Trade and poverty addis - june 2013
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Does Trade Reduce Poverty?A View from Africa
Raju Jan Singh (World Bank)Maëlan Le Goff (CEPII)
June 5 - 6, 2013
Trade and Regulation in Services in Africa, Addis Ababa
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Introduction
• Trade liberalization promoted as a key component in development strategies. It potentially affects poverty through its effects on both growth and income distribution.
• However, theoretically and empirically, the impact of trade openness on poverty reduction is ambiguous.
• The literature on the trade-poverty relationship in Africa is almost non-existent.
MOTIVES
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Introduction
1- Empirically examine the effect of trade openness on poverty in Africa.
2- Remove uncertainty regarding the effect of TO on poverty by testing whether the poverty reduction effect of greater trade openness depends on a variety of structural characteristics, including some that are subject to reform.
Define general policy guidelines to help trade liberalization policies alleviate poverty in Africa.
OBJECTIVES (1)
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Introduction
More precisely, we examine the possible role played by:
• financial development: can help the poor create market activities by easing the provision of important inputs + may diminish rising income risks when they switch from producing subsistence-local goods to producing tradable goods.
• education level: indicates whether the poor have enough skills to gain from trade liberalization, to interact with markets and how vulnerable they are to change.
• institutional quality: can promote the effect of trade on growth
OBJECTIVES (2)
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Literature review
• Two broad strands of argumentation when discussing the effects of freer trade on poverty: static and dynamic (Bhagwati and Srinivasan, 2002)
• The static approach based on the Stolper-Samuelson theorem (the abundant factor should see an increase in its real income when a country opens up to trade) + changes in prices.
• The dynamic approach: economic growth is key to sustained poverty alleviation and trade liberalization is argued to lead to the needed increases in productivity to sustain growth (Berg and Krueger, 2003; Grossman and Helpman, 1991; Lucas, 1988).
IN THEORY
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Literature reviewIN THEORY
1. Factors may not be as mobile as assumed;
2. Informal sector may crowd out formal employment;
3. Skill-biased technological change;
4. Natural resources instead of labor-intensive sectors.
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Literature reviewEMPIRICAL STUDIES
1. Employment effects of freer trade policies
were generally rather limited (Krueger, 1983);
2. Cross-country studies on poverty seem to show that at best the benefits of greater trade openness have bypassed the poor (Beck et al., 2007; Dollar and Kraay, 2001; Guillaumont-Jeanneney and Kpodar, 2011; Kpodar and Singh, 2011; Singh and Huang, 2011).
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Literature reviewCONCLUSIONS
suggesting that trade liberalization may require a combination with other policies 1. Policies that would encourage investment, allow
effective conflict resolution, and promote human-capital accumulation (Winters et al., 2004: Bolaky and Freund, 2008);
2. Domestic political structures and institutions (such as oligarchic or predatory regimes) may prevent the poor from benefiting from globalization (Sindzingre; 2005);.
3. (a) Macroeconomic stability and a sound investment climate; and (b) protection for workers, maintenance of high-quality working conditions, and facilitation of labor transitions (Newfarmer and Sztajerowska, 2012)
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Empirical Analysis
• 30 African countries
• Over the period 1981 to 2010
• Data averaged over five-year periods (1981-1985; 1986-1990; 1991-1995; 1996-2000; 2001-2005; 2006-2010)
SAMPLE
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Empirical Analysis
• Poverty measureThe poverty headcount index (% of the population living with income or consumption per person below the $1.25 poverty line) – World Bank Global Poverty Index Database
• Trade opennessThe sum of exports and imports as a share of GDP (rather than a legalistic measure of liberalization)- WDI
• Control variables- Gross Domestic Product per Capita- WDI- Primary completion rate- UNESCO- Private credit as a share of GDP- IFS- Inflation- WDI- Law and order- ICRG
DATA AND VARIABLE DEFINITIONS
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Empirical Analysis
• Our point of departure :
EMPIRICAL MODEL (1)
tiittititi XTOPoverty ,,2,1,
- Poverty is the log of the poverty headcount index- X is the matrix of control variables- TO is our measure of trade openness
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Empirical Analysis
• We then allow the poverty reduction effect of openness to vary with some country characteristics by estimating the following model :
EMPIRICAL MODEL (2)
tiittititititi xTOXTOPoverty ,,,3,2,1,
- Poverty is the log of the poverty headcount index- X is the matrix of control variables- TO is our measure of trade openness- x represents alternatively: financial development, education level
and institution quality
Note: all variables are included in log, except the variable of institutional quality
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Empirical Analysis
• Presence of unobserved period- and country-specific effects
• Most explanatory variables could be jointly endogenous with poverty (simultaneity or reverse causation)
Use of the System Generalized Method-of-Moment (GMM) estimator developed by Blundell and Bond (1998).
METHODOLOGY
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-20
24
Lo
g o
f p
ove
rty
he
ad
coun
t
2 3 4 5 6Log of trade openness
Bottom group Linear prediction (bottom group)Top group Linear prediction (top group)
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24
Lo
g o
f p
ove
rty h
ead
coun
t
2 3 4 5 6Log of trade openness
Bottom group Linear prediction (bottom group)Top group Linear prediction (top group)
-20
24
Lo
g o
f p
ove
rty h
ead
coun
t
2 3 4 5 6Log of trade openness
Bottom group Linear prediction (bottom group)Top group Linear prediction (top group)
Empirical AnalysisRESULTS-FIRST LOOK
Financial developmen
t
Education level
Institutional quality
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Poverty headcount (log)(1) (2) (3) (4)
Trade openness (log) 0.390(0.91)
2.670**(1.99)
5.037*(1.75)
2.402**(2.09)
GDP per capita (log) -0.888**(-2.45)
-0.818**(-2.10)
-0.863***(-3.70)
-0.553**(-2.14)
Inflation (log) 0.157*(1.84)
0.184*(1.84)
0.058(0.58)
0.119(1.40)
Education (log) -0.778**(-2.36)
-0.447(-1.50)
4.884*(1.74)
-0.425(-1.55)
Law and order 0.152(1.03)
0.014(0.09)
-0.097(-0.70)
2.917**(2.18)
Private Credit/GDP (log) -0.192(-0.81)
3.778*(1.69)
-0.034(-0.23)
-0.276(-1.46)
Private Credit/GDP *Trade openness -0.928*(-1.72)
Education* Trade openness -1.310*(-1.80)
Law and order *Trade openness -0.725**(-2.08)
Constant 11.059***(2.97)
-0.148(-0.02)
-8.339(-0.82)
-0.065(-0.01)
Observations 64 64 64 64Number of countries 30 30 30 30Sargan/Hansen test 0.59 0.47 0.82 0.57AR(2) 0.29 0.47 0.64 0.75
Empirical AnalysisRESULTS (1)
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Empirical AnalysisRESULTS (2)
Results of the basic equation estimation (columns 1):
• Control variables: results are consistent with previous empirical literature:- Gross Domestic Product per capita- negative- Percentage of primary school complete- negative- Inflation- positive- Private credit as a share of GDP- non significant- Law and order- non significant
• Trade openness: greater trade openness is associated with higher levels of poverty, albeit not in a significant way
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Poverty headcount (log)(1) (2) (3) (4)
Trade openness (log) 0.390(0.91)
2.670**(1.99)
5.037*(1.75)
2.402**(2.09)
GDP per capita (log) -0.888**(-2.45)
-0.818**(-2.10)
-0.863***(-3.70)
-0.553**(-2.14)
Inflation (log) 0.157*(1.84)
0.184*(1.84)
0.058(0.58)
0.119(1.40)
Education (log) -0.778**(-2.36)
-0.447(-1.50)
4.884*(1.74)
-0.425(-1.55)
Law and order 0.152(1.03)
0.014(0.09)
-0.097(-0.70)
2.917**(2.18)
Private Credit/GDP (log) -0.192(-0.81)
3.778*(1.69)
-0.034(-0.23)
-0.276(-1.46)
Private Credit/GDP *Trade openness -0.928*(-1.72)
Education* Trade openness -1.310*(-1.80)
Law and order *Trade openness -0.725**(-2.08)
Constant 11.059***(2.97)
-0.148(-0.02)
-8.339(-0.82)
-0.065(-0.01)
Observations 64 64 64 64Number of countries 30 30 30 30Sargan/Hansen test 0.59 0.47 0.82 0.57AR(2) 0.29 0.47 0.64 0.75
Empirical AnalysisRESULTS (3)
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Empirical AnalysisRESULTS (4)
Trade poverty relationship and development of the financial system:
• Better access to credit allows poor people to benefit more from trade openness
• The poor can benefit from trade when domestic private credit overcomes the threshold of 17.7% as a share of GDP (sample average=21.2%).
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Poverty headcount (log)(1) (2) (3) (4)
Trade openness (log) 0.390(0.91)
2.670**(1.99)
5.037*(1.75)
2.402**(2.09)
GDP per capita (log) -0.888**(-2.45)
-0.818**(-2.10)
-0.863***(-3.70)
-0.553**(-2.14)
Inflation (log) 0.157*(1.84)
0.184*(1.84)
0.058(0.58)
0.119(1.40)
Education (log) -0.778**(-2.36)
-0.447(-1.50)
4.884*(1.74)
-0.425(-1.55)
Law and order 0.152(1.03)
0.014(0.09)
-0.097(-0.70)
2.917**(2.18)
Private Credit/GDP (log) -0.192(-0.81)
3.778*(1.69)
-0.034(-0.23)
-0.276(-1.46)
Private Credit/GDP *Trade openness -0.928*(-1.72)
Education* Trade openness -1.310*(-1.80)
Law and order *Trade openness -0.725**(-2.08)
Constant 11.059***(2.97)
-0.148(-0.02)
-8.339(-0.82)
-0.065(-0.01)
Observations 64 64 64 64Number of countries 30 30 30 30Sargan/Hansen test 0.59 0.47 0.82 0.57AR(2) 0.29 0.47 0.64 0.75
Empirical AnalysisRESULTS (5)
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Empirical AnalysisRESULTS (6)
Trade poverty relationship and human capital level:
• The beneficial impact of an increase in trade openness is larger when the investment in human capital is stronger;
• Trade openness starts being favorable to the poor when primary completion rate exceeds 46.7% (sample average= 55%)
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Poverty headcount (log)(1) (2) (3) (4)
Trade openness (log) 0.390(0.91)
2.670**(1.99)
5.037*(1.75)
2.402**(2.09)
GDP per capita (log) -0.888**(-2.45)
-0.818**(-2.10)
-0.863***(-3.70)
-0.553**(-2.14)
Inflation (log) 0.157*(1.84)
0.184*(1.84)
0.058(0.58)
0.119(1.40)
Education (log) -0.778**(-2.36)
-0.447(-1.50)
4.884*(1.74)
-0.425(-1.55)
Law and order 0.152(1.03)
0.014(0.09)
-0.097(-0.70)
2.917**(2.18)
Private Credit/GDP (log) -0.192(-0.81)
3.778*(1.69)
-0.034(-0.23)
-0.276(-1.46)
Private Credit/GDP *Trade openness -0.928*(-1.72)
Education* Trade openness -1.310*(-1.80)
Law and order *Trade openness -0.725**(-2.08)
Constant 11.059***(2.97)
-0.148(-0.02)
-8.339(-0.82)
-0.065(-0.01)
Observations 64 64 64 64Number of countries 30 30 30 30Sargan/Hansen test 0.59 0.47 0.82 0.57AR(2) 0.29 0.47 0.64 0.75
Empirical AnalysisRESULTS (7)
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Empirical AnalysisRESULTS (8)
Trade poverty relationship and the country’s institutional environment:
• The negative association between trade and poverty could diminish with improvements in the respect of rule of law and even reverse;
• Trade openness could be favorable to the poor when institutional quality reaches 3.3 (sample average=2.9)
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Concluding Remarks
• While on average trade does not seem to be associated with lower poverty in Africa, this observation hides important non-linearities.
• More openness results in a reduction in poverty when financial sector is deeper, education levels higher, and governance stronger.
• Trade liberalization should therefore not be seen in isolation and additional policies will sometimes be needed to enhance its impact on poverty.
• If these services are not developed, could the countries import them?
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Thank you for your attention