Trade Policies, Household Welfare and Poverty Alleviation

Book Launch

Nina PavcnikDartmouth College

UNCTAD, September 8, 2014

Why this book?

• Low- and middle-income countries have dramatically increased their participation in global economy– Exports of low income countries grew from 26 percent of their

GDP in 1994 to 55 percent in 2008 – Exports of middle income countries grew from 25 to 55

percent of their GDP between 1994 and 2008

• Global poverty has dropped from 52% in 1981 to 22% in 2008 ($1 a day measure)

• How do the poor fare in a globalized world?

Source: Hanson (2012), Chan and Ravallion (2012)

Why this book?

• How do the poor fare as low-income countries embrace more liberalized trade policies and expose domestic markets to intl. competition?

• Under what circumstances do the poor benefit as countries gain access to high-income export markets?

• What are the consequences of terms-of-trade shocks for the poor?

This book

• Contributes to research on globalization and poverty

• Examines the welfare and poverty consequences of changes in global commodity prices and trade policies

• Collection of 8 case studies

Outline of the talk

• The book in broader context of research on globalization and poverty

• Overview of case studies

• Key insights

Outline of the talk

• The book in broader context of research on globalization and poverty

• Overview of case studies

• Key insights

Globalization and Poverty

• Effects of trade on poverty through – economic growth– effects on relative prices, wages, and employment– effects on relative prices, consumption and

production/earnings

• Case studies in this book focus on the third mechanism

Main mechanism

• Short-term effects of price changes on household welfare and poverty through household – consumption – production – wage earnings

• Quantify the role of these channels with information from household-level survey data

Basic idea: Consumption

• Individuals differ in income and goods vary in sensitivity of demand to income

• Poor and rich individuals differ in consumption expenditure shares at given prices

• Trade shocks (via prices) have unequal effects on welfare of poor/rich– Consumers with lower incomes benefit more from

price reductions of low-income elastic goods

Basic idea: Production

• Individuals differ in source of earnings/production

• Individuals differ in income shares from production/wage earnings at given prices

• Trade shocks (via prices) have unequal effects on welfare of poor/rich through production

Terms-of-trade shocks in food

• Welfare effects of food price changes revealed to be a concern for individuals and policy makers in low- and middle-income countries– Riots and policy responses to 2007-8 food price

increases– Motivated by concerns about increased poverty• To the extent the poor are net consumers of food, they

would be disproportionately negatively affected • Poor would benefit if they are net producers of food

Focus on food

• Large component of average household budget– 6.6% in the US; 25% in India; 27% in China; 40% or

over in Nigeria, Cameroon, Pakistan

• The largest budget item for the very poor in less developed economies– 58-75 % of household budget of the poor spent on

foodSource: USDA Economic Research Service (2012), Duflo and Benarjee (2007)

Focus on food

Prevalence of agricultural employment in low-income countries

Outline of the talk

• The book in broader context of research on globalization and poverty

• Overview of case studies

• Key insights

The book has two broad themes

• Welfare and poverty consequences of recent increases in global food prices– Importing countries (Philippines, FYR of

Macedonia)– Exporting country (Argentina)

• Welfare effects of trade policies and exchange rate shocks– Costa Rica, Peru, Nigeria, China, and Viet Nam

Topics

Case-study countriesCase studies focus on lower-middle to middle income countries

Case-study countriesCase study countries differ in aggregate poverty levels (as measured by $1 a day)

Case-study countriesCase-study countries differ in their exposure to global agricultural markets through production and employment

Outline of the talk

• The book in broader context of research on globalization and poverty

• Overview of case studies

• Key insights

Broad findings

• Not possible to generalize how trade policy or higher food prices affect the poor– Add to evidence by Aksoy and Hoekman (2010)

• The consequences of shocks for the poor are country- and commodity-specific and depend on– Impact of the policy change on domestic prices – The magnitude of price change– Exposure of the poor households to price

fluctuations as consumers and producers/wage earners

Broad findings-an illustration

Philippines• Importer of rice

• Increase in the price of rice

• Harms the rural poor– Net consumers of rice

FYR of Macedonia• Importer of maize

• Increase in the price of maize

• Benefits the rural poor– Net producers of maize

Importance of micro-survey analysis

• Policy-makers are concerned about distributional effects of price shocks/policy

• Useful to evaluate consequences of trade policy or policy responses to terms-of-trade shocks with evidence based on micro data– Short-term effects of price changes– Ex-ante impact of potential trade policy • Potential short-term effect of CAFTA-DR in Costa Rica

Domestic distortions

• Welfare effects of price changes/policy depend on how price changes are passed through the supply chain from ports/producers to consumers

• Domestic distortions influence transmission of price changes to domestic producers and consumers– Internal trade costs– Wholesale and retail distribution– Imperfect pass-through (variable markups)

• Distortion might vary across poor vs. rich households

Domestic distortions: an illustration

• Producer welfare gains from higher prices – The main beneficiaries might be the middlemen and

intermediaries rather than producers of commodities– Case studies for Vietnam, Argentina

• Consumer welfare gains from lower import tariffs– Consumer welfare gains might be reduced when

wholesale importers do not fully pass-on cost savings to consumers of final goods• Case studies for Costa Rica, Peru

Summary

• The case studies in this book provide useful policy-relevant insights on welfare and poverty consequences of changes in global commodity prices and trade policies in case-study countries

Thank you