The Doha Trade Round and Mozambique

1. The Doha Trade Round and Mozambique Channing Arndt, Purdue University Ministry of Planning and Development, Mozambique

2. Outline • Background information • Macroeconomic results from country CGE model linked to GTAP model of global trade. • Poverty implications from a microsimulation model using 8700 households. • Conclusions.

3. Purpose of Trade Liberalization • Shift resources to sectors with comparative advantage. • Foster links with the global economy which is thought to yield dynamic advantages. • Technology transfer • Skills acquisition • Large demand source

5. Attributes • Large volume of reasonably high quality arable land • Long coastline • Fisheries • Tourism • At least three decent natural harbors (transport services to interior) • Mineral and other natural resources • Not quite 19 million people

6. National Accounts: 1996-2002

7. Poverty • Despite growth and the positive attributes, more than half the population is classified as absolutely poor. • About 90% of the population lives on less than twice the line defining absolute poverty. • Measured poverty rates are declining • 54% in 2002-03 • 69% in 1996-97 • Overall, trend good – level bad.

8. History • Weak human capital development over the colonial period even by African standards, • Failed socialist policies initiated shortly after independence in 1975, and • A brutal civil war that endured for more than a decade. “Poorest country in the world” at the cessation of hostilities in 1992.

9. Commonalities with other Countries • A predominantly rural population with economic and social indicators at less favorable levels in rural areas (About 3 out of 4 poor people rural). • An overwhelming dependence on agriculture in rural areas. • Large distances and poor transport infrastructure which result in substantial transport costs particularly between distant regions. • Large price changes within seasons (post-harvest low to pre-harvest high) for many basic commodities. • High food shares in the total budget of the poor (around 70% in the case of Mozambique).

10. Indicators of Food Price Dispersion

11. Maize Price Series

12. Home Consumption Expend. Share

13. Impact of Trade Margins • Pe=Pwe(1-te)*exr-ice*Pice 50=100 – 50 (initial equilibrium) 60=110 – 50 (proportional magnification) • Pm=Pwm(1+tm)*exr-icm*Picm 100=50+50 (initial equilibrium) 105=55+50 (proportional dampening)

14. Macro Structure (2001)

15. Mozambique’s Three Economies • Mega projects • Aluminum smelting • Hydro electric power generation • Large scale mineral extraction (natural gas etc.) • Subsistence and informal sectors • Rest of the formal sector

16. Import Competition Indicator 1The figures in the above Table are drawn from production and import information for 144 sectors representing all commodities. The intent is to discover which productive sectors compete intensively with imports and which are specialized meaning that either commodity supply comes 90% from domestic production or 90% from imports.

17. Static CGE Model • Disaggregation • 47 commodities • 6 factors • 2 households • Accounts for marketing wedges for domestic products, exports, and imports. • Accounts for home consumption • Neoclassical closure

18. Simulations NB:Due to tariff binding overhand, Mozambican tariff cuts in the Doha scenarios are essentially zero.

19. Macroeconomic Results

20. Welfare Results

21. Microsimulation (Post Sim) • Use data on 8700 households from household survey to obtain information on expenditure shares and shares in factor earnings. • Obtain price changes by commodity and wage changes by factor from the CGE model. • Use this information to determine the first order welfare impact of reform on each household in the sample. Note: For home produced/consumed commodities, the first order welfare impact of price changes is zero.

22. Micro-simulation for DHSDT

23. Critique of Current Model • Price transmission. • “Engineering issues” associated with linking to the global model. In particular, excessive export price declines when Mozambique liberalizes. • Evasion, exemptions, and revenue replacement.

24. Robust Conclusions • Static implications of Doha scenarios very small due to: • Lack of domestic tariff cuts • Isolation of much of the economy • Home consumption • Insulation due to import margins • Tendency of much of the economy to be “specialized” • Even with full domestic liberalization, the static implications for poverty are likely to be small.

25. Implications • Winters, McCulloch, and McKay (2004): More liberal trading regimes are associated with higher rates of economic growth. • Mozambique has an opportunity to move to a much more open trade regime at relatively small adjustment cost. NB: Full trade liberalization is not a sufficient condition for growth.

26. Future Research • Price transmission. • Implication of large margins between FOB export prices and farm/factory gate prices for exportable commodities. • Revenue replacement with evasion and exemptions considered explicitly.