simulations with Linkage model and country micro-simulation modules.
Other approaches
CGE + more complex micro model: Bourguignon, Robilliard and Robinson (2002) on Indonesia and Bussolo and Lay (2003) on Colombia
CGE+full household sample: Cogneau and Robilliard (2000) on Madagascar, Cockburn (2002) on Nepal
Full feed-back models: Savard (2003) on Philippines
Off-the-shelf methods simSIP PovStat
Both the above methods assess the (ex-ante or ex-post) effect of aggregate economic growth on poverty
Poverty Analysis Macroeconomic Simulator (PAMS) Maps macroeconomic results (differential
output, employment, labor revenues across sectors) into poverty effects
123PRSP
Difficulties
As Kanbur (2001) puts it: trade and openness is the archetypal, emblematic, area around which there are deep divisions, and where certainly the rhetoric is fiercest Level of aggregation Time horizon Market structure
Domestic policies (regulation and competition)
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0.4
0.8
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1.6
Dynamic gains from trade: Increasing integration in global markets is associated with faster growth
(Average annual per-capita GDP growth, 1980-2003, percent)
Source: World Development Indicators and DECVP staff calculations
Increasing export share in GDP
Decreasing export share in GDP
Much is left out of the analysis…(Real income gains for developing countries in
$billion)
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Services Merchandise
Trade barriers EfficiencyCompetition
Merchandise trade vs. services, GTAP5 (1997) Merchandise trade and productivity, GTAP 6 (2005)
Source: Left panel, GEP 2002. Right panel, Anderson, Martin and van der Mensbrugghe (2006).
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Low income Middle income
Static Dynamic
Other elements in a good PSIA: Stakeholders analysis Trade policy is an economic inefficient but politically
efficient re-distributive tool Trade policy normally favors import-competing
sectors (and factors) rather than export-oriented ones (for historical reasons revenues collection)
Predictive analysis of the distributional effects is crucial for a successful and sustainable trade policy reform: Approach 1: the factor endowments model Approach 2: the sector specific model
Institutions Globalization and governance
WTO commitments Effects on domestic institutions Bonaglia, Braga,
Bussolo (2002) Coordination across different public institutions
Example: trade liberalization in Colombia Trade reform as part of a larger development agenda
Conclusions Poverty impacts are different across countries and scenarios We show that at least for one case, Mexico, a simple approach is
detecting a reduction in poverty, in contrast to an increase, as shown by an approach considering distribution
Strong distribution effects can dominate the average growth effects
Useful information for the design of trade reforms (capture, rent seeking) and compensatory measures (targeting); different emphasis for the short run and the long run
Volatility and risk (Loyaza on Managing Volatility Handbook) MDG context: Halving poverty requires about 5% yearly
reductions, with full trade lib, in the good cases, we get about 2% (static gains only)