Links Between International Trade and Poverty in Developing Countries

Universiteit Antwerpen

Lugar: Amberes; Año: 2009 p. 152

978-90-8994-007-0

The linkages between trade, trade policy, and poverty have not been traditionally the subject of interest in the international economics literature. Trade and trade policy were recognized from the beginning of economic studies as redistributive policies. However, the study of their effects on the levels of poverty and inequality has developed only in recent decades, coupled with the worries about the effects of the globalisation process, in which trade plays a significant role. The research presented in this thesis aims at improving the knowledge of the effects that trade liberalisation has on individual and households´ welfare in developing countries. Furthermore, this research goes to some length to enhance the scarcity of literature on the topic by providing diverse empirical approaches. Utilising diverse methods, each of the empirical Chapters provides a measure of the impacts of trade opening on key variables at the household level. The consideration of consumption and supply responses to trade policies and of specific prices and wages transmission, and its quantification for the specific countries under study, constitute the main contribution of the research to the body of literature to date. The importance of the subject under study resides in the prominence of the trade components among the overall policy reforms that less developed countries have followed in the past, and that are also part of their current and future agendas. The search for poverty effects of trade does not mean that it is assumed nor advised that the policies related to external commerce should be the methods of addressing the problem of lack of income of poor households. Other policies, such as distributive fiscal policy, or incentives to increase employment and education, are better suited to directly addressing this issue. Nevertheless, it should be recognised that opening an economy to world markets will most likely produce welfare changes among different stakeholders. Precisely, the possibility that these changes distinctly affect the poor is the reason for this study. Chapter 2 is devoted to survey the existing literature on the topic. Given the applied nature of the research presented in the next Chapters, special attention is placed on the methodological approaches that have been suggested in previous works. The connection between trade and poverty has only rather recently become a subject of study on its own right. Therefore, there is yet no consensus on the best approach for addressing this topic. The main strands in the literature addressing the links between trade and poverty are reviewed as a way to introduce the following chapters, which deal with many of the concepts and issues discussed in this introductory chapter. The empirical research on the subject is reported in Chapters 3 to 5. These are specific country case studies of the effects of trade liberalisation on households´ welfare. Two Latin American developing countries are used, Guatemala and Argentina, each of them having liberalised trade recently, but with differing socioeconomic characteristics. Whereas in the Central-American nation there is a large percentage of the population living in rural settings, many of them being poor subsistence farmers; in the South-American country the poor are predominantly found in the urban population, earning most of their income in the labour market. In Chapter 3 a multimarket model is built to assess the impact of the opening of the maize market in Guatemala. This crop is the most important agricultural product for the country, and occupies a very important place in the households´ consumption and production decisions. In 2006, Guatemala entered CAFTA, a free trade agreement involving Central-American countries and the United States, and maize was one of the products subject to a special protection regime, which will be subject to free trade after ten years. The importance of this crop, and the close relationship with other agricultural and food products, render suitable the partial equilibrium multimarket model developed in the chapter to obtain the likely price effects at the end of the liberalisation period. These changes in prices are subsequently included in a i 7 household characterisation to obtain the welfare impacts in different regions and groups of households. Chapters 4 and 5 study the impacts of trade liberalisation on poverty and welfare of individuals and households in Argentina. Unlike Guatemala, in this case the main household effects of opening up to world markets are more likely to be reflected in the labour market. Consequently, Chapter 4 consists of an econometric estimation of general equilibrium relationships to establish the effects on sectoral prices and wages of a simulated elimination of tariffs. These estimates are then included in a micro simulation of the welfare effects of the changes generated by the policy, accounting for household and regional heterogeneity. Chapter 5 narrows down the possible impact of trade on income and poverty, by focusing on the group of individuals the previous chapter identified as the segment of the population that is more prone to be most significantly affected: individuals working in tradable manufacturing industries. The Argentinean liberalisation experience of the 1990s is under scrutiny in this Chapter, using a ground breaking methodology among the studies on this topic. Impact evaluation techniques are adapted to isolate the trade policy effects from the overall policy reforms the country was undertaking. A comparison group is defined to represent the counterfactual, which allows obtaining labour market effects such as wage and employment impacts, and relative measures of differential effects of trade opening up on income poverty. Each empirical Chapter presents its own set of findings and conclusions, since it is argued that specific case studies are a better-suited approach than the seeking of general outcomes. The applied nature of the studies and the restrictions imposed by data availability, imply that the accuracy of the methods and results presented in each chapter could be improved in the future through the incorporation of more detail in the models and the collection of new data. However, the research presented in this thesis constitutes a new step towards identifying and quantifying some of the links through which trade policy may possibly affect welfare and poverty in the countries under study.