United Nations Conference on Trade and Development Trade and poverty through the micro-lens: How can...

United Nations Conference on Trade and Development

Trade and poverty through

the micro-lens:

How can trade affect

households and

individuals?

Cora Mezger/UNCTAD


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


Trade-Poverty relationship??

Source: Ravallion (2004)

22

-0.8-0.8

11

00

11

-2-2-0.4-0.4 0.00.0 0.40.4 0.80.8 1.21.2

Rate

of

Ch

an

ge in

Povert

yR

ate

of

Ch

an

ge in

Povert

y

(Log d

iffere

nce

in

the $

1 a

day h

eadco

unt

index)

(Log d

iffere

nce

in

the $

1 a

day h

eadco

unt

index)

Growth of Trade VolumeGrowth of Trade Volume

(Log difference of exports + imports as share of the GDP)(Log difference of exports + imports as share of the GDP)


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


The static effects of trade on households

The Winters’ framework

Monetary dimension of poverty – income, consumption

Trade and trade liberalization in this framework

Trading Domain

Tradables

Pass through, competition

National

Taxes, regulation, distributors, procurement

Regional

Distribution, taxes, regulation, co-ops

Co-operatives, technology, random shocks

Subsis- tence

Quantities

Border Price

Tariffs, QR's

Retail Price

Enterprises

Tariff Revenue

Taxes Spending

Factor Markets

Welfare

Exchange Rate

males

female

elderly

young

Wholesale Price

Source: McCulloch et al. (2001)


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


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


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)


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




Trading Domain

Tradables


National


Regional



Subsis- tence

Quantities

Border Price

Tariffs, QR's

Retail Price

Enterprises

Tariff Revenue

Taxes Spending

Factor Markets

Welfare

Exchange Rate

males

female

elderly

young

Wholesale Price



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


Presentation

Virgulino Nhate, Mozambique:

"An empirical estimation of the degree of price transmission from border to

consumer prices"




Trading Domain

Tradables


National


Regional



Subsis- tence

Quantities

Border Price

Tariffs, QR's

Retail Price

Enterprises

Tariff Revenue

Taxes Spending

Factor Markets

Welfare

Exchange Rate

males

female

elderly

young

Wholesale Price



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


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


Wage and employment effects – Madagascar

Household analysis by A. Nicita (2006): “Export-led growth, pro-poor or not? Evidence from Madagascar’s textile and apparel industry”

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?

19911991 19921992 19931993 19941994 19951995 19961996 19971997 19981998 1999199919901990 20002000 20012001

100100

200200

300300

400400

500500

00

Exports to the USAExports to the USA

Exports to the EUNExports to the EUN

Exports to other countriesExports to other countries

Million U

SD

Million U

SD

Net ExportsNet Exports

19911991 19921992 19931993 19941994 19951995 19961996 19971997 19981998 1999199919901990 20002000 20012001

100100

200200

300300

400400

500500

00

Exports to the USAExports to the USA

Exports to the EUNExports to the EUN

Exports to other countriesExports to other countries

Million U

SD

Million U

SD

Net ExportsNet Exports



• Descriptive analysis: characteristics of the textile and apparel workforce in 1997, 1999, and 2001

• Microsimulation:

a) Estimate the propensity of working in the sector and rank individuals;

b) Estimate the wage premium for “new” workers and the wage trend for current workers in the industry;

c) 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)

ijijijij IXW 210ln

iii HXL 210

itititititit TXTXW 3210ln



Descriptive analysis 1997 1999 2001 Number of employees 46,000 136,000 191,000 Skilled workers (%) 51 54 46 Unskilled workers (%) 49 46 56 Average years of education 8.5 9.0 7.9 Temporary employment 34 39 20 Workers below the poverty line (%) 50 39 42 Average earnings $37 $39 $50 of skilled workers $41 $52 $76 of unskilled workers $32 $29 $33 Average age 36 34 32 Female labour force (%) 76 75 80 Workers' localization by region (%) Urban Antananarivo 49 58 44 Rural Antananarivo 9 32 41 Other 42 10 25

Source: Nicita, A. (2006)


Employees (2001)

Best matching

Number of employees 191,000 100,000 Skilled workers (%) 46 42.1 Average years of education 7.9 10.0 Temporary employment 20 34.2 Workers below the poverty line (%) 42 78.7 Average earnings $50 $29 of skilled workers $76 $47 of unskilled workers $33 $20 Average age 32 31.9 Female labour force (%) 80 76.2 Workers' localization by region (%) Urban Antananarivo 44 39.8 Rural Antananarivo 41 47.4 Other 25 12.8


“New” textile workers



Low-growth scenario High-growth scenario

Av. monthly gains per

worker (US$)

All workers (in thousand)

Av. monthly gains per

worker (US$)

All workers (in thousand)

Total 112 310 104 430 Skilled 165 196 160 255 Unskilled 47 114 48 175 Men 143 72 144 98 Women 102 238 92 332


Monetary gains




Change in poverty headcount index

00 11 22 33 44 55

- 1- 1

- 0.5- 0.5

00

Urban (Urban (low low

growthgrowth))

Urban (Urban (high high

growthgrowth))

National (National (high high

growthgrowth))

National (National (low growthlow growth))

NOTE: dashed lines show 95% bootstrapped confidence NOTE: dashed lines show 95% bootstrapped confidence intervalsintervals

Ch

an

ge in

Povert

y H

ead

Cou

nt

Ch

an

ge in

Povert

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ead

Cou

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Ind

ex

Ind

ex




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



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?


Presentation

Adeolu Adewuyi, Nigeria:

“Wage and Employment effects of

Trade Policy reform”



The Winters’ framework Trading Domain

Tradables


National


Regional



Subsis- tence

Quantities

Border Price

Tariffs, QR's

Retail Price

Enterprises

Tariff Revenue

Taxes Spending

Factor Markets

Welfare

Exchange Rate

males

female

elderly

young

Wholesale Price



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


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?


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


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


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


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


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


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)

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