Transcript Trade and poverty psia day - New Rules for Global Finance Coalition

PSIA: Key Issues in Trade Policy Reform
or How to Measure the Linkages between Trade Growth
and Poverty
Maurizio Bussolo
DECPG
The World Bank
March 2006
Based on the PSIA note on Trade Policy reform
authored by Maurizio Bussolo and Alessandro Nicita.
Intro
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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:
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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
Trade Policy
3
Income level and growth
4
Income distribution
1
2
Poverty
Fiscal issues, Risk, Volatility
1st group of studies: the growthinequality-poverty regression
approach
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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
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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
Z
Reduction due to
Growth
Reduction due to
distribution change
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15
20
25
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Trade and Poverty Links: an
overview
Trade Policy
3
Income level and growth
4
Income distribution
1
2
Poverty
Fiscal issues, Risk, Volatility
Trade Reforms
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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:
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Multilateral liberalization (WTO negotiations)
Unilateral liberalization
Discriminatory liberalization (regional, bilateral
agreements)
Different institutional arrangements and
different effects
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.2
.4
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Income distribution implications of Multilateral and
Regional liberalizations, an example for Nicaragua
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0
5
10
percentage gain
Full
CAFT A
Kernel Distribution of Gains for Nicaraguan households for
a multilateral (full) and a CAFTA liberalization scenarios
Trade and Poverty Links: more
details
a. goods prices
b.
c.
d.
e.
f.
(expenditure channel)
factor prices, employment (income channel)
government fiscal position (transfers, tariff revenues,
other taxes)
Investment/productivity changes (long term growth)
Short run adjustment costs (volatility, risk)
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 +1
a. 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:
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
output
input
w
cons
W   




c
p


p


w


p



j
j
k
k
f
f
c

W 
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 The change in welfare is function of: a) the change
in output prices, b) inputs prices, c) factor prices
and d) consumption goods prices
Partial equilibrium analyses:
advantages/disadvantages
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the ’s are household specific: full heterogeneity is
included
Key characteristics of the poor inform the analysis
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Problems:
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Examples: Ethiopia export/food crops regional
segmentation, and own consumption in Nicita Olarreaga
(2003); Madagascar booming textile in Nicita Razzaz
(2003)
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
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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)
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Main result: poorest household earn 4 times more than richer
households
Decomposition exercises; test different type of liberalization
Problems:
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Within group variance is fixed
No heterogeneity across the poor
Perfect price transmissions
Micro-Macro synthesis
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Top-down sequential approach
Inclusion of the full household sample in the CGE
model
Feed-back full models
Top-Down sequential approach:
an example
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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
Global trade reform can reduce
poverty more than proportionately
(Poverty elasticities generated by household microsimulation linked to global trade reform scenario)
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3
2
1
0
Low labor mobility
Distributionally
neutral elasticity
Brazil
Chile
High labor mobility
Colombia
Source: Staff simulations with Linkage model and country micro-simulation modules.
Other approaches
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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
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simSIP
PovStat
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Poverty Analysis Macroeconomic Simulator
(PAMS)
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Both the above methods assess the (ex-ante or
ex-post) effect of aggregate economic growth
on poverty
Maps macroeconomic results (differential
output, employment, labor revenues across
sectors) into poverty effects
123PRSP
Difficulties
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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
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Level of aggregation
Time horizon
Market structure
Domestic policies (regulation and competition)
Dynamic gains from trade: Increasing integration in
global markets is associated with faster growth
(Average annual per-capita GDP growth, 1980-2003,
percent)
Increasing export
share in GDP
1.6
1.2
Decreasing export
share in GDP
0.8
0.4
0.0
Source: World Development Indicators and DECVP staff calculations
Much is left out of the analysis…
(Real income gains for developing countries in
$billion)
Merchandise trade vs. services, GTAP5 (1997)
1000
Trade barriers
Competition
Merchandise trade and productivity, GTAP 6 (2005)
Efficiency
Static
Dynamic
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900
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700
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500
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400
60
300
40
200
100
20
0
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Services
Merchandise
Low income
Middle income
Source: Left panel, GEP 2002. Right panel, Anderson, Martin and van der Mensbrugghe (2006).
Other elements in a good PSIA:
Stakeholders analysis
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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:
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Approach 1: the factor endowments model
Approach 2: the sector specific model
Institutions
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Globalization and governance
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Coordination across different public institutions
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WTO commitments
Effects on domestic institutions Bonaglia, Braga,
Bussolo (2002)
Example: trade liberalization in Colombia
Trade reform as part of a larger development agenda
Conclusions
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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)