Trade and poverty through the micro-lens: How can trade affect households and individuals? Cora Mezger/UNCTAD

1. United Nations Conference on Trade and Development Trade and poverty through the micro-lens: How can trade affect households and individuals?Cora Mezger/UNCTAD

2. 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

3. 2 1 Rate of Change in Poverty (Log difference in the $1 a day headcount index) 0 1 -2 -0.8 -0.4 0.0 0.4 0.8 1.2 Growth of Trade Volume (Log difference of exports + imports as share of the GDP) United Nations Conference on Trade and Development Trade-Poverty relationship?? Source: Ravallion (2004)

4. 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

5. United Nations Conference on Trade and Development The static effects of trade on households • The Winters’ framework Source: McCulloch et al. (2001) • Monetary dimension of poverty – income, consumption • Trade and trade liberalization in this framework

6. 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

7. 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

8. 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)

9. 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

10. United Nations Conference on Trade and Development The static effects of trade on households • The Winters’ framework Source: McCulloch et al. (2001)

11. 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

12. 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"

13. United Nations Conference on Trade and Development The static effects of trade on households • The Winters’ framework Source: McCulloch et al. (2001)

14. 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

15. 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

16. Household analysis by A. Nicita (2006): “Export-led growth, pro-poor or not? Evidence from Madagascar’s textile and apparel industry” United Nations Conference on Trade and Development Wage and employment effects – Madagascar 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?

17. 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: • Estimate the propensity of working in the sector and rank individuals; • Estimate the wage premium for “new” workers and the wage trend for current workers in the industry; • 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)

18. United Nations Conference on Trade and Development Wage and employment effects – Madagascar • Descriptive analysis Source: Nicita, A. (2006)

19. United Nations Conference on Trade and Development Wage and employment effects – Madagascar • “New” textile workers Source: Nicita, A. (2006)

20. United Nations Conference on Trade and Development Wage and employment effects – Madagascar • Monetary gains Source: Nicita, A. (2006)

21. 0 National (low growth) National (high growth) - 0.5 Urban (low growth) Change in Poverty HeadCount Index - 1 Urban (high growth) 0 1 2 3 4 5 NOTE: dashed lines show 95% bootstrapped confidence intervals United Nations Conference on Trade and Development Wage and employment effects – Madagascar • Change in poverty headcount index Source: Nicita, A. (2006)

22. 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

23. 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?

24. United Nations Conference on Trade and Development Presentation Adeolu Adewuyi, Nigeria: “Wage and Employment effects of Trade Policy reform”

25. United Nations Conference on Trade and Development The static effects of trade on households • The Winters’ framework Source: McCulloch et al. (2001)

26. 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

27. 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?

28. 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

29. 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

30. 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

31. 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

32. 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

33. 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)