INTERAMERICAN DEVELOPMENT BANKINTERAMERICAN DEVELOPMENT BANK Integration and Trade SectorIntegration and Trade Sector

The trade and poverty nexus in Latin AmericaThe trade and poverty nexus in Latin America

LATN Plenary MeetingBuenos Aires - November 17, 2008

PAOLO GIORDANO

In Latin America anxiety is eroding the consensus for trade integration...

Source: Latinobarometro (different years)

60%

65%

70%

75%

80%

85%

90%

95%

100%

1996 1997 1998 2001 2002 2005

LAC: ATTITUDES TOWARD TRADE INTEGRATION (% Population in Favor)

... and in the developed economies there is a perception that free trade should be more pro-poor

Source: The German Marshall Fund (2006)

0% 20% 40% 60% 80% 100%

Believe that poor countries benefit from free trade

Agree to promote free trade with poor countries

Agree to provide assistance to poor countries

EuropeUSA

75%

72%

77%

75%

70%

56%

Outline

1. Trade and Poverty: an elusive question ?

2. Transmission Channels

3. Empirical Evidence in LAC

4. Toward a Policy Agenda

5. The LATN proposal

The trade and poverty debate:

a dialogue of the deaf when terms are not well defined

Trade: Free trade vs. globalization Technological change, FDI, capital flows, migrations, etc. Trade policy measures vs. trade outcomes

Poverty: Poverty vs. inequality Relative vs. absolute measures (national and global)

Monetary measures vs. basic needsMeasurement issues

Necessary to clearly define the variables under analysis

Outline

1. Trade and Poverty: an elusive question ?

2. Transmission Channels

3. Empirical Evidence in LAC

4. Toward a Policy Agenda

5. The LATN proposal

Prices

Employment

Government/ Fiscal Policy

Wages/ Salaries

Consumption

Consumption/ Income

Consumer or producer?Weight in consumption basketMarket structure (comp, olig, mono)Are markets integrated?

Labor mobility?Skills of householdsFull employment or unemployment?Levels of informalityPrivate sector competitiveness

Fiscal dependence on trade tariffs Is tax reform progressive or regressive?Are social safety nets in place?

Transmission channels of standard trade theory do not work as expected in LAC

Overall, standard theory does not tell the whole story

Initial conditions: Labor-intensive sectors enjoyed past protection> adjustment costs are significant

Skill biased technological change: Technological change (often embodied in FDI) favored high-skilled labor

> wage inequality increased

Shifting comparative advantages: LAC opened-up parallel to the global integration of labor-intensive economies (eg. India,China)

> LAC comp. advantage is no longer in labor-intensive goods

Outline

1. Trade and Poverty: an elusive question ?

2. Transmission Channels

3. Empirical Evidence in LAC

4. Toward a Policy Agenda

5. The LATN proposal

An IDB – DFID partnership for Trade and Poverty

The Trade and Poverty Trust Fund is financed by

Ex-post evidence

Trade, Growth & Poverty: positive but small link

> but protectionism is certainly anti-poor

Trade & Inequality: mixed results

> tech. change, FDI and capital acc.t opening may be regressive

Need of flanking measures:

> compensatory and complementary policies

Source: Giordano and Florez (2008)

-8.00 -7.00 -6.00 -5.00 -4.00 -3.00 -2.00 -1.00 0.00 1.00

COL

CHI

PAR

BOL

DOM

HON

PER

BRA

VEN

ARG

SAL

URU

CRI

MEX

ECU

Unilateral FTAA WTO

IMPACT ON POVERTY (%)

Ex-ante simulations

-0.6%-0.4%-0.2%0.0%0.2%0.4%0.6%

Colombia Peru Bolivia

GDP Poverty

Andean - US FTAs (%)

-0.8%

-0.4%

0.0%

0.4%

0.8%

1.2%

Costa Rica Honduras Nicaragua

CAFTA (%)

Source: Ganuza, Morley, Robinson and Vos (2004) Source: Giordano and Watanuki (2008)

Outline

1. Trade and Poverty: an elusive question ?

2. Transmission Channels

3. Empirical Evidence in LAC

4. Toward a Policy Agenda

5. The LATN proposal

Lessons learned for policymaking

The effects of Trade on Poverty are:

Long-termed

Indirect y specific

Contingent on internal conditions

Potential negative short-term effects

Sustain momentum

Research & dialogue

Complementarypolicies

Compensatorypolicies

Support to negotiations & implementation

Knowledge generationRegional policy dialogue

Aid for Trade

Outline

1. Trade and Poverty: an elusive question ?

2. Transmission Channels

3. Empirical Evidence in LAC

4. Toward a Policy Agenda

5. The LATN proposal

The LATN proposal: a prioritization

Micro-econometrics: marginal returns (Andean, C. America)

CGE: IDB-INT multi-region model w. micro-simulations (Andean, C. America)

Price transmission: a daunting task (country / product specific)

Value chains governance cases studies: generalization issues

Compensatory / complementary policies: effectiveness evaluation

>> identification of operational proposals / quick wins>> policy dialogue

Food for thoughts

Trade and poverty: is it the appropriate question ?

The debate is launched: how to maintain momentum ?

Aid for Trade: how to contribute to its implementation ?

LATN network: which is the comparative advantage ?

INTERAMERICAN DEVELOPMENT BANKINTERAMERICAN DEVELOPMENT BANK Integration and Trade SectorIntegration and Trade Sector

Thank youThank you

LATN Plenary MeetingBuenos Aires - November 17, 2008