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United Nations Conference on Trade and Development
Trade and poverty through
the micro-lens:
How can trade affect
households and
individuals?
Cora Mezger/UNCTAD
United Nations Conference on Trade and Development
Outline
The micro-level impact of trade The static effects of trade on households
• Price effects
• Markets and availability of goods
• The trading domain
• Presentation – Virgulino Nhate
• Wage and employment effects
• Presentation – Adeolu Adewuyi
• Taxes and transfers
Within-household effects Response constraints and feedback effects Links to next sessions
United Nations Conference on Trade and Development
Trade-Poverty relationship??
Source: Ravallion (2004)
22
-0.8-0.8
11
00
11
-2-2-0.4-0.4 0.00.0 0.40.4 0.80.8 1.21.2
Rate
of
Ch
an
ge in
Povert
yR
ate
of
Ch
an
ge in
Povert
y
(Log d
iffere
nce
in
the $
1 a
day h
eadco
unt
index)
(Log d
iffere
nce
in
the $
1 a
day h
eadco
unt
index)
Growth of Trade VolumeGrowth of Trade Volume
(Log difference of exports + imports as share of the GDP)(Log difference of exports + imports as share of the GDP)
United Nations Conference on Trade and Development
The micro-level impact of trade
Country, sector, product, household disaggregation
Effects on aggregate poverty measures may disguise changes at the household- and individual level
“[…] a micro empirical lens points to considerable heterogeneity in impacts underlying the aggregates. There is a sizable, and at least partly explicable, variance in impacts across households with different characteristics." Ravallion, M. (2004)
Heterogeneity of the poor: geographic, demographic characteristics, net-trading position
United Nations Conference on Trade and Development
The static effects of trade on households
The Winters’ framework
Monetary dimension of poverty – income, consumption
Trade and trade liberalization in this framework
Trading Domain
Tradables
Pass through, competition
National
Taxes, regulation, distributors, procurement
Regional
Distribution, taxes, regulation, co-ops
Co-operatives, technology, random shocks
Subsis- tence
Quantities
Border Price
Tariffs, QR's
Retail Price
Enterprises
Tariff Revenue
Taxes Spending
Factor Markets
Welfare
Exchange Rate
males
female
elderly
young
Wholesale Price
Source: McCulloch et al. (2001)
United Nations Conference on Trade and Development
Price effects
Post-tariff border price: World price, exchange rates, tariffs/quotas/non-tariff measures
Transmission of changes in prices from the border to distribution centres, local producers, retailers, the consumers
Share of affected goods in poor’s consumption basket
Constraints to the transmission of price changes• Price policies (e.g. prices are fixed by marketing boards),
compulsory procurement
• Lack of infrastructure
• Structure of the value chains
How to measure welfare effect of new products: change from infinite price to finite price
United Nations Conference on Trade and Development
Markets and availability of goods – Case of Zambia’s maize sector
Importance of maize:
1991-2004: maize accounted for more than 60% of cropped area, planted by 75% of smallholders, c.a. 30% of production sold (large subsistence share)
Before the trade reforms: • Subsidized inputs (fertilizer, seeds)
• Government/cooperatives main buyers
• No price risk: pan-territorial pricing and pan-seasonal pricing
• Agricultural sector cross-subsidized through mining sector
Elimination of subsidies and purchasing monopsony in the early
1990s
Two private firms become main buyers of maize
United Nations Conference on Trade and Development
Case of Zambia’s maize sector
Second half of the 1990s: • Inputs more expensive; availability and access
of inputs and credit limited
• Farm-gate price decreases; markets for maize disappear in remote areas: no buyers anymore, few transactions at worse terms of trade mainly barter trade
• Also not so remote farmers worse off because cross-subsidies from mining sector eliminated
• Only limited adjustment through switches to other crops (e.g. cassava), commodities (cotton)
• Falls in output, increases in poverty, problems with food security (coinciding with droughts)
United Nations Conference on Trade and Development
Case of Zambia’s maize sector
Beginning of this decade: • Some diversification of smallholder farming
• Presidential elections in 2002; new President reintroduces agricultural subsidies; marketing board
• Increasing maize production in the recent years, but still food shortages
• Markets remain underdeveloped; restrictions on trade; remote farmers still isolated from commercial markets
– 2% of smallholder farmers account for 40% of maize sold by smallholder farmers (2001-2004)
– Majority of smallholder maize production is subsistence farming
United Nations Conference on Trade and Development
The static effects of trade on households
The Winters’ framework
Trading Domain
Tradables
Pass through, competition
National
Taxes, regulation, distributors, procurement
Regional
Distribution, taxes, regulation, co-ops
Co-operatives, technology, random shocks
Subsis- tence
Quantities
Border Price
Tariffs, QR's
Retail Price
Enterprises
Tariff Revenue
Taxes Spending
Factor Markets
Welfare
Exchange Rate
males
female
elderly
young
Wholesale Price
Source: McCulloch et al. (2001)
United Nations Conference on Trade and Development
The trading domain – second round effects on prices
Do alternative goods or activities exist? If yes, substituting a good or activity is likely to
have second-round effects on other markets How large this effect is depends on the domain
of trade: • international,
• national,
• regional or
• subsistence
The role of local demand spillovers
United Nations Conference on Trade and Development
Presentation
Virgulino Nhate, Mozambique:
"An empirical estimation of the degree of price transmission from border to
consumer prices"
United Nations Conference on Trade and Development
The static effects of trade on households
The Winters’ framework
Trading Domain
Tradables
Pass through, competition
National
Taxes, regulation, distributors, procurement
Regional
Distribution, taxes, regulation, co-ops
Co-operatives, technology, random shocks
Subsis- tence
Quantities
Border Price
Tariffs, QR's
Retail Price
Enterprises
Tariff Revenue
Taxes Spending
Factor Markets
Welfare
Exchange Rate
males
female
elderly
young
Wholesale Price
Source: McCulloch et al. (2001)
United Nations Conference on Trade and Development
Wage and employment effects
Changes in the enterprise sector (including firms, larger farms, part of the informal sector; excluding household production)• Demand (income and export/import/domestic prices;
price and income elasticities)
• Supply by firms
• Factor markets
Trade and development views – two extremes:• Fixed total factor supply, flexible factor prices
• Fixed factor prices, perfectly elastic factor supply
United Nations Conference on Trade and Development
Wage and employment effects
What happens at the micro-level?• Characteristics of affected sectors and
characteristics of poor• Effects on non-traded sectors• Effects on the informal labour market
+ informality: subcontracting, lay-offs
- informality: generation of employment opportunities
• Geographical concentration of the positive/negative effects, second-round effects
• Spell of unemployment, intensity of underemployment
• Poverty measures and dynamic aspects of poverty
United Nations Conference on Trade and Development
Wage and employment effects – Madagascar
Household analysis by A. Nicita (2006): “Export-led growth, pro-poor or not? Evidence from Madagascar’s textile and apparel industry”
Research questions:In how far did the sharp increase in textile exports and in employment in the sector benefit the poor over the 1990s?
What are the likely effects on household welfare in the near future?
19911991 19921992 19931993 19941994 19951995 19961996 19971997 19981998 1999199919901990 20002000 20012001
100100
200200
300300
400400
500500
00
Exports to the USAExports to the USA
Exports to the EUNExports to the EUN
Exports to other countriesExports to other countries
Million U
SD
Million U
SD
Net ExportsNet Exports
19911991 19921992 19931993 19941994 19951995 19961996 19971997 19981998 1999199919901990 20002000 20012001
100100
200200
300300
400400
500500
00
Exports to the USAExports to the USA
Exports to the EUNExports to the EUN
Exports to other countriesExports to other countries
Million U
SD
Million U
SD
Net ExportsNet Exports
United Nations Conference on Trade and Development
Wage and employment effects – Madagascar
• Descriptive analysis: characteristics of the textile and apparel workforce in 1997, 1999, and 2001
• Microsimulation:
a) Estimate the propensity of working in the sector and rank individuals;
b) Estimate the wage premium for “new” workers and the wage trend for current workers in the industry;
c) Simulate welfare/poverty effects in two scenarios: 10% and 20% employment growth/year.
– Welfare changes are computed as the sum of changes in monetary household incomes (textile workers and closest matches)
ijijijij IXW 210ln
iii HXL 210
itititititit TXTXW 3210ln
United Nations Conference on Trade and Development
Wage and employment effects – Madagascar
Descriptive analysis 1997 1999 2001 Number of employees 46,000 136,000 191,000 Skilled workers (%) 51 54 46 Unskilled workers (%) 49 46 56 Average years of education 8.5 9.0 7.9 Temporary employment 34 39 20 Workers below the poverty line (%) 50 39 42 Average earnings $37 $39 $50 of skilled workers $41 $52 $76 of unskilled workers $32 $29 $33 Average age 36 34 32 Female labour force (%) 76 75 80 Workers' localization by region (%) Urban Antananarivo 49 58 44 Rural Antananarivo 9 32 41 Other 42 10 25
Source: Nicita, A. (2006)
United Nations Conference on Trade and Development
Employees (2001)
Best matching
Number of employees 191,000 100,000 Skilled workers (%) 46 42.1 Average years of education 7.9 10.0 Temporary employment 20 34.2 Workers below the poverty line (%) 42 78.7 Average earnings $50 $29 of skilled workers $76 $47 of unskilled workers $33 $20 Average age 32 31.9 Female labour force (%) 80 76.2 Workers' localization by region (%) Urban Antananarivo 44 39.8 Rural Antananarivo 41 47.4 Other 25 12.8
Wage and employment effects – Madagascar
“New” textile workers
Source: Nicita, A. (2006)
United Nations Conference on Trade and Development
Low-growth scenario High-growth scenario
Av. monthly gains per
worker (US$)
All workers (in thousand)
Av. monthly gains per
worker (US$)
All workers (in thousand)
Total 112 310 104 430 Skilled 165 196 160 255 Unskilled 47 114 48 175 Men 143 72 144 98 Women 102 238 92 332
Wage and employment effects – Madagascar
Monetary gains
Source: Nicita, A. (2006)
United Nations Conference on Trade and Development
Wage and employment effects – Madagascar
Change in poverty headcount index
00 11 22 33 44 55
- 1- 1
- 0.5- 0.5
00
Urban (Urban (low low
growthgrowth))
Urban (Urban (high high
growthgrowth))
National (National (high high
growthgrowth))
National (National (low growthlow growth))
NOTE: dashed lines show 95% bootstrapped confidence NOTE: dashed lines show 95% bootstrapped confidence intervalsintervals
Ch
an
ge in
Povert
y H
ead
Cou
nt
Ch
an
ge in
Povert
y H
ead
Cou
nt
Ind
ex
Ind
ex
Source: Nicita, A. (2006)
United Nations Conference on Trade and Development
Wage and employment effects – Madagascar
Conclusions• Growth in textiles and apparel exports is likely to
improve households living conditions through employment creation and increases in wages
• But: skilled more likely to benefit than unskilled, urban more than rural Poverty reduction effect exists, but rather
small Inequality between poor- and non-poor, urban
and rural likely to increase at least in the first years
Keep in mind that total numbers are small: only 2% of active labour force employed in the sector in 2001
United Nations Conference on Trade and Development
Wage and employment effects – Madagascar
Remarks
• Partial-equilibrium approach: no effects on other sectors; similar approach could however be second step in macro-micro model with CGE as first step
• Fixed prices
• Within-household effects
• Matching procedure requires that individual can actually switch to textiles sector
• Growth effects and government transfers
• Scenarios realistic?
United Nations Conference on Trade and Development
Presentation
Adeolu Adewuyi, Nigeria:
“Wage and Employment effects of
Trade Policy reform”
United Nations Conference on Trade and Development
The static effects of trade on households
The Winters’ framework Trading Domain
Tradables
Pass through, competition
National
Taxes, regulation, distributors, procurement
Regional
Distribution, taxes, regulation, co-ops
Co-operatives, technology, random shocks
Subsis- tence
Quantities
Border Price
Tariffs, QR's
Retail Price
Enterprises
Tariff Revenue
Taxes Spending
Factor Markets
Welfare
Exchange Rate
males
female
elderly
young
Wholesale Price
Source: McCulloch et al. (2001)
United Nations Conference on Trade and Development
Taxes and transfers
Trade liberalization, but also changes in the structure of trade can have effects on government revenue• Early phases of liberalization: revenue may even increase
• Point when tariff revenues decrease and have to be replaced by other types of taxes
Effect depends on:• Initial importance of trade taxation in total revenue
• Initial importance of trade taxation for social transfers
• Choice of alternative tax mechanisms/tax structure pro-poor? (e.g. goods consumed mainly by the poor exempted from VAT)
• Effectiveness and efficiency of tax administration
• Political will to protect social transfers from cuts in government spending
United Nations Conference on Trade and Development
Taxes and transfers
Policy space• Adherence to trade agreements may limit
governments’ policy space: subsidies or tax exemptions for targeted industries, selected import protection, differential interest rates
• Do these policies actually benefit the poor? Analyse effects on dynamic and static effects
Remittances• Does trade generate employment opportunities and
facilitate movement of labour internally or abroad (e.g. GATS Mode 4)? Or are trade and labour mobility substitutes rather than complements?
United Nations Conference on Trade and Development
Within-household effects
Gender and generation effects of trade• Allocation of household resources Pareto-efficient?
• Differences in access to resources, bargaining power
• Participation in labour markets
• Impact on other household members
Include non-market activities and unpaid work in analysis; segment analysis by gender and age
United Nations Conference on Trade and Development
Effects on risks
Increased or reduced risk of existing activities• Weight of foreign relative to domestic shocks
New risks• e.g. switch from subsistence to cultivation of cash
crops
Ability to bear risks• complementary policies, e.g. access to insurance and
credit markets
United Nations Conference on Trade and Development
Response constraints and feedback effects
Welfare effect depends on the ability of the poor to adjust to changes in prices (e.g. switch consumption to substitutes, to producing goods or services whose prices have gone up, take up employment in an expanding sector)
Response constraints due to:
• restricted access to assets
• institutional characteristics
Policy interventions at national, regional, international levels – cost of targeted policies
United Nations Conference on Trade and Development
Response constraints and feedback effects
How can trade affect different types of capital:• Human capital • Natural capital
• Financial capital • Physical capital
• Social capital
And dynamic effects? • Feedbacks, e.g. changes at the enterprise level will
feed back into prices
• “Top-down” linear analysis difficult: changes in effective demand – changes in production – changes in employment – changes in demand
• Growth and investment effects which feed back into prices, employment, government revenue and transfers
United Nations Conference on Trade and Development
Links to the next sessions
Data requirements • Trade data/information about tariffs, non-tariff measures,
• Price surveys,
• Information about the value chains of affected sectors (e.g. entry into distribution networks, how many buyers)
• Elasticities (income elasticity of demand, price elasticities, elasticities of labour supply etc.)
• Labour market regulations, disaggregated wage rates, employment data
• Household surveys, including income/expenditure/assets, education, demographic characteristics: “poverty profiles” important to establish characteristics of the poor,
• Community-level data, e.g. on infrastructure/agroclimatic info,
• Tax, revenue, public expenditure data,
… if possible panel data
United Nations Conference on Trade and Development
Links to the next sessions
Methodologies employed to analyse the transmission channels:
• ex-post, ex-ante;
• descriptive/case-study,
• econometric models,
• partial-/general,
• how to account for dynamics,
• how to integrate micro- and macro-levels of analysis;
• How to combine several methods (e.g. CGE and econometric estimation of elasticities)