trade liberalization and poverty- the evidence so far

Journal of Economic LiteratureVol XLII (March 2004) pp 72ndash115

Trade Liberalization and PovertyThe Evidence So Far

L ALAN WINTERS NEIL MCCULLOCH and ANDREW MCKAY1

72

1 Introduction

Most economists accept that in the longrun open economies fare better in

aggregate than do closed ones and that rela-tively open policies contribute significantly todevelopment Many commentators fear how-ever that in the shorter run one of the stepstowards opennessmdashtrade liberalizationmdashharms poorer actors in the economy and thateven in the longer run successful openregimes may leave some people behind inpoverty Liberalization by its nature impliesadjustment and so is likely to have distribu-tional impacts but to what extent are thepoor likely to suffer adverse effects Thispaper takes these concerns seriously by exam-ining the evidence about whether developingcountriesrsquo own trade liberalizations have

reduced or increased poverty2

If trade liberalization and poverty wereboth easily measured and if there weremany historical instances in which liberaliza-tion could be identified as the main eco-nomic shock it might be easy to derivesimple empirical regularities linking the twoUnfortunately these conditions do not holdso there is relatively little direct evidence onthis question Analysts therefore are obligedto try to decompose the link into steps andcompile the evidence on each of them indi-vidually A conceptual framework decom-posing the links between trade policy andpoverty has been developed by L AlanWinters (2000a 2002a) and the review inthis paper is based on an examination of theevidence linking these components3 Even

1 Winters School of Social Sciences University ofSussex McCulloch Institute of Development StudiesUniversity of Sussex McKay University of Bath andUniversity of NottinghamWe are grateful to EnriqueBlanco de Armas Xavier Cirera Abbi Mamo Kedir andCarolina Villegas Sanchez for research assistance to RosieBellinger Janet Ellis Amy Sheehan and Reto Speck forlogistical help to innumerable colleagues for help andadvice and to the editor and three anonymous referees forcomments on an earlier version of this paper Naturallynone of these people is responsible for the paperrsquos remain-ing imperfections

2 The paper does not address the issue of global tradereform (through the WTO) on poverty or poorer countriesFor evidence of this see for example Oxfam (2002)World Bank (2002) and L Alan Winters (2003) Howeverthe approach and much of the analysis mostly generalizesto other real-side shocks such as other countriesrsquo trade-pol-icy shocks commodity-price booms and slumps andexchange-rate changes

3 In related papers we have examined a subset of rele-vant empirical results (Andrew McKay L Alan Wintersand Abbi Mamo Kedir 2000) explored policy responses tothe possibility that liberalization causes poverty (Winters2002b) and provided an extended treatment for policymakers including discussion of specific trade negotiationissues (Neil McCulloch L Alan Winters and XavierCirera 2001)

Winters McCulloch and McKay Trade Liberalization and Poverty 73

this it turns out can only be partial foroften there are no direct studies of thepoverty effects of trade and trade liberaliza-tion In these cases we have sought evidencefrom experiences that might have parallelswith trade liberalization such as domesticmarket liberalization and public sectorretrenchments This latter process howeverhas sometimes threatened to open up toolarge a literature so a good deal of selectionand judgement has been exercised to keepthe output manageable

The paper is explicitly empirical in focusWe report theoretical work if it informsempirical studies but our emphasis is prima-rily on the study of ex post data pertaining toactual instances of trade liberalization andrelated shocks We include a little of the com-putable general equilibrium (CGE) model-ling literature which while fundamentallytheoretical does at least rely on some data

The paper starts with a brief account ofour analytical framework which providesthe organizational framework for the paperWe then survey the evidence on trade liber-alization and poverty under four headingsmacro-economic aspects (growth and fluctu-ations) households and markets wages andemployment and government revenue andspending While for each component tradeliberalization can facilitate poverty allevia-tion in none of them can an unambiguousgeneralization be made either in theory orempirically

The ambiguity arises partly because of theheterogeneity of poverty there are manyreasons why people are poor and even with-in broadly defined groups there are huge dif-ferences in the circumstances of individualhouseholds The conclusions of much of thework surveyed below are conditional onthese circumstances so a crucial part of anyspecific analysis must be to identify the dif-ferent characteristics of the poor includinginformation about their consumption pro-duction and employment activitiesOutcomes will also depend on the specifictrade reform measures being undertaken

4 Amartya Sen (1993) discusses many of the centralissues and World Bamk (2001) provides a discussion of dif-ferent concepts

and the economic environment in whichthey take place Given the variety of factorsto take into account it will hardly be surpris-ing that there are no general comparativestatic results about whether trade liberaliza-tion will increase or reduce poverty Simplestatements about ldquothe poorrdquo will lose infor-mation at best and simple generalizationsabout all countries will just be wrong

An important aspect of any analysis ofpoverty is the definition and measurement ofpoverty itself Poverty is a complex and mul-tidimensional phenomenon and there isconsiderable controversy in the literatureabout how it should be defined and meas-ured4 However the majority of the empiri-cal economic literature on poverty especiallyin relation to this issue adopts an absoluteincome or consumption metric Thereforewhile recognizing that there are many legiti-mate approaches to the measurement ofpoverty the evidence that we review focuseson this approach Much of the methodologi-cal discussion is likely to generalize to otherdimensions of poverty

Finally it is worth emphasizing that ourconcern is with poverty not inequality Sincetrade liberalization tends to increase theopportunities for economic activity it canvery easily increase income inequality whileat the same time reducing povertyConsequently statements about its effectson inequality cannot be translated directlyinto statements about its impact on absolutepoverty There may be sound positive andnormative reasons for interest in inequalitybut they are not the concerns of this paper

2 An Analytical Framework

As argued already we approach the ques-tion of trade liberalization and poverty byconstructing an analytical framework intowhich to slot the various pieces of theory andevidence This section briefly outlines such a

74 Journal of Economic Literature Vol XLII (March 2004)

frameworkmdashdeveloped by Winters (2000a2002a)mdashand from it extracts twelve keyquestions around which we organize our sur-vey of empirical results It considers in turneconomic growth and stability the behaviorof households and markets wages andemployment and the government

Economic Growth and Stability The keyto sustained poverty alleviation is economicgrowth as is widely accepted by economistsand development practitioners Althoughgrowth can be unequalizing it has to be verystrongly so if it is to increase absolute pov-erty This appears not to be the case either ingeneral or for growth associated with freertrade The link that has seen the most sus-tained debate among economists however isthat between greater openness and growthWhile there is a good deal of empirical sup-port for the argument that trade liberalizationand openness stimulate long-run growth andincome the case has certainly not yet beencompletely proven there is no evidencehowever that they are harmful to growthSustained growth requires increases in pro-ductivity and most of the evidence suggeststhat trade liberalization operates through thisroute This link however warns us that in theshort run some factor owners could suffer ifproductivity increases faster than outputFinally openness is likely to influence thesort of shocks that affect an economy so weneed to consider macroeconomic volatilityand its effects on growth

Section 3 of this paper addresses theseissues under three broad headings

Does liberalization stimulate growthand relieve poverty

Does trade liberalization boost produc-tivity

Are open economies less stableHouseholds and Markets Given that the

majority of the poor in most countries areself-employed the best way of thinkingabout poor households is in terms of theldquofarm householdrdquo which produces goods orservices sells its labor and consumes(Inderjit Singh Lyn Squire and John

Strauss 1986) An increase in the price ofsomething of which the household is a netseller (labor goods services) increases itsreal income while a decrease reduces itPoor households typically have severalsources of income including transfersremittances from absent family membersand income in kind as well as wages andprofits from production The frameworkneeds to ask how trade liberalization affectsall of these as well as considering consump-tion We also note that shocks to a householdcan impinge differently on different familymembers Thus women might bear the bur-den of adjustment if they have to start towork outside the home while continuing tobear family responsibilities Similarly oneneeds to consider whether trade liberaliza-tion affects household investments in childwelfare such as basic education and health

If price changes are an important pathwaythrough which liberalization affects the poorthen we must ask how a trade liberalizationaffects prices Even simple economies haveseveral stages between the border wheretrade policy operates and the poor house-hold so one consideration is how much ofany price change gets passed through to thepoor Unchanged internal distribution costsattenuate proportionate border price shocksas they pass through to households forimportables but exacerbate them forexportables Shocks can even get lost com-pletely if distribution is monopolized as forexample with official marketing boards orthe private monopolies that sometimesreplace them

More important than price changes iswhether markets exist at all trade reformcan both create and destroy marketsExtreme adverse poverty shocks are oftenassociated with the disappearance of a mar-ket while strong poverty alleviation can arisewhen markets are created for previouslyuntraded or unavailable goods Another crit-ical issue is how households are able torespond to the price (and other) changesthat reach them Can households respond to


favorable price movements (eg in the priceof an agricultural output) are poorer house-holds less able to respond than richer house-holds and are they less able to protectthemselves against adverse movements

Obviously a householdrsquos ability to adjust toa trade shock affects the size of any impact it suffers but not generally its signAdjustment however is also the mechanismby which shocks in one market spill over intoanother If these spillovers are particularlydeep and narrow they can be very significantlocally For example a major attraction ofliberalizations that increase agriculturalprices is argued to be that the direct benefi-ciariesmdashfarmersmdashspend much of their extraincome on goods and services provided locally by the poor such as construction personal services and simple manufactures

A common worry is that opening up aneconomy will expose it and its componenthouseholds to increased risk Certainly it willexpose them to new risks but the net effectcan be to reduce overall risk because worldmarkets (which have many players) are oftenmore stable than domestic ones or becausethey offer portfolio benefits On the otherhand trade liberalization can increase riskeither by undermining existing stabilizationmechanisms (either autonomous or policy-based) or because residents consciouslyswitch to a portfolio that offers higher averagerewards but greater variability

Section 4 takes up these issues under fiveheadings

Do border price shocks get transmittedto poor households

Are markets created or destroyed How well do households respond Do the spillovers benefit the poor Does trade liberalization increase vul-

nerabilityWages and Employment In all countries

some of the poor and in some countries mostof the poor rely on labor markets for thebulk of their income Labor markets are alsooften an important route out of poverty(when an individual obtains a job) or into it

(when a job is lost) Thus the effects of tradereform on wages and employment areimportant especially those of unskilledworkers If reform boosts the demand forlabor-intensive products it boosts thedemand for labor and either wages oremployment (or both) will increase How-ever if the poor are mostly in completelyunskilled families while it is semi-skilledlabor that receives the boost poverty will beunaffectedmdashor possibly worsened If pover-ty is measured by counting individuals belowthe poverty linemdashthe headcount indexmdashit isalso important where the various wage rateslie relative to the poverty line If wages arepushed up from poverty line to higher levelsor the expanding sectors offer above poverty-line wages then headcount poverty will fallIf on the other hand wages do not cross crit-ical thresholds recorded poverty could beunaffected despite changes in welfare

While simple Hechscher-Ohlin trade the-ory suggests that in relatively unskilled-labor-abundant countries trade liberalizationwill relieve poverty in practice other factorsmay need to be considered For instancetrade liberalization may be accompanied byskill-biased technical change which canmean that skilled labor may benefit relativeto unskilled labor Also not all developingcountries are abundant in unskilled laborFor example many Latin American andsome African countries have very strongendowments of mineral and agriculturalresources and so liberalization will stimulatethese sectors rather than labor-intensiveones Similarly if the unskilled are primarilyemployed in nontraded sectors whileexports draw mainly on the semi-skilled aliberalization accompanied by a real-exchange-rate depreciation could haveadverse effects

Even if favorable in the long run staticgains from trade rely largely on adjusting acountryrsquos output bundle Hence some peo-ple are likely to suffer temporary adverseshocks most specifically in the form ofunemployment The initially nonpoor can


generally tide themselves over these periodsso poverty statistics willmdashand public policyshouldmdashrespond mainly to those who areinitially relatively poor but who suffer suchtemporary setbacks

Section 5 of this paper considers theseissues under two key headings

Does liberalization raise wages oremployment

Is transitional unemployment concen-trated on the poor

Government Revenue and SpendingTrade reform can affect government rev-enue but actually does so less frequently andless adversely than is popularly imaginedbecause for example trade volume and col-lection rates increase as tariffs fall or becausetariff exemptions are removed Even whererevenue falls (as eventually must be true astariffs fall to zero) it is not inevitable that thepoor suffer Even recognizing the adminis-trative constraints faced by poor-countrygovernments it is ultimately a political deci-sion whether the new taxes necessary tomake up the shortfall or the cuts in govern-ment expenditure that result from fallingrevenue impinge heavily on the poor

Thus the final substantive section of thepaper asks

Does liberalization actually cut govern-ment revenue

Do falling revenues from trade taxationhurt the poor

3 Economic Growth and Stability

This section examines the macroeconomiclinks between trade liberalization opennessand growth It identifies the growth pathwayas the most criticalmdashand the most con-tentiousmdashasking whether liberalization aidsgrowth and whether growth aids povertyalleviation In both cases the answer is ldquoyesrdquobut not unconditionally The section thendiscusses the effects of liberalization on pro-ductivity growth which are generally strongand its consequences for macroeconomicstability which appear to be mixed

31 Does Trade Liberalization EnhanceGrowth and Hence Alleviate Poverty

In the long run economic growth is thekey to the alleviation of absolute poverty Itcreates the resources to raise incomes andeven if ldquotrickle-downrdquo is insufficient to bringthe benefits to the poor governments willhave scope for stronger redistributive meas-ures when income is higher and growingfaster This section considers the question inthe title in two parts

From Openness to Growth Economictheory offers many reasons to expect tradeliberalization to stimulate economic growthIn the medium term reaping the static (effi-ciency) benefits of trade could look ratherlike growth In the long run the potentialpositive forces include access to technologyand to appropriate intermediate and capitalgoods the benefits of scale and competitionthe flexibility induced by relying on marketsignals and the constraints on governmentincompetence or corruption (see Gene MGrossman and Elhanan Helpman 1991 orRobert Lucas 1988 for discussion)Unfortunately none of the benefits is guar-anteed and it is not difficult to constructmodels in which openness pushes countriesinto less dynamic sectors (eg primaryextraction) and harms growthmdashsee forexample Francisco Rodriguez and DaniRodrik (2001) Therefore ultimately theopennessndashgrowth link is an empirical matterand it is that literature which this sectionbriefly surveys

Over the 1990s the conviction that open-ness is good for economic growth was fos-tered by several highly visible andwell-promoted cross-country studies forinstance by David Dollar (1992) JeffreySachs and Andrew Warner (1995) andSebastian Edwards (1998) Recently how-ever these were subjected to searching criti-cism and reworking by Rodriguez andRodrik (2001) who argue that their conclu-sions rest on very weak empirical foundationssuch as flawed measures of openness and


5 Effective openness requires predictability trans-parency and convenience of the trade regime as well aslow barriers per se

serious econometric shortcomings More-over liberal trade is usually only one of sev-eral indicators of openness used and onethat often seems to weigh rather lightly in theoverall result (See also Ann Harrison 1996)

The difficulty of establishing an empiricallink between a liberal trade regime andincome or growth arises from at least threesources First once one comes inside theboundary of near autarchy measuring tradestances is difficult for example tariffs needto be aggregated quantitative restrictionsassessed and then aggregated and the levelsof credibility and enforcement measured5

These different dimensions of trade restric-tion are far from perfectly correlated (seefor example Lant Pritchett 1996) and needto be aggregated into a single index foreconometric purposes James Anderson andPeter Nearyrsquos (1996) Trade RestrictivenessIndex provides a coherent way of aggregat-ing tariffs (given highly restrictive assump-tions about behavior and a pile of data) butcan handle nontariff barriers only once theirtariff equivalents are known The latter aredifficult to establish (even conceptually) on acase-by-case basis and quite impossible forall goods in a broad range of countries

Second causation is difficult to establishRodriguez and Rodrik (2001) rightly observethat actual openness usually measured byimports plus exports relative to GDP is like-ly to be endogenous but there is also con-cern that even policy-based measures egaverage tariffs could be so Recently JeffreyFrankel and David Romer (1999) andDouglas Irwin and Marko Tervio (2002)have tried to address this problem by instru-menting openness in the income equationwith populations land areas borders anddistances between trading partners Thisappears to be successful althoughRodriguez and Rodrik (2001) point out that

the instruments might be correlated withfactors that boost growth independently oftrademdashfor example health and institu-tionsmdashand that adding geographical vari-ables directly to the growth equationundermines the result Deeper investigationof these concerns however by JeffreyFrankel and Andrew Rose (2002) suggeststhat these worries are misplaced and soimply that there is evidence for a positivecausal relationship between openness andincome and hence between liberalizationand medium-term growth

The third complication is that if it is tohave a long-lived or even permanent effecton growth trade liberalization almost cer-tainly requires combination with otherappropriate policies as well The sort of poli-cies envisaged here are those that encourageinvestment allow effective conflict resolu-tion and promote human-capital accumula-tion Unfortunately the linear regressionmodel which is standard to this literature isnot equipped to identify the necessity of vari-ables rather than their additivity in thegrowth process Hints of the importance ofthese policies however can be found inexercises identifying the structural relation-ships through which openness affects growthFor example Alan Taylor (1998) and RomainWacziarg (2001) both find that investment isa key link and thus that poor investment poli-cies could undermine trade benefits Rodrik(1999) shows how the negative effects ofexternal shocks on growth are mitigated bybetter institutions for managing distribu-tional conflict Robert Baldwin (2002) how-ever argues that since trade liberalization isnever recommended or applied in isolationtrying to isolate its effects from those of associated policies makes little sense

A further avenue for growth effects is thepossibility that openness is correlated withchanges in other policies see Anne Krueger(1978 1990) Perhaps the most importantdimension is corruption recent evidencefrom Alberto Ades and Rafael Di Tella(1997 1999) shows a clear cross-country


6 Shang-Jin Wei (2000) on the other hand suggeststhat the losses from corruption increase with opennessbecause corruption impinges disproportionately on foreigntransactions and as a result that open countries havegreater incentives to develop better institutions

7 Brock and Durlauf (2001) also question the ability ofeconomic theory to specify growth equations tightlyenough to permit traditional classical statistical inferencein cross-country regressions especially given that thedeterminants of growth might genuinely be highly corre-lated

connection between higher rents stemmingfrom things such as active industrial policyand trade restrictions and higher corrup-tion The latter in turn reduces investmentand hence growth6 On standard macroeco-nomic policy inflation appears to be lower inopen economies Romer (1993) suggeststhat this is because real depreciation is morecostly in terms of inflation in openeconomies so that such economies are lesslikely to run the risks of excessive moneycreation

The majority of this evidence in the recentgrowth literature relies on cross-countrystudies The weight borne by such studies isremarkable particularly since so many econ-omists profess to distrust them The cross-sectional (or panel) assumption that the samemodel and parameter set applies to Austriaand Angola is heroic so too is the neglect ofdynamics and path dependency implicit inthe view that the data reflect stable steady-state relationships There are huge cross-country differences in the measurement ofmany of the variables used Obviously impor-tant idiosyncratic factors are ignored andthere is no indication of how long it takes forthe cross-sectional relationship to beachieved7 Nonetheless the attraction of sim-ple generalizations has seduced most of theprofession into taking their results seriouslyOne exception is T N Srinivasan and JagdishBhagwati (2001) who chide economists forforgetting the problems and neglecting otherapproaches to the opennessndashgrowth linkThe latter include detailed case studies ofparticular countries which consider a wide

variety of causes and channels for growthbut frequently find openness at the heart ofthe matter as for example with MichaelMichaely Demetris Papageorgiou andArmeane Choksi (1991) Ritva Reinikka andPaul Collier (2001) and Sebastian Edwardsand Daniel Lederman (2002)

A second alternative approach is to specifythe links between openness and growth andexamine them separately Some studies asso-ciate openness strongly with higher accumu-lationmdashRoss Levine and David Renelt(1992) Taylor (1998) Wacziarg (2001)mdashandhence stronger growth especially over rela-tively short periods (five years or so) Othersexamine the link to productivity using sec-toral- or firm-level data for particular coun-tries as well as cross-country methods Thelatter are discussed in section 32 below

Despite the econometric and conceptualdifficulties of establishing beyond doubt thatopenness enhances income levels theweight of experience and evidence seemsstrongly in that direction Charles Jones(2001 p 337) argues that despite the uncer-tainty about the size of the effect ldquoour bestestimate is that trade restrictions are harm-ful to long-run incomesrdquo And Rodriguezand Rodrik concede that there is no ldquocredi-ble [post-war] evidence hellip that trade restric-tions are systematically associated withhigher growthrdquo (p 317)

From Growth to Poverty Economistshave long maintained that economic growthgenerally reduces poverty Many haveargued that on average growth does nothave identifiable systematic effects onincome distributionmdashsee for exampleGary Fields (1989) Ravallion (1995) orMichael Bruno Martin Ravallion and LynSquire (1998) These early studies werebased on rather small samples but recentwork has extended the sample and reachedexactly the same conclusions although atthe expense of great controversy Most con-troversial has been the study by DavidDollar and Aart Kraay (2002) which exam-ines the relationship between growth and


8 This specification was first used by Montek SAhluwalia (1976)

poverty both in levels across countries andin changes through time (national growthrates) Dollar and Kraay relate the meanincome of the poor (bottom 20 percent ofthe income distribution) to overall meanincome plus some additional variables8

They never reject the hypotheses that themean income of the poor moves proportion-ally with mean income and with the excep-tion of inflation that a variety of othervariables (including measures of openness)affect it only via mean income The residualerrors of Dollar and Kraayrsquos equations arelarge and so are perfectly consistent withthere being instances in which growth hurtsthe poor On average however these areoffset by those in which the poor benefitdisproportionately

Howard White and Edward Anderson(2001) categorize growth histories into suchldquoprordquo and ldquoantirdquo poor experiences and findthat in over one-quarter of cases distribu-tional changes offset growth effectsmdashiethat the mean and ldquopoorrdquo incomes moved indifferent directions They are not very suc-cessful however at identifying the factorsthat make growth pro- or anti-poor Theyrun ldquostandardrdquo growth equations for theincome growth of each quintile and examinedifferences in the resulting coefficients It ishard to detect clear patterns but one starkresult is that openness is associated with sig-nificantly higher income growth everywhereexcept in the top quintile and that thegreatest effects proportionally are for lowerquintiles that is openness appears to beprogressive

Several concerns have been raised aboutthe robustness of these studies of growthopenness and poverty (in addition to thoseraised above in relation to cross-countryregressions) The data on the incomes of thepoor are clearly subject to error9 Reportingerrors and sample biases are likely to be seri-ous at the bottom of the distribution and in

9 So too of course are those on mean income butprobably less so

many cases Dollar and Kraay had to infer theshare of the lowest quintile from a broadermeasure of income distribution The WorldBankrsquos sample of income and expenditureGini coefficients (eg Klaus Deininger andLyn Squire 1996 and later extensions) hasbeen criticized for severe implausibilitymdasheg by Tony Atkinson and AndreaBrandolini (2001) Stephen Knowles (2001)shows that the relationship between inequal-ity and growth can change once one distin-guishes between data based on incomemeasures of inequality and those based onconsumption data

There is also an increasing body of evi-dence that income distribution (and by asso-ciation poverty) determines growth rates(and hence mean incomes)mdashsee PhilippeAghion Eve Caroli and Cecilia Garcia-Pentildealosa (1999)mdashimplying a potential endo-geneity problem Alternatively the share ofthe poor and mean incomes could be jointlydetermined by some third factor Finally theaverage income of the poorest quintile is avery crude indicator of povertymdashespeciallyabsolute poverty

Ravallion (2001) offers a more widelyaccepted discussion of the povertyndashgrowthlink By regressing the change in the $-a-daypoverty ratio on the change in mean incomehe finds that a 1-percent increase in meanincome results on average in a fall of 25percent in the proportion of people inabsolute poverty or 2 percent if the meanincome measure is instrumented to allow forerrors of observation Of course individualexperience will vary around this averagegrowth elasticity of poverty with one of themost important determinants being initiallevels of inequality The more compact theincome distribution the greater the share ofpopulation likely to be clustered about thepoverty line and hence the greater theeffect of moving the distribution in onedirection or the other10


10 Ravallion (2001) suggests the robust empirical rule ofthumb that the elasticity of the poverty headcount withrespect to mean incomes is roughly proportional to(1ndashindex of inequality) He also notes that if the income ofthe poor is proportional to mean income economic growthbenefits the poor far less than average in absolute terms

As with the opennessndashgrowth relation-ships more convincing insights may bederived from country case studies MartinRavallion and Gaurav Datt (2002) explorethe factors behind pro-poor growth morethoroughly in the context of differencesbetween Indian states Higher farm yieldshigher development spending and lowerinflation all appear to reduce poverty Mostinteresting however is higher nonfarm out-put this also helps to reduce poverty butmuch more strongly where farm productiv-ity is higher the rural-urban divide smallerand rural education better (all of which indi-cate higher initial levels of rural income)Translated into terms of national growthpro-poor growth seems more likely to occurwhere initial conditions (including openness)give the poor the ability to take advantage ofthe opportunities it generates

Despite the methodological challenges tothe recent literature there is no evidence tooverturn the traditional conclusion thatgrowth on average benefits the poor nor tosuggest that growth generated by greateropenness is any worse than other growth inthis respect (and may even be better) It isquite clear however that on occasionsgrowth has been accompanied by worseningpoverty and the challenge is to identify whyIndeed much of this paper can be seen astrying to answer precisely this question inthe case of trade liberalization

32 Trade Liberalization and Productivity

An alternative approach to the linksbetween trade liberalization growth andpoverty is to consider the firstrsquos effects onproductivity By universal agreementimproved productivity is necessary for sus-tained economic growth and developmentHowever it may not be sufficient and

11 Howard Pack (1988) takes a sceptical view of theearly literature on the links

because of its distributional implications itsbeneficial effects on poverty could be lessthan those of growth emanating from othersources Thus for example if higher pro-ductivity reflected declining inputs ratherthan increasing outputs its short-term effectcould be to reduce employment and henceexacerbate poverty Moreover despite thestrong presumption in modern growth theo-ry with its references to increased competi-tion access to new technology betterintermediate goods and so on the responseof productivity to trade liberalization is ulti-mately ambiguous11 Thus as ever there isan empirical issue to be settled

An influential cross-country analysis oftrade and aggregate productivity is DavidCoe Elhanan Helpman and AlexanderHoffmaister (1997) They construct an indexof total knowledge capital (measured by accu-mulated investment in RampD) in each indus-trial country Trading partners get access to acountryrsquos stock of knowledge in proportion totheir imports of capital goods from that coun-try Using import-weighted sums of industrialcountriesrsquo knowledge stocks to reflect devel-oping countriesrsquo access to foreign knowledgethey find that interacted with the importingcountryrsquos openness the latter has a statisti-cally significant positive effect on total factorproductivity (TFP) Their sample comprisesquinquennial observations on 77 developingcountries over 1971ndash90

Intuitive as these results are they leavesome questions unanswered First they donot seriously consider competing explana-tions of access to knowledge capital Secondthey imply an excessive bilateralism in accessto knowledge Coe Helpman andHoffmaisterrsquos measure implies that the onlyway for say Ghana to obtain French knowl-edge is to import equipment from FranceBut if Germany imports from France (andso by hypothesis accesses French knowl-edge) and then Ghana imports from


12 Jonsson and Subramanian also conduct a time seriesexercise which links TFP positively to the openness ratiomdash(exports plus imports)GDP

Germany this should give Ghana at leastsome access to French knowledge OlivierLumenga-Neso Marcelo Olarreaga andMaurice Schiff (2001) who advance thisexplanation show that recognizing suchindirect knowledge flows offers a betterexplanation of TFP than the earlier studies

A second approach to the link betweentrade liberalization and productivity is cross-sectoral studies for individual countriesMany of these have shown that reductions intrade barriers were followed by significantincreases in productivity generally becauseof increased import competition see forexample Donald Hay (2001) and PedroFerreira and Joseacute Luis Rossi (2001) onBrazil Gunnar Jonsson and ArvindSubramanian (2001) on South Africa12 andJong-Wha Lee (1996) on Korea On theother hand Euysung Kim (2000) also onKorea suggests that most of the apparentTFP advance is actually due to the compres-sion of margins and to economies of scaleImport competition makes some contribu-tion via these effects and also directly onldquotechnologyrdquo but overall Kim argues that itwas not the major force Trade liberalizationplays a similarly minor role in KishorSharma Sisira Jayasuriya and EdwardOczkowskirsquos (2000) results on Nepalalthough its effects are small mainly theauthors argue because necessary comple-mentary policies such as infrastructureinvestment were absent

The sectoral studies relate TFP to a sec-torrsquos own trade barriers and thus imply thatcompetition is the causal link But for gener-al liberalizations it is likely that barriers onimported inputs also fall and this could beequally important At an aggregate and sec-toral level Hadi Esfahani (1991) and RobertFeenstra et al (1997) suggest such a link asdo James Tybout and Daniel Westbrook(1995) at the firm level The last study pro-

13 The same causation difficulty arises in interpretingthe observation that where a region exports heavily allfirms are more productive is it positive spillovers or com-parative advantage

vides a comprehensive view of Mexicanmanufacturing firms over the liberalizationof 1984ndash90 Among its more important find-ings are that rationalization gains (theshrinking or elimination of inefficient firms)are an important contributor to sectoral pro-ductivity gains that cheaper intermediatesprovide significant productivity and prof-itability stimuli and that competition fromimports seems to stimulate increases in tech-nical efficiency (with the strongest effects inindustries that are already most open)

Firm-level data also allow one to test theperennial claim that exporting is the key totechnological advance While macro studiesor case studies have suggested links to pro-ductivity enterprise level data have shown amuch more nuanced picture Arne Bigstenet al (2000) find a positive stimulus fromexports to productivity in Africa and Kraay(1997) is ambiguous for China but Tyboutand Westbrook (1995) and Bee Yan AwSukkyun Chung and Mark Roberts (1999)find little evidence for it in Latin Americaand Asia respectively The fundamentalproblem is that of causation efficiency andexporting are highly correlated because effi-cient firms export13 Hence researchersmust first identify this link (by careful mod-elling of the timing of changes in exports andproductivity) if they are then to isolate thereverse one Tyboutrsquos (2000) excellent surveysuggests that the positive results for Africaand China may have arisen because datashortages obliged their authors to use muchsimpler dynamic structures than the Asianand American exercises

The strong positive relationship betweenopenness and productivity generally found atthe sectoral level and the somewhat weakerone at the firm level may be reconciled bynoting that exporting will allow more effi-cient firms to grow faster than less efficientones and that import competition may pick


off the weaker domestic firms Firm turnoveris significant in developing countries (MarkRoberts and James Tybout 1996) and evi-dence for the beneficial rationalizationeffects of trade liberalization may be found inTybout and Westbrook (1995) and inferredfrom the lower productivity dispersion acrossplants in open economies (James TyboutJaime de Melo and Vittorio Corbo 1991)

Rationalization effects highlight thepoverty concerns about opennessParticularly in Africa significant numbers ofindustrial enterprises have been unable tocope with increased import competitionand in places this has resulted in a substan-tial contraction in industrial employmentSanjaya Lallrsquos (1999) study of technologicaladaptation in the Kenyan Tanzanian andZimbabwean engineering and garment sec-tors finds the majority of firms responding topressure by contracting rather than upgrad-ing aggressively Among the reasons Lalladvances for this are the lack of preparationof firms for competition the absence of poli-cies to promote technological improvement(especially among SMEs) and the poortechnological and human infrastructure inthese very poor countries That adjustmentis a key consideration is confirmed by directevidence on micro and small enterprisesfrom five African countries (Ronald ParkerRandall Riopelle and William Steel 1995)this shows that firms that adapted quicklywere net beneficiaries of import liberaliza-tion while those ill-prepared to face compe-tition lost out Both these studies show thatopen trade by itself may not be associatedwith increased productivity if other essentialelements often including an appropriatepolicy environment are not present

Sectoral analyses are applied almost exclu-sively to industrial sectors In many casesthese will lie at the heart of developmentstrategies and the generally positive linkbetween productivity and openness is acause for long-run optimism For most of thepoor however even if productivity in ruralnonfarm activities is important agricultural

14 Their work also raises the general issue that it is actu-ally rather difficult to get accurate measures of productiv-ity or even of factor inputs

productivity will be of the most direct inter-est Historically there has been considerabledebate about whether agricultural produc-tivity improvements are good for the poorbut recently the tendency has been on theoptimistic side see for example GauravDatt and Martin Ravallion (1998)

What is less clear is how agricultural pro-ductivity is related to openness and trade lib-eralization In section 42 below we note thatthe liberalization of farm-input marketsstimulated output per head in Bangladeshbut of course not all this is productivity gainin the TFP sense Will Martin andDevashish Mitra (2001) show that TFPincreases are generally higher in agriculturethan in industry but do not seek to explainthem They do note however a strong ten-dency for international convergence of pro-ductivity levels which suggests effectivetransmission forces although whether theseare via trade or via technology transfer isunclear14

Of course openness in a broad sensemdashopenness to foreign technologymdashlay behindthe greatest leap in agricultural productivityin recent timesmdashthe Green Revolution Thehuge increase in grain productivity benefitedfarmers directly and also in different pro-portions in different places consumerswage laborers and rural nonfarm workersMitch Renkow (2000) makes the obviouspoint that the distribution of the gainsdepends very much on whether the countryis open if trade determines the price of afood product productivity increases mainlybenefit producers whereas in closedeconomies the benefits come mostly as pricedeclines for consumers Moreover despitefears expressed at the time poor farmerswere able to take advantage of the advancesby learning appropriate technologies andbecause some high yield varieties weredeveloped for low-input cultivation (IFAD


2001)One complication in virtually all this liter-

ature is actually measuring TFP The prevail-ing methodologymdasheg Andrew Bernard andCharles Jones (1996)mdashassumes perfectcompetition and equates marginal productswith factor shares as is implied by Cobb-Douglas technology Attempts to relax theseassumptions by say estimating productionor cost functions econometrically haveproved disappointing especially for develop-ing countries with apparently implausibleestimates very common (eg see ZviGriliches and Jacques Mairesse 1998)Besides measuring factor inputs (especiallycapital) is difficult not only conceptually buteven merely in terms of obtaining datamdashseefor example Donald Larson et al (2000) onagricultural inputs

Overall the recent empirical evidenceseems to suggest that openness and tradeliberalization have a strong influence on pro-ductivity and its rate of change In manycases the latter will be immediately anddirectly poverty alleviating and in the longrun they are a necessary part of any viablepoverty-reduction strategy As we noted atthe outset however the immediate effect ofan increase in productivity could be toreduce inputs as well as to raise output Thenet effect on employment will then dependon the relative sizes of the output and pro-ductivity shocks and will be influenced byfactors such as the flexibility of labor andcredit markets It is not difficult to imagineadverse short-term implications for jobs andpoverty and so we review the evidence onthese in section 5 below

33 Are Open Economies Less Stable

Macroeconomic volatility is one of themost important sources of risk for all house-holds both poor and non-poor Hence weexamine briefly the links from trade liberal-ization to output volatility and terms of tradevolatility The presumption is usually thatopen economies are less stablemdashsee forexample Rodrik (1998) who explains the 15 These results do depend on the nature of the shocks

positive correlation between openness andgovernment size in such termsmdashbut this isnot particularly well-grounded empirically

As Assaf Razin and Andrew Rose (1992)elaborated more open capital marketsshould be associated with smoother con-sumption but more volatile investmentwhereas more open goods markets should beassociated with greater output volatility Thisis because goods market integration allowseconomies to specialize and thus reducesrisk spreading in production15 Moreover ifexport markets display random undiversifi-able shocks greater openness increasesexposure In their empirical tests over1980ndash88 however they find no significantcorrelations between openness and volatili-tymdashmainly because many shocks appear tobe common across countries

William Easterly and Aart Kraay (2000)on the other hand find that small stateswhich are generally more open than largerstates tend to have more volatile growthrates albeit around higher averages Thereason is not that their terms of trade aremore volatile but that a given terms of tradevolatility has greater effects on output themore open the economy

Turning to the literature linking opennessto terms of trade (ToT) volatility and theimpact of such volatility on growth thePrebisch-Singer hypothesis suggests that ifthe supply of primary products is relativelyprice inelastic (compared to that of manu-factures) fluctuations in world demand willmake primary commodity prices morevolatile than those of manufactures If tradeliberalization encourages specializationtowards primary commodities this suggeststhat it will increase the volatility of develop-ing countriesrsquo terms of trade (ToT) In facthowever Matthias Lutz and Hans Singer(1994) find the very oppositemdasha mild ten-dency for openness to reduce volatilitymdashwhile Easterly and Kraay (2000) find norelationship between ToT volatility and

country size (which in turn is correlatedwith openness)

David Bevan Paul Collier and JanGunning (1990) suggest that the causalitybetween the ToT and openness may operatein the opposite direction with ToT shocksgiving rise to trade reform They cite the caseof Kenya in which an increase in the worldprice of coffee raised government revenuesand consequently public expenditure oninfrastructure When prices fell the govern-ment liberalized in order to access foreignfinance for their expenditure programmesThis is a plausible story and one which coulddominate any empirical relationship betweentrade liberalization and the terms of tradeHowever it concerns a single specific changein the terms of trade not volatility per se Itis possible that a series of such episodeswould suggest a connection between repeat-ed ToT changes and increasing liberalizationbut the case remains to be made

Turning to the effects of ToT volatility ongrowth the simple presumption would bethat volatility causes uncertainty which inturn reduces investment and thereforegrowth Empirical tests of this hypothesishowever give mixed results starting withAlasdair MacBeanrsquos (1966) classic refutationLutz and Singer (1994) provide a fairlydetailed empirical analysis They find no evi-dence that volatility in the net barter termsof trade harms growthmdashindeed signs of thereversemdashbut they do find that volatility inthe income terms of trade does Howeverthis is not apparently true in low-income orprimary product exporting countries thetwo groups where poverty levels tend to behighest Parantap Basu and Darryl McLeod(1992) construct a simple open economy sto-chastic growth model and test it using VARsfor twelve developing countries Theirresults confirm the existence of persistenteffects of ToT shocks on output levels andsuggest that greater ToT variability reduceseconomic growth

A study by Patrick Guillaumont SylvianeGuillaumont Jeanneney and Jean Francois

Brun (1999) uses cross-country data to arguethat Africa exhibits higher ldquoprimaryrdquo insta-bilities (ie structural instabilities includingToT shocks) than countries from otherregions and that this has negatively affectedits growth by increasing the instability ofinvestment and the real exchange rateThese latter ldquointermediaterdquo instabilitiesaffect growth more by reducing the rate oftotal factor productivity growth than throughreductions in the rate of investmentAlthough such costs of ToT volatility are rel-evant to open economies the role of open-ness in generating these instabilities is notspelled out hence it is not clear whethereven in the volatility dimension alonereducing openness would help

A third possible link is via financial mar-kets Helena Svaleryd and Jonas Vlachos(2002) argue that protection might deter thegrowth of financial markets because govern-ments use it to shelter firms from shocks Ifso trade liberalization could promote finan-cial development as indeed their data tendto suggest In turn financial development isoften claimed to be an important input togrowthmdashsee eg William EasterlyRoumeen Islam and Joseph Stiglitz (2000)

4 Households and Markets

This section turns to households and mar-kets Treating the household as the basic unitover which poverty is defined it asks howthe price changes generated by tradereforms impinge on poor households giventheir consumption and production bundlesThe starting point is the observation thatgiven labor and transfer incomes the firstorder approximation of the welfare effect ofa small change in prices is

DW = aringi (qimdashci) Dpi (1)where qi is production of good i ci con-sumption of i and Dpi the price changeAngus Deaton (1997 ch 3) provides theanalytical background as well as interestingexamples of this approach applied todomestic reforms



Even in its simplest form (1) provides apowerful starting point for identifying thepoverty effects of trade liberalizationChristopher Barrett and Paul Dorosh (1996)predict the short-run effects of rice pricechanges in Madagascar (partly induced byimport policy) by applying kernel estimatesto household data on net sales as a share ofincome (ie (qr-cr)y where the subscript rdenotes rice) They estimate that one-thirdof poor rice farmers could lose from higherprices or price variability

David Sahn and Alexander Sarris (1991)apply basically this methodology to severalAfrican countries to determine the conse-quences of structural adjustment pro-grammes on rural small-holders (Theyconsider wages as well as sales of output assources of income) Their work is attractivein its reliance on observed ex post price databut unfortunately they do not relate these totrade policy changes James LevinsohnSteven Berry and Jed Friedmanrsquos (1999)study of changes in Indonesian price indicesby class of household is essentially (1) withquantities set at zero They find that thepoor suffered more from price increases in1997 than the non-poor although with sig-nificant geographical variations Theirs arenot estimates of the poverty effects of thecrisis per se however because they ignorechanges in income and any induced changesin consumption

Duncan Thomas et al (1999) and AsepSuryahadi Widyanti Wenefrida andSudarno Sumarto (2003) also examine theconsequences of the Indonesian crisis andconclude that the greatest challenge in mak-ing poverty assessments is constructing thecorrect price deflator ie estimating theprice changes appropriate to each house-hold The former very thorough studyshows that households in agricultural regionsfared relatively well in real income termsbecause the relative prices of their outputincreased while regions with many civil ser-vants fared particularly badly because wageswere held back far behind prices

This part of the paper comprises sectionson how prices are transmitted from the bor-der to poor households whether markets fortheir output purchases or services aredestroyed or created by trade liberalizationhow households respond to trade-relatedprice shocks whether spillovers betweenhouseholds exacerbate or alleviate povertyand whether trade reform increases house-hold vulnerability

41 The Transmission of Border-PriceShocks

In any economy there are several steps oftransmission between changes in (tariff-inclusive) border prices following externalliberalization and price changes experiencedby producers or consumers at local levelsThe extent of transmission may be limited bya number of factors including transport costsand other costs of distribution the extent ofcompetition between traders and the func-tioning of markets more generally and infra-structure domestic taxes and regulationsSome of these costs such as transport costsare inevitable (though they may be increasedby other factors such as fuel taxes or inade-quate infrastructure) others represent directeconomic inefficiency such as monopoly ormonopsony power exercised by traders

At its simplest we can represent the localprice of an importable good (Pm

l) asPm

l = Pwr (l+tm) + gm (2a)Where Pw is the world price r the exchangerate tm the proportional tariff or tax and gmthe transaction costs on importables For anexportable the corresponding equation is

Pxl = Pwr (l-tx) - gx (2b)

These equations illustrate four simplepoints First the proportional changes in Pm

lare smaller than those in tax-inclusive borderprices [Pwr (l+tm)] while those in Px

l are larg-er than those in Pwr (l-tx) Second changes intrade taxes (ti) could be (partially) offset bychanges in world prices if the country orcountries under consideration are large Forcertain export products this is probably true

for some developing country producersmdashsee for example Lutz and Singer (1994)mdashbut we do not pursue it further here Thirdcorrecting exchange rate distortions can havemajor effects on the prices faced by the poorsee for example Krueger (1992) Fourthchanges in border taxes (ti) can be offset orexacerbated by changes in g i These may beexogenousmdashie due to (domestic) policychanges such as when trade liberalization isaccompanied by marketing reformsmdashorendogenous as for example when an imper-fectly competitive distribution sector absorbssome of the border price change into its ownmargins

The available evidence on the effective-ness of transmission mainly concerns pricesin agriculture (where the issue is perhapsmost important) at the national level Manyexport crops especially those of small farm-ers are sold through public or private mar-keting agencies whose prices are less thanthe fob export price (see for instance YairMundlak and Donald Larson 1992 TimLloyd et al 1999) The differential reflectstransport marketing and the other costs ofthe agencies (Andrew McKay OliverMorrissey and Charlotte Vaillant 1997)plus in many instances monopsonistic prof-its In the case of public sector marketingagencies the purpose of their operationswas often to insulate farmers from worldprice fluctuations and thus trade liberaliza-tion per se would not be transmitted at allThe evidence suggests that this aim was notalways achieved (Mundlak and Larson 1992)but in any case the net effect was usually totax farmers on average In the case ofPakistan Paul Dorosh and Alberto Valdes(1990) find that farm gate prices received byfarmers increased significantly as a result oftrade reform in large measure because ofthe reduction in the exchange rate overvalu-ation that had eroded any benefits fromtrade policy

The mere presence of transactions costsprovides natural protection to local producersof import competing products a factor found

to be important by Chris Milner OliverMorrissey and Nicodemus Rudaheranwa(2001) in Uganda But such costs also taxprospective purchasers of imports (producersand consumers) and prospective suppliers ofexports Moreover as just noted they attenu-ate and magnify price changes respectivelyPaul Glewwe and Dennis de Tray (1989)illustrate the attenuation effect in the potatomarket in Peru

Price transmission is likely to be particu-larly ineffective for poor people living inremote rural areas (where g i will be higher)in the absence of specific policy interven-tions to improve it In extreme instances pro-ducers or consumers can be completelyinsulated from changes taking place at thebordermdashie goods cease to be tradableStephan Goetz (1992) reports that high fixedtransport costs prevent some householdsfrom trading in many parts of sub-SaharanAfrica and IFAD (2001) lays the blame sub-stantially on poor infrastructure NicholasMinot (1998) found in Rwanda in the early1980s that changes in relative prices at theborder had little effect on predominantlyrural low-income households because oftheir isolation from the cash economy Thispresumably reflects their physical isolationwhich curtails their ability to gain from trade(even within Rwanda) and trade liberaliza-tion and thus reduces the level of theirincome significantly Thomas et al (1999)find that isolated regions of Indonesia wereinsulated from much of the 1997 crisis

Once internal trade and hence transmis-sion is possible both the level and the(endogenous) change in transactions costsare relevant For example Vietnam experi-enced significant increases in rice producerprices as export restrictions were lifted overthe 1990s and transformed itself from a netimporter into a significant exporter(Nicholas Minot and Francesco Goletti1998)16 Nonetheless rice exports are con-strained by a relatively underdeveloped mar-keting system controlled by a small numberof state enterprises Measures to enable



16 Equations (2) do not easily cope with quantitativerestrictions of this kind but this case may be thought of asthe transmission of border policies despite high domestictransactions costs

17 Unless the private sector is immensely more efficienttechnically

competition between central and local stateenterprises have helped but these authorsargue that significantly greater liberalizationincluding the entry of the private sector isrequired to enable Vietnam to realise its fullpotential as a rice exporter This they arguewill reduce the level of transactions costsand the extent to which border pricechanges can be absorbed into distributionrather than being passed on to farmers

The transmission of price shocks to locallevels is related but not identical to theissue of spatial market integration Thedegree of market integration is typicallyassessed in terms of comovements in spatialprice spreadsmdashthe extent to which prices indifferent regions (including the border)move in parallel (see for example StefanDercon 1995) If this is high border changeswill be transmitted strongly but it does notnecessarily indicate the competitiveness oflocal markets (Ousmane Badiane 1997)because it does not take account of the levelof costs and so does not demonstrate thatprice levels converge (Bob Baulch 1997) Inthe Philippines Baulch finds arbitragebetween markets to be quite efficientdespite large constant difference in pricelevels due to transaction costs

But introducing private distribution willnot help if it amounts merely to the creationof private monopolies17 (Badiane 19971998 Minot and Goletti 1998) as recent evi-dence on the privatisation of marketingarrangements in Zambia and Zimbabweillustrates (Oxfam-IDS 1999 L AlanWinters 2000b) In Zimbabwe three privatebuyers emerged after the privatisation ofcotton purchasing including one owned bythe farmers There was increased competi-tion resulting in higher output prices andbetter supplies of inputs (including provision

of credit) and farm income increased appre-ciably In Zambia on the other hand whenthe government abolished the officialmonopsony in maize the activity becamedominated by two private firms which pos-sibly colluded to keep prices low and whichabandoned purchasing altogether in remoteareas The last point essentially reflected thedeterioration of critical infrastructuremdashruralroadsmdashwhich raised transaction costs aboveviable levels It illustrates the importance ofphysical as well as policy-based frictions totrade (see also section 42) and the need toconsider both in assessing the povertyimpacts of trade reform

Ousmane Badiane and Mylegravene Kherallah(1999) show that the domestic liberalizationof food crop farming in Africa has had astrong effect on reducing poverty Theyargue that it brought about increased levelsof investment by private traders and anexpansion in their activities This createdemployment for low skilled labor in itselfbut in addition it reduced retail prices forfood and various transactions costs Thusdomestic agricultural reforms can amplifythe benefits of agricultural trade reform forpoverty even if it reduces natural protectionfor some

42 Are Markets Created or Destroyed

The biggest impacts of trade reform areoften associated with the creation ordestruction of markets Greater opennesscan result in a wider variety of commoditiesbeing available or create new opportunitiesfor production (eg by allowing importedinputs) At the same time other markets maycease to exist for instance due to the effectsof increased import competition on a localmarket Often however it is the measuresthat accompany trade liberalization such asthe privatisation of marketing arrangementsthat eliminate markets rather than tradeliberalization itself

From a theoretical perspective PaulRomer (1994) argues that the most substan-tial welfare costs of trade restrictions come


from the goods and services that theyexclude from the market and the loss of pro-ductive activities that results from that exclu-sion A good or service will not beproducedmdashor importedmdashif fixed costsmake it unprofitable as Romer elegantlyshows by applying Dupuitrsquos bridge buildingexample (Jules Dupuit 1854) to trade policyEven if a bridge is operated as a monopolyby the firm that constructed it it can stillprovide substantial social benefits in termsof the surplus it providesmdashthe ldquoDupuit tri-anglerdquo An ad valorem tax on bridge cross-ings does not affect the monopolistsrsquo optimalprice or output as long as the bridge is stillbuilt It does reduce the monopolistrsquos profitshowever so that at some level profits nolonger cover fixed costs and the bridge willnot be built at this point the welfare cost ofthe tax to society becomes substantial

This basic point applies widely includingto trade taxes Substantial welfare benefitscan come from technological change anddiffusion of knowledge for which (as dis-cussed above) trade is often a very impor-tant vehicle Romer argues that the maincosts of trade restriction may come from itsadverse impact on the adoption of newtechnologies and on the variety of produc-tive activities outputs and inputs Thegrowth literature surveyed above is sugges-tive and David Gisselquist and Jean-MarieGrether (2000) report significant directbenefits to agricultural producers inBangladesh as liberalization increased theavailability of inputs Consumers too benefitfrom the increased availability of goodsDavid Booth et al (1993) in a participatorystudy in Tanzania find that following liber-alization the greater availability of goods atinternational prices was regarded as a sub-stantial improvement compared with thepast even by quite poor rural people andparticularly by women On balance thecommunities considered the improvedavailability of goods to have more than com-pensated for the steep rises in real pricesthat had accompanied improved supply

18 We say ldquoreportedlyrdquo for one commentator hasargued privately to us that farmers in the remote NorthernProvince never sold much to the official buyers preferringinstead to trade informally over the border with Malawi

But where trade liberalization or accom-panying changes in domestic marketingarrangements destroys markets householdscan become completely isolated from themarket and suffer substantial income losses(L Alan Winters 2000b) For instance if offi-cial marketing boards provided small farmerswith inputs secured against future outputwhereas post-liberalization private agentsor banks do not such farmers could loseeven if output prices have risen substantiallyAs noted above the abolition of the officialmaize purchasing monopsony in Zambia inthe early 1990s led to the abandonment ofpurchasing altogether in remote areasreportedly causing great hardship18 In partthis was due to the deterioration of the roadswhich made the transactions costs of collect-ing small consignments in rural Zambia toohigh to make any trade worthwhile But italso illustrates a simple and sometimes neg-lected methodological point the effects ofreform depend on the effects of the policiesthat it is undoing In Zambia the marketingboardrsquos policy of pan-seasonal and pan-regional pricing was essentially a subsidy tosmall and remote farmers (a large one inview of the poor infrastructure in remoteareas) The liberalization removed the sub-sidy so it is not surprising that these farmerssuffered The extent of their suffering wasemphasized however by the discontinuousnature of the change

Finally in an environment of trade liber-alization policy interventions can help tocreate markets that would be viable for thepoor but which would otherwise not formOne example is the creation of jobs foryoung women in the clothing export facto-ries in Bangladesh Despite their shortcom-ings by Western standards it is widelyaccepted that these jobs have transformedthe lives of these womenmdashsee for exampleNaila Kabeer (2000) Two other examples


19 Head writes that ldquoworking in the canning lines for 5or 6 months of the year hellip the women workershellipdevel-opedhellipa sense of independencerdquo (p10) which was the firstcasualty of the retrenchment of the canning plant and thatthe workers moved from ldquoa hard but honourable life to alife of despair and destitutionrdquo (p 2)

illustrate the gains from trade by highlight-ing the problems that its removal causesJudith Head (1998) reports the widespreaddistress of female workers in Paarl a townin South Africa when the EU scaled backits imports of their canned fruit19 SimilarlySpencer Henson et al (2000) report thatthe near cessation of EU imports of fishfrom Tanzania over 1997ndash98 cut fishermenrsquosincomes by 80 percent In these examplesthe loss of trade implies the cessation of theactivity concerned A more modest versionof the same story occurs if transactions costscause a product to become nontradable aspostulated in the simulation model of Alainde Janvry Marcel Fafchamps andElisabeth Sadoulet (1991) They show theo-retically how such non-tradabilities couldaffect the responses of other tradables tomarket shocks and hence the welfare conse-quences of the latter Unfortunately thereis to our knowledge no empirical (asopposed to numerical) implementation ofthese ideas

43 How Do Households Respond

To the extent that the effects of tradereform are transmitted to local levels thenext question is how agents respond to themTo what extent are agents in generalmdashandthe poor in particularmdashable to protect them-selves against any potential adverse impactsand to take advantage of potentiallyfavourable effects Such ability increases themagnitude of a real income shockmdashalthoughit does not normally change its sign Againthe nature of local markets and the quality oflocal infrastructure are likely to play animportant role Both the production andconsumption responses of household areimportant

Production The most plentiful evidenceon production effects concerns responses tochanges in prices usually in agriculturebased on aggregate time series data Manysuch supply response studies whether forindividual crops (Marian Bond 1983) or agri-culture as a whole (Maurice Schiff andClaudio Montenegro 1997) suggest that inaggregate agricultural producers are quiteresponsive to price incentives when theyhave access to the necessary inputs informa-tion and credit (McKay Morrissey andVaillant 1997) a condition that may well callfor complementary government policiessuch as information and extension services

But to assess the poverty impact of pricechanges it is necessary to focus on theresponses of individual producers espe-cially small farmers This is most easilyexplored using micro (farm) level datathough few such studies have been con-ducted Using micro level panel data forfarm households in Zambia over the period199394 to 199495 Klaus Deininger andPedro Olinto (2000) show that for manyhouseholds a major constraint on improve-ments in agricultural productivity followingexternal liberalization was the absence ofkey productive assets (draft animals imple-ments) Similarly based on a small panel offarm households in Mexico Ramoacuten LoacutepezJohn Nash and Julie Stanton (1995) findthat those with low levels of capital inputswere on average less responsive to priceincentives than those with higher levelsBut farmers with little capital were alsothose who had more problems obtainingcredit were less likely to use purchasedinputs were less educated and farmedpoorer quality land any or all of whichcould account for their lower supplyresponse Rasmus Heltberg and Finn Tarp(2002) obtained similar results forMozambique These studies highlight theimportance of complementary policies tar-geted at small farmers to enable them tobenefit fully from new opportunities forexample in fostering asset accumulation


20 Confusingly Nadal uses the term ldquosubsistence farm-ersrdquo for such people

improving access to credit and providinggood quality extension services

A case where constrained responses arefrequently alleged to have rendered tradeliberalization harmful is the effect ofNAFTA on poor corn producers in MexicoSeveral ex ante studies forecast problems forsmall farmersmdashfor instance Santiago Levyand Sweder Van Wijnbergen (1992)mdashbutAlejandro Nadal (2000) is to our knowl-edge the only thorough ex post study Hefinds that though the corn price fell smalland poor farmers maintained their produc-tion levels of corn even increasing theirplanted areas20 In part this presumablyreflected the costs of switching activitiesbut it was also partly because much of theiroutput was for subsistence purposes andbecause the prices of substitute crops alsofell sharply With so little adjustment the fallin the price of maize reduced these produc-ersrsquo incomes both directly and throughreduced nonfarm employment opportuni-ties increasing the cultivated area couldonly cushion this marginally The depth ofthese farmersrsquo plight however seems to lieless with trade liberalization per se thanwith how it was done Following the pesocrisis of 1994 the government abandoned itsplans to phase in the liberalization graduallyand to provide adjustment support over thetransition period In such a sensitive crop itis not surprising that so sudden a shockcaused hardship

Two other aspects of this story warrantnote First one aspect of the response ofhouseholds to the reduced employmentopportunities in rural areas was male labormigration which increased the workloadsfor women and children remaining behind(Kevin Watkins 1997) Second the prospec-tive consumer gains from corn liberaliza-tionmdashlower consumer pricesmdashalso failed tomaterialize Nadal notes that the cartelisedtortilla sector was able to maintain prices

despite the reduction in its costs followingliberalization

As well as its impact on production tradeliberalization in agriculture frequently pro-vides incentives for such producers to startto supply the marketmdashie for commercial-ization Heltberg and Tarp (2002) find thiseffect to be substantial in the case ofMozambique in 1996-97 They find that thesame factors influence both poor and non-poor farmersrsquo decisions about whether tomarket their output notably land and capitalendowments and the characteristics of thefarms such as yield and risk However thenon-poor are generally better endowed thanthe poor with respect to these factors and soare better placed to respond

In addition some agricultural householdsare better placed than others to deal with thecommercialised environment that resultsfrom trade liberalization For instance inMalawi trade liberalization encouraged theemergence of traders who buy food com-modities from farmers and sell in urbanareas or export (Brett Parris 1999) Howeverbecause most smallholders are unable tostore their output they tend to sell in theimmediate post-harvest period when pricesare low rather than wait until prices wouldbe higher This inability to cope with fluctu-ating prices can penalize poor farmers andcompromise their food security for as well asselling low they may need to buy in the leanperiod when prices are high One cannotknow a priori however whether these diffi-culties will fully outweigh the gains fromopening up the new market Thus ratherthan being an argument against commercial-ization and trade liberalization per se thisexample rather emphasizes the importanceof appropriate institutions to allow farmersto cope with fluctuating prices (such asaccess to storage or credit)

One aspect of a move towards more com-mercialised agriculture is the switch fromfood to cash crops A concern frequentlyexpressed about this is that it could com-promise household food security or health


status Diane Elson and Barbara Evers(1997) write of Uganda ldquohellip adjustmentmeasures have elicited a positive exportsupply response but the greater demandson female labor time have damaging reper-cussions for the health and well being ofchildren Survey data reveal that the expan-sion of NTAE [non-traditional agriculturalexports] has meant that men work for wageson othersrsquo farms to the neglect of landpreparation on their wivesrsquo food farmsIncreasing workloads of women have led toa decline in breast feeding and worseningchild care practices and food insecurity hasbeen intensified helliprdquo But the effect onnutrition is not necessarily adverse giventhat commercialisation often leads to signif-icant gains in smallholder income (Joachimvon Braun 1989 von Braun DavidHotchkiss and Maarten Immink 1989) Inaddition increased agricultural commer-cialisation often has other favourableimpacts on poverty for example on thedemand for landless workers (EileenKennedy and Bruce Cogill 1987)

Consumption and Labor Supply Equation(1) provides a first order approximation ofthe welfare effects of a price change If wetake outputs as given (determined by a sepa-rable income-generation model) we can useconsumer theory to explore how consump-tion changes in order to take advantage ofthe new price vector Such changes are typi-cally calculated by estimating the demandsystem for a (representative) consumer (orclass of consumer) and applying predicted orobserved price changes to it This is verymuch in the tradition of tax reform analysissome parts of which include trade taxes seeDavid Newbery and Nicholas Stern (1987)

A pertinent example of this approachalthough only of a hypothetical policy changeis Martin Ravallion and Dominique van deWallersquos (1991) study of Indonesian ricereform They use detailed data to estimatehousehold demand equations and apply tothem assumed income and price changesThey show inter alia that the results depend

partly on how the government passes thebudget shock implied by rice price changesonto consumers and on what poverty line isused The very poor are net consumers of riceand so suffer from the price rises whereasfarmers just below the standard poverty lineare net producers and hence benefit andshow positive chances of escaping frompoverty Given that much of the worstpoverty is among self-employed farmerschanges in input and output prices can be animportant determinant of poverty

A major technical problem with empiricaldemand systems is that having data for onlyone period researchers have had to rely onthe geographical variation of prices to iden-tify the price effects Deaton (1988) showsthat the unit values of purchases reported byindividual households will reflect qualitywhich is endogenous and correlated withincome as well as with true prices which areexogenous This will bias the estimatesunless relatively sophisticated methods areused (see Deaton 1997 for an accessibleaccount) Deaton uses these methods to dis-cuss the implications of tax reform in Indiaand Pakistan In Pakistan a reduction in theeffective domestic subsidies to rice andwheat (due in the case of rice to exporttaxes) would be efficiency enhancing but inboth cases the burden falls relatively heavilyon the poor who have high and relativelyinflexible expenditure shares on these itemsIdeally the adverse distributional effects ofsuch tax reform could be addressed byappropriate complementary policies

Jed Friedman and James Levinsohn(2002) use Deatonrsquos approach to estimatethe parameters for their extension of equa-tion (1) to a second-order approximation ofthe effects of the 1997 crisis in IndonesiaThey find that allowing for householdresponses roughly halves the welfare lossespredicted by the first order formulation aswell as affecting their distribution overhouseholds a little They caution howeverthat using parameters derived solely fromregional price variations to predict the


effects of huge price changes over time rep-resents a massive out-of-sample extrapola-tion and must be treated accordingly

As hinted above an important dimensionof poor householdsrsquo response to shocks islabor supply Although we consider labormarkets in section 5 below we briefly con-sider supply responses here The importantpoint is that for poor households with somesubsistence activities wage employmentself employment and consumption arepotentially jointly determined so that shocksto one affect the other De JanvryFafchamps and Sadoulet (1991) modelthese interactions numerically and show thatmissing markets for say wage employmentseriously disturb householdsrsquo responses tocommodity price shocks Serious attempts toreflect such factors in empirical workinclude Dwayne Benjamin (1992) on Javaand Sylvie Lambert and Thierry Magnac(1997) on Cocircte drsquoIvoire although neitherdeals specifically with poor householdsThese studies conclude that in general theseparability of consumption and productiondecisions cannot be rejected but probablymore because of poor data quality thanbecause underlying behavior is separable

A related literature shows that lsquoimperfectlabor marketsrsquo within the household can con-strain supply responses Christopher Udry(1996) and Lisa Smith and Jean-Paul Chavas(1999) for example show that distortions tothe allocation of responsibilities amonghousehold members both impose absolutelosses (ie are inefficient) and prevent optimalresponses to price signals

An interesting recent analysis ofVietnammdashEric Edmonds and Nina Pavcnik(2002)mdashsuggests that trade reform hasreduced the incidence of child labor via itsincome effects Observing an averageincrease in the rice price of 29 percentbetween two household surveys in 199293and 199798 Edmonds and Pavcnik findthat reductions in child labor are well corre-lated with rice price increases across house-holds and communes Many of the

households concerned are poor so this is apowerful result for our purposes providedthat trade reform explains the price increaseEdmonds and Pavcnik basically just assertthat link but Yoko Niimi Puja Vasudeva-Dutta and L Alan Winters (2003) produceat least circumstantial evidence that it exists

A detailed study of short-term adjust-ment to an external shock is ElizabethFrankenberg James Smith and DuncanThomas (2003) As noted above this teamfound some households gaining despite the15-percent decline in the Indonesian econ-omy over 1997ndash98 They also found exten-sive mitigation of the shock with falls inreal family incomes of only about half ofthose in individual real earning (JamesSmith et al 2002) Coping strategies includ-ed re-organizing households to locatedependants in low-cost locations and work-ers in household that could employ themincreased hours of work the postponementof ldquodeferrablerdquo expenditure and dissavingIn the latter case the role of gold stands outAs an internationally traded asset the goldprice increased fourfold in rupiah termspermitting strong consumption smoothingopportunities Interestingly most of thegold was owned by women (as jewellery)which arguably affected the uses to whichthe dissaving was put

In summary there is plenty of evidencethat households will respond to the impactsof trade liberalization that affect them asproducers or as consumers both to takeadvantage of opportunities and to protectthemselves from adverse effects But theability to respond varies across householdsso there will often be an important role forcomplementary policies in helping to ensurethat poorer as well as richer households areable to respond appropriately by for exam-ple enhancing access to key inputs marketsor infrastructure

44 Do the Spillovers Benefit the Poor

Even if the poor do not benefit directlyfrom increased demand generated by a trade

liberalization they may do so indirectly asthose who do benefit directly increase theirdemands for inputs and consumption goodsand services For example John Mellor andSarah Gavian (1999) argue that one of themain advantages of stimulating agriculture isthat it strongly increases the demand forgoods and services produced by the poor

The literature on growth linkages distin-guishes production (or inter-sectoral) link-ages (Albert Hirschman 1958) fromexpenditure linkages (John Mellor 1976)Production linkages can be eitherldquoupstreamrdquo (or ldquobackwardrdquo) which refer to asectorrsquos demand for factors or intermediateinputs or ldquodownstreamrdquo (or ldquoforwardrdquo) link-ages which occur when the expansion of asector induces investments in processingand distribution in sectors using its outputExpenditure linkages refer to the extent towhich increased incomes in one sector (typ-ically farming) increase the demand for theoutputs and hence factor inputs of anothersector (typically the nonfarm sector) This isthe standard Keynesian multiplier effectalthough for poverty analysis there can bebenefits even if the increased demand isreflected in higher factor returns for thepoor rather than increased activity

Given that linkages are often strong inrural areas a trade liberalization that bene-fits one group is likely to have strong bene-fits for the rest of the rural economy It isnow widely accepted that in Asia theincreases in agricultural productivitybrought about by the green revolution in the1970s reduced poverty at least partlybecause an extra dollar of agriculturalincome was typically associated with an addi-tional 80 cents of nonagricultural income forlocal enterprises (Christopher Delgado et al1998) Studies point to the importance ofboth production (John Mellor and BruceJohnston 1984) and consumption expendi-ture (Peter Hazell and Ailsa Roell 1983)linkages In general surveys show that largeshares of rural householdsrsquo incomes and con-sumption are related to locally produced

nontradeables such as services bulky tradi-tional starch items perishable foods andlocally processed foods This means thatexpenditure linkages are particularly impor-tant for the rural poor (Christopher Delgado1996) although as Barbara Harriss (1987)points out these results depend heavily onuntested assumptions

Until recently it was thought that growthlinkages were weaker in Africa because ofsmaller inter-industry flows (due in part tothin markets and high transaction costs) andthe absence of important construction andmaintenance expenditures associated withthe Asian irrigated agriculture (StevenHaggblade Peter Hazell and James Brown1989) However a survey of the evidence byDelgado et al (1998) drawing on panel datasets from Burkina Faso Niger SenegalZambia and Zimbabwe finds the contrary Itfinds that adding $100 of new farm incomecould increase total household income by$288 in Burkina Faso $196 in Niger $248in the Central Groundnut Basin of Senegaland $257 in Zambia Peter Hazell andBehjat Hojjati (1995) show that growth mul-tipliers in the Eastern Province of Zambiaare driven primarily by household consump-tion demands and are largely intra-agricul-tural because of high marginal propensitiesto consume local non-tradable foods Bigstenand Collier (1995) also identify strong pecu-niary multipliers but relatively weak realmultipliers from agriculture in Kenya

For policy purposes it is useful to knowwhich sectors yield the largest growth link-ages Peter Hazell and Steven Haggblade(1991) show that growth multipliers in Indiaare higher for irrigated than for rainfed agri-culture suggesting that for example aboom in rice exports could provide a largestimulus Early evidence from Malaysia andNigeria suggested that it is the householdsoperating the largest farms which have theexpenditure patterns most desirable for thegeneration of indirect labor-intensive growth(Mellor 1983) Hazell and Roell (1983) andHaggblade Hazell and Brown (1989) on



21 The concept of vulnerability is thus closely related tothe concept of ldquoexpected povertyrdquo introduced by Ravallion(1988) Robert Chambers (1989) gives a broader discus-sion of vulnerability in developing countries

the other hand contend that the multipliersare bigger for small to medium-sized farmsthan for very large farms as does econo-metric evidence from India (Hazell andHaggblade 1991)

The effectiveness of linkages in raising theincomes of the poor also depends upon localbusinesses being able to respond toincreased demand If institutional or otherrigidities prevent this then the benefits maybe dissipated in higher inflation For exam-ple Delgado et al (1998) warn that risingfood staple prices have the potential tochoke off growth from demand-side linkagesif the conditions for a high supply responseto prices are not in place Of course priceincreases will still raise the incomes of netsuppliers of those goods or services and it isstill relevant to ask whether these are thepoor But the overall impact on growth willbe less in such cases and it seems likely thatits impact upon poverty will also be smaller

45 Does Trade Liberalization IncreaseVulnerability

In addition to its impact on mean incomeit is often claimed that trade liberalizationincreases the risks faced by poor householdsand their vulnerability to external shocksVulnerability is a key element of poverty anda major concern of the poor see for exampleWorld Bank (2001) However though clear-ly related poverty and vulnerability are notcoterminous Almost by definition povertyreflects well-being status while vulnerabilityis dynamic and stochastic Lant PritchettAsep Suryhadi and Sudarno Sumarto (2000)define vulnerability as having a high proba-bility of being below the poverty line over athree-year period and thus introduce uncer-tainty of consumption as well as its level21

Trade liberalization will typically affectboth the means and variances of a house-holdrsquos sources of income and could affect

22 A similar argument can be made about employmentin an export processing zone (EPZ) which may be betterpaid but less secure than say employment in government

household vulnerability in four wayschanges in mean incomes changes in theportfolio of activities undertaken by house-holds changes in the variability of existingincome sources (andor the correlationbetween them) and poverty traps Theimpact of trade liberalization on the meanincomes of the poor is the focus of much ofthe rest of this article this section considersthe other three effects

Portfolio Choice Household surveys indeveloping countries have shown thathouseholds often have a large number of dif-ferent sources of income (Thomas Reardon1997) An optimizing household will choosea portfolio which maximizes its utility takinginto account its degree of risk aversion(Frank Ellis 1993 Michael Lipton 1968)and clearly trade liberalization could alterthe optimal portfolio The obvious exampleis a liberalization which encourages farmersto switch from subsistence to cash cropsThe latter may have higher returns but alsoa higher variance Whether this increasesthe vulnerability of the household will thendepend on the relative sizes of these shifts22

In fact whether the change is made at allwill depend on these things

There is an important distinction to bemade here between ex ante and ex post posi-tions If households are fully informed of theconsequences of changing their portfoliosthe status quo is still feasible and suchchanges are made freely then we mayassume that switches in portfolio will raisewelfare ex ante But of course ex post ahousehold may lose from an unlucky realisa-tion Thus increases in observed poverty canbe consistent with ex ante improvements inwelfare if households trade higher meanincomes for higher variances

The flip-side of this argument is thatpoorer households may be unable or unwill-ing to undertake potentially profitable new


23 Barrett and Dorosh (1996) show formally that thecosts of variability increase with the share of the commod-ity or income source in total income

24 Although not all policies designed to do this succeed

activities because of risk aversion MarcelFafchamps and John Pender (1997) showthat credit constraints faced by poor farmersin India make them unwilling to make non-divisible and irreversible investments inrisky tubewells despite the substantiallyhigher returns associated with irrigated pro-duction when tubewells are successfulOther studies indicate the impact of riskaversion on poor farmersrsquo portfolios of agri-cultural investments (Mark Rosenzweig andKenneth Wolpin 1993) and cultivation pat-terns (Takashi Kurosaki 1995) In each casethe existence of undiversifiable risk couldundermine the potential gains from tradeliberalization among the poor and result inpoverty traps

In addition the poor may lack informa-tion about the risks associated with newactivities leading to suboptimal choicesHowever such information problems arelikely to be short-lived as individuals andcommunities learn the true extent of therisks faced Besides trade liberalizationusually involves shifts in the relative returnsof activities that are already being under-taken in which case information willalready exist on the risks associated with theactivity

The Variability of Existing IncomeSources or Prices Trade liberalization couldalso increase income vulnerability byincreasing the variance of important incomesources or prices23 One possibility is thatsay due to favorable production conditionsthe domestic market is typically stable andthat opening it up lsquoimportsrsquo price variationSimilarly trade liberalization (either domes-tic or international) may eliminate institu-tions or policies that actually smoothdomestic prices24 For example abolishingofficial purchasing has increased cocoa pricevariances in West Africa (ChristopherGilbert and Panos Varangis 2002)

25 Similarly exporting may also stabilize local prices

On the other hand trade liberalizationcan reduce risk if it increases competitionsince this will make households less vul-nerable to decisions made by individualtraders or employers Liberalization mayalso reduce price volatility if it allowshouseholds to import goods that wouldotherwise have been subject to large priceswings due to the limited size of the localmarket25 Consequently whether liberal-ization increases or reduces price risk is anempirical rather than a theoretical matterUnfortunately evidence on this issue isextremely limited since it requires timeseries data on prices before and after lib-eralization Carlo Del Ninno and PaulDorosh (2001) show how trade liberaliza-tion helped to mitigate Bangladeshrsquos post-flood food crisis in 1998 with privateimports stabilising prices and increasingsupplies P V Srinivasan and Shikha Jha(2001) use simulation models to show thattrade is stabilizing in Indian food-grainmarkets (and incidentally for world foodprices too) On the other hand Lloyd et al(1999) provide evidence that domesticmarketing arrangements in Cocircte drsquoIvoiresubstantially smoothed price fluctuations(although at very high cost) suggestingthat liberalization would increase the vari-ance of prices However whether thiswould increase the vulnerability of poorfarmers is not clear given the likely con-current increase in prices associated withliberalization

Even if liberalization does increase pricevolatility at the border whether householdvulnerability increases will depend on howprices are transmitted through the economy(see section 41) and on the ability ofhouseholds to insure against income riskand to cope with shocks The large body ofliterature on the ways in which householdsrespond to idiosyncratic and covariant riskin developing countries shows that poorhouseholds take several steps to insure


26 These include diversifying income sources (FrankEllis 1998) precautionary saving entering into sharecrop-ping tenancy arrangements (Robert Townsend and RolfMueller 1998) maintaining buffer stocks of key assets(Rosenzweig and Wolpin 1993) and building social capital(Franque Grimard 1997) See Tim Besley (1995) for a gen-eral discussion

27 For example asset depletion (Rosenzweig andWolpin 1993) borrowing (Christopher Udry 1995)changes in labor supply (Anjini Kochar 1995) temporarymigration (Sylvie Lambert 1994) and reductions in humancapital investment (Hanan Jacoby and Emmanuel Skoufias1997)

themselves against bad outcomes26 or toprotect themselves ex post from the effectsof negative shocks27

Unsurprisingly however the poor aremuch less well insured and less able to copewith negative shocks than are the non-poor(Jyotsna Jalan and Martin Ravallion 1999)This makes it particularly important to con-sider the effectiveness of the mechanismsavailable to the poor to smooth consumptionwhen introducing trade reforms likely toincrease the variability of their incomes It isalso possible that trade reforms disrupt (orenhance) the ability of the poor to cope withshocks For example if trade reforms abol-ish an institution responsible for fixing pro-ducer prices at low levels this may reducevulnerability even if it increases price volatil-ity but if the same institution was responsi-ble for providing a social safety net (eg byallowing deferred payment or providing sub-sidized inputs) then it is possible that thetrade reform could increase vulnerabilityoverall The association of state-ownedenterprises with the provision of pensionsand health coverage in transition economiesis one possible example

Poverty Traps Finally shocks includingthose induced by trade liberalization maygive rise to poverty traps that is actual real-izations of bad outcomes may of themselveschange the inter-temporal distribution ofincome Jonathan Morduch (1994) showshow credit constraints on the poor can resultin them preferring low-return low-risk activ-ities to potentially highly profitable but riskyactivities Moreover poorer households may

have less to lose from reneging on creditagreements and consequently find it harderto borrow and insure (Abhijit Banerjee andAndrew Newman 1994) this too can createa poverty trap (Oded Galor and Joseph Zeira1993) Alternatively if households areforced to curtail investment or deplete pro-ductive assets in order to maintain con-sumption this can reduce their permanentincome and create a cycle of poverty

Overall however the little empirical evi-dence available does not suggest the wide-spread existence of poverty traps (iesituations in which once a household fallsbelow the poverty line it is impossible forthem to escape) For example MichaelLokshin and Martin Ravallion (2000) find noevidence of such non-convexities using apanel of Hungarian households in the 1990salthough it generally takes households sever-al years to recover from transient shocksThere is however evidence for the existenceof spatial poverty traps Jyotsna Jalan andMartin Ravallion (1997) show that there aregeographical externalities in rural Chinawhereby neighbourhood endowments ofphysical and human capital affect the pro-ductivity of a householdrsquos own capitalSimilarly there can be inter-generationaltransmission of poverty effects if theresponse to a trade shock is to reduce expen-diture on educationmdashas Thomas et al(1999) identified for rural families followingthe Indonesian crisis of 1997mdashor on childnutrition or healthmdashsee for example JohnStrauss and Duncan Thomas (1998)

Most of the myriad causes of vulnerabilityin developing countries have little directconnection with trade liberalizationFurthermore given the multiple causes ofvulnerability it is extremely difficult tounpick the impact of trade liberalizationfrom that of other events influencing house-holds Thus although Paul Glewwe andGillette Hall (1998) use panel data fromPeru in the late 1980s to show how somegroups are more vulnerable to macroeco-nomic shocks than others their results do


28 Glewwe and Hall (1998) define a household as beingvulnerable if it has a larger than average percentage fall inconsumption

not explicitly consider trade reforms28

They do find however that subsistencefarmers and other relatively autarchic house-holds are less affected by and thus less vul-nerable to economic shocks while those inthe construction manufacturing and agricul-tural export sectors are more vulnerableincluding presumably to external shocks

Although there is little existing evidencedirectly linking trade liberalization to vul-nerability at the household level it seemslikely that some trade liberalizations haveincreased the risks faced by the poor andthat in some cases this will have increasedtheir vulnerability When this does happenthe poor will usually be less well placed toinsure themselves against its adverseimpact One can certainly identify circum-stances where this can happen (eg whereeffective mechanisms of social protectionare absent) but there is no evidence abouthow widespread such outcomes are in prac-tice or indeed about cases in which tradeliberalization reduces vulnerability

5 Wages and Employment

For the self-employed the main determi-nant of income is the price commanded bytheir output and inputs but for employeescommodity prices need to be translated intofactor prices (wages) or employment oppor-tunities before they have an effect This Partconsiders this vital link between trade liber-alization and poverty first via permanentshifts in wages and employment and secondvia adjustment stresses

51 Does Liberalization Raise Wages orEmployment

An important mechanism by which for-eign shocks are translated into povertyimpacts is through factor markets especially

the labor market Indeed obtaining employ-ment is one of the surest ways out of pov-erty while the loss of a job is probably themost common reason for the precipitatedeclines into poverty that catch most publicattention The structure of the labor marketis critical to how trade liberalization getstranslated into wage and employmentchanges

Wages and Employment Traditional inter-national trade theory assumes that factorsupplies are fixed and wages are flexible Ina two factor world the Stolper-SamuelsonTheorem predicts that an increase in theprice of the good that is labor-intensive inproduction will increase its production andthus increase the real wage Unfortunatelyhowever while its basic insight is almost cer-tainly robust the Stolper-SamuelsonTheorem is not sufficient to answer ques-tions of trade and poverty in the real worldFor example the theorem is less powerful inmulti-commodity multi-factor models andthe functional and personal distributions ofincome are only loosely related Thus even ifincreases in the prices of unskilled-labor-intensive goods raise unskilled wages pover-ty will be alleviated only if poor householdsrely largely on unskilled wage earners PeterLloyd (2000) formalises this issue theoreti-cally He characterises the effect of a tradeshock on a given household in terms of thelatterrsquos endowments of factors its consump-tion pattern and the matrix mapping changesin commodity prices into changes in factorrewards Lloyd shows that each householdgains from at least one price increase andloses from at least one other and that pro-vided households differ sufficiently achange in the price of a good that is actuallyproduced will benefit at least one householdand hurt at least one other

The alternative polar view of labor mar-kets in developing countries is that labor isavailable in perfectly elastic supply In thiscase the wage will be fixed exogenously bywhat labor can earn elsewhere and theadjustment will take place in terms of


29 Winters (2000a 2002a) offers more discussion of thesignificance of these alternative views of the labor markets

employment Then the reason for the fixityof the wage matters If it is fixed by the exis-tence of a subsistence sector moving work-ers into the formal sector will alleviatepoverty only if the loss of labor in subsis-tence agriculture is so large that the workersremaining in that sector increase theirldquowagerdquo This is the case of successful devel-opment which is generally likely to requirefar more than just trade liberalization toachieve

Alternatively the labor markets may besegmented for say legal or institutional rea-sons The formal sector may pay a minimumor conventional wage at above what wemight loosely think of as ldquopoverty levelsrdquoand at which there is excess supply whilethe subsistence or informal sector payswages below ldquopoverty levelsrdquo Then povertywill potentially be affected by a trade shockIf the latter raises the value of the marginalproduct of labor in the formal sector (eg byraising the price of its output) trade liberal-ization reduces the producer real wageincreases employment and alleviates pover-ty If on the other hand it reduces the valueof the marginal product and thus reducesemployment it has adverse consequencesClearly the poverty impact depends notonly on employment but also on where thedifferent wage levels lie relative to thepoverty line29

The critical issues then are the effects oftrade liberalization on the demand forlabormdashthe shock to the labor marketmdashandthe elasticity of labor supplymdashwhere theeconomy actually lies between the two polarextremes of vertical and horizontal supplycurves of labor If we recognize several class-es of labor these factors are likely to varyacross classes In addition empirical analysisshould recognize that adjustment takes timeso that short-run effects may differ fromlong-run ones (see for example SebastianEdwards 1988 and Chris Milner and Peter

Wright 1998) allow for non-traded goods andtheir prices in the analysis and distinguishbetween formal and informal labor marketsIt is also important to remember that factormarket effects depend wholly on tradereform first changing output which in turndepends on the structure of goods marketsand on the substitutability between importsexports and locally produced varieties (RodFalvey 1999)

Smith et al (2002) found that virtually allof the effects of the Asian crisis on Indonesiaover 1997ndash98 were felt in real wages withemployment remaining constant The realwages of skilled workers appeared to fallequally in both rural urban areas (34 percentfor males over just one year)mdashsuggesting afairly integrated marketmdashwhile among theunskilled urban workers suffered more thanrural ones (ndash 42 percent compared with ndash 32 percent) The real incomes of the self-employed fell in line with wages except forrural males where amazingly theyremained roughly constant The latter essen-tially reflects the stability of the prices oftradable staples (especially rice) noted abovewhen we discussed prices

There are many studies of the labor mar-ket effects of trade reform but most ofthem presume segmented markets and dealonly with the manufacturing sector and somake it difficult to draw conclusions aboutoverall poverty Moreover they rely onintersectoral or interfirm variations to iden-tify effects and so have little to say on gen-eral equilibrium effects (which one wouldexpect to be smaller than partial equilibri-um ones) Nonetheless the most strikingcommon feature of these studies is thesmallness of the wage and employmenteffects they find whilst the most striking dif-ference is the variety of explanationsoffered for it

An early discussion of trade and employ-ment was by Krueger (1983) who arguedthat developing-country trade liberalizationshould boost labor-intensive output andincrease employment Her case studies


showed that developing countriesrsquo manufac-tured exports were indeed labor-intensivebut that the employment effects of liberaltrade policies were generally rather mutedCalling for more research she tentativelyconcluded that this was because of otherdistortions in factor markets

More recent exercises have had more lib-eralizations to consider and better data andalthough they show mixed results the gener-al tendency is still towards small effects Forexample Martin Rama (1994) applying amodel of monopolistic competition to a panelof 39 sectors in Uruguay over 1979ndash86found a significant positive relationshipbetween protection and employment in man-ufacturing but no significant effects on realwages Janet Currie and Ann Harrison (1997)find that employment responses in Moroccodepended heavily on firm characteristics(especially public versus private ownership)Where profit margins were slim initially theliberalization of manufacturing led to jobloss but in most firms it led to lower marginsand almost no change in output or employ-ment Thus trade liberalization here proba-bly raised efficiency and aggregate welfare byaddressing goods market imperfections

Ana Revenga (1997) on the other handattributed the low employment effects ofMexican trade reforms to factorndashmarketimperfections (She found no effect onemployment from tariff cuts and a statistical-ly significant but small negative response toquota abolition) She did however find realwages falling in manufacturing (3ndash4 percenton average 10ndash14 percent in some sectors)which she attributed to the erosion of rentswith high rates of unionisation formal laborhad been able to appropriate some of therents created by trade barriers Again thereare likely to have been overall poverty bene-fits from this element of trade liberalizationfor few formal sector workers are likely tohave been pushed into poverty by such wagecuts while the erosion of rents will presum-ably have benefited consumers Similarlysmall employment effects elsewhere in Latin

30 Similarly trade liberalization and trade growth havevastly increased female employment in clothing inBangladesh

America are reported by for exampleGustavo Marquez and Carmen Pageacutes-Serra(1998) for Latin America and the Caribbeanin general James Levinsohn (1999) forChile and Mauriacutecio Moreira and SheilaNajberg (2000) for Brazil

Milner and Wright (1998) explore indus-try level data on Mauritius and find a slight-ly more positive response to liberalizationAfter an initially adverse wage effect theyfind fairly strong long-run growth in wagesand employment in the exportables sector(mainly of female labor producingclothes)30 But they also find surprisinglygrowth in the import-competing sectorwhich they attribute to Mauritiusrsquo overallstrong economic performance

Deepak Lal (1986) applies a modifiedStolper-Samuelson Theorem directly to thePhilippines Distinguishing only tradableand nontradable goods but allowing forflows of factors between sectors he explainsthe periodic declines in real wages in termsof real exchange rate changes As the relativeprice of nontradables (the labor-intensivesector) falls real wages decline

Winters (2000b) suggests similarly thatthe real exchange rate depreciation couldexplain the simultaneous increase in formaland decrease in informal manufacturingemployment in India in the 1990s the non-traded sector being ldquoinformal intensiverdquoFrom a poverty perspective an importantquestion is what happened to those who losttheir informal manufacturing jobs If theycould move back into agriculture or otherinformal services at approximately the samewage the answer would be not much andthe increase in observed formal employmentat higher wages would be poverty alleviatingIf on the other hand the loss of an informalmanufacturing job signals a descent (deeper)into poverty the net effects of these changeswould be negative for poverty alleviation


31 Among researchers finding an increased skills gap inLatin America are Feenstra and Hanson (1995) GordonHanson and Ann Harrison (1999) Zadia Feliciano (1996)and Michael Cragg and Mario Epelbaum (1996) forMexico Harald Beyer Patricio Rojas and Rodrigo Vergara(1999) for Chile and Robbins and Grindling (1999) forCosta Rica

Unfortunately we just do not know althoughgiven that urban informal wages averageonly just over the Indian poverty line for afamily of five we should not be too sanguine

Wage Inequality Recently at least as muchattention has been paid to relative wagesbetween skilled and unskilled labormdashthe so-called skills gapmdashas to employment andwages generally This is frequently linked toincome inequality and thence casually andless justifiably to poverty The debate is per-tinent to this paper however because awidening skills gap could reflect fallingunskilled wages (relative to the no-reformcounterfactual) and because many commen-tators have interpreted the widening skill gapin developing countries as a refutation of thefactor-abundance model of trade and incomedistribution in which skilled and unskilledlabor are separate factors

Most of the recent evidence concernsLatin America and as argued by AdrianWood (1997) Latin Americarsquos increasingskills gap contrasts with the earlier experi-ence of East Asia where liberalization wasaccompanied by a narrowing of the gap31

Wood considers various explanations for thisdifference Some concern the different tim-ing of the liberalizations the entry of largelabor abundant countries into world markets(especially China) in the 1980s and 1990swhich meant that Latin America was notactually unskilled labor abundant when itopened up the burst of skill-biased technicalprogress in the 1980s and 1990s the greaterinternational mobility of highly skilled laborand capital in the later period and the effectof the debt crisis

A further issue of timing was the growth ofoutsourcing over the 1990s Industrial coun-try firms operating abroad may not wish to

use the lowest-grade labor in host develop-ing countries thus while the labor they use is unskilled by say US standards it is relatively skilled by local standardsmdashseeRobert Feenstra and Gordon Hanson (1995)on Mexico Donald Robbins and T HGrindling (1999) adduce a similar biastowards skilled workers in Costa Ricarsquos liber-alization They identify the bias using fairlyrobust nonparametric methods and thenoffer some regression evidence that it is dueto the increasing stock of imported machin-ery in the economy If liberalization encour-ages higher capital goods imports and ifthese embody recent biases towards skilledlabor use then liberalization could widenthe skills gap

These latter explanations warn us thatwithin developing countries it is not guaran-teed that it is the least-skilled workers andthus the most likely to be poor who are themost intensively used factor in the produc-tion of exportable goods For example thewages of workers with completed primaryeducation may increase with trade liberaliza-tion while those of illiterate workers maynot One of the reasons that agricultural lib-eralization is so important for poverty allevi-ation is that for this sector one can bereasonably confident that very-low-skilledworkers in rural areas will benefit throughthe production responses

Other explanations for the skills-gap aremore structural For example from Woodthe Latin American countries are relativelyabundant in natural resources whereas EastAsian countries were relatively abundant in(initially) unskilled labor Latin Americanliberalization involved mainly import liberal-ization while East Asian liberalization alsoinvolved providing incentives to exportersand the vast expansion of basic education inEast Asia increased productivity and also therelative supply of skilled labor

In addition the initial structure of tariffsin many Latin American countries protectedunskilled workers so it is hardly surprisingthat liberalization reduced their wages see


Gordon Hanson and Ann Harrison (1999)on Mexico And it may take time for marketsto clear Chilersquos liberalizations were associat-ed with worsening inequality over the 1980sbut inequality measures have now returnedto pre-reform levelsmdashand at vastly higheraverage income levels and lower povertylevels Francisco Ferreira and JulieLitchfield (1999) Finally very recent evi-dence suggests that the skills gap stabilizedor even reversed over the 1990s but with nodiscernible reduction in the speed of tradeliberalization

Among the relatively small amount ofrecent evidence on countries outside LatinAmerica Milner and Wright (1998) find thattrade liberalization in Mauritius increasedthe relative wages for female and unskilledlabor in the exportables sector

One potentially important dimension ofthe skills gap is whether openness stimulatesdeveloping countriesrsquo demand for educationand acquisition of human capital SimpleStolper-Samuelson theory suggests that thereturns to skill will decline and with them theincentives for education see Adrian Woodand Cristobal Ridao-Cano (1999) who findsome suggestion of such a problem empiri-cally The alternative analyses just discussedhowever have quite the opposite implication

This section has shown that the effects oftrade liberalization on wages and employ-ment are complex to predict in detailAlthough liberalization will often raise thedemand for relatively unskilled workers inmany developing countries and so on aver-age be poverty alleviating there will also beimportant exceptions eg possibly wherenatural resources dominate exports andwhere out-sourcing is importantmdashas well ascases where segmented import-competingsectors suffer adverse shocks

Computable General EquilibriumModelling One response to the complexitiesof using econometric methods to track com-modity price shocks resulting from tradepolicy through factor prices to poor house-holds has been to use computable general

32 Neil McCulloch L Alan Winters and Xavier Cirera(2001 ch 5) and Jeffrey Reimer (2002) discuss CGE modelling and poverty in more detail

equilibrium (CGE) models These areessentially numerical manifestations of theo-retical systems and thus lay out precisely andquantify many of the steps discussed in ourframework They are not strictly empirical(which classically means ldquowithout theoryrdquo)but if they are carefully constructed andgrounded in real data they can provide use-ful insight The danger is that they dependcritically on parameters and functions whichcan barely be tested one-by-one let alone incombination CGE models are indeedalmost the only tool available for predictingthe effects of future trade policy changesbut care must be taken not to fall for theirspurious precision32

One approach is to use a CGE modelwith a single lsquorepresentativersquo consumer togenerate changes in commodity and factorprices from a trade liberalization experi-ment and then apply these to householddata to calculate the poverty impacts This is akin to the first-order approximation exercises described in the introduction tosection 4 above Elena IanchovichinaAlessandro Nicita and Isidro Soloaga(2001) take this approach they simulate set-ting all Mexicorsquos tariffs to zero and devoteconsiderable effort to matching the incomeand expenditure classes of the householdsurvey data to those of the CGE model inorder to apply the estimated price changesto each household in the survey The datashow that changes in the cost of living varyby income level (because consumption bas-kets vary) and the authors estimate thatcombining price and income changes allhouseholds would gain from trade liberal-ization with larger proportionate changesfor poorer households

Thomas W Hertel et al (2001) distinguishfive classes of household according to theirpredominant source of income and disag-gregate within each class by twenty income

levels They estimate a very general con-sumption model and combining the incomeand expenditure profiles with a CGE modelthey explore the effects of possible liberal-ization on households clustered around theassumed poverty line They examine theeffects of a multilateral liberalization onseven countries four suggest reductions inpoverty (Indonesia Philippines Ugandaand Zambia) and three increases (BrazilChile and Thailand)

A second approach is to embed thehousehold disaggregation within the CGEmodel This has the advantage of beinginternally consistent Also the behavioralchanges at the household level which areignored above are both modelled and fedback into the macroeconomic solution Anearly approach of this sort is by FranccediloisBourguignon William Branson and Jaimede Melo (1991) and more recent examplesinclude Denis Cogneau and Anne-SophieRobillard (2000) and Glenn HarrisonThomas Rutherford and David Tarr (2003)Cogneau and Robillard estimate a house-hold model from survey data on Madagascarto explain labor income decisions andembed it in a three-sector CGE modelAmong their simulations is one of anincrease in the world price of export cropswhich reduces rural poverty significantlybut increases urban poverty slightly JohnCockburn (2001) uses a similar approachfor Nepal and concludes that because liber-alization mainly reduces agricultural pricesit benefits the urban poor and harms therural poor

All of these simulation exercises areinstructive and should be important inputsinto the policy-making process In particularthey help to identify household types thatare vulnerable even when trade liberaliza-tions are beneficial on average They are allpredictions however and are complemen-tary to not substitutes for genuine empiri-cal studies on ex post data Only the latterpermit us to test our models and reallyunderstand the world as it actually is

52 Is Transitional UnemploymentConcentrated on the Poor

There is always a possibility of temporaryunemployment as a liberalising economyadjusts to new prices Even in cases wherethe overall aggregate effect is small changemay still be taking place at a more disaggre-gated level This adjustment process will beassociated with some transitional unemploy-ment as workers lose one job and requiretime to find another In Chile for instanceSebastian Edwards and Alejandro CoxEdwards (1996) find a positive associationbetween the degree of liberalization a sectorexperienced and the extent of layoffs thesectors experiencing the greatest liberaliza-tion were also the ones where the durationof unemployment was longest

There is surprisingly little evidence on thenature and extent of transitional unemploy-ment and even less on its incidence amongthe poor A multi-country study of trade lib-eralization before 1985 (MichaelyPapageorgiou and Choksi 1991) argued thatexperiences varied from case to case butthat on the whole transitional unemploy-ment was quite small In a survey of morethan fifty studies of the adjustment costs oftrade liberalization in the manufacturing sec-tor Steven Matusz and David Tarr (1999)argue that the adjustment costs associatedwith transitional unemployment are not highand that unemployment durations are gener-ally quite short Indeed in some casesemployment appears to increase more or lessinstantlymdashas for example Ann Harrison andAna Revenga (1998) report for Costa RicaPeru and Uruguay Overall however there istoo little evidence to form a general view onmanufacturing employment and still less onwhether similar points apply to agriculture orservices or indeed outside the formal sector

Moreover the available studies do notanswer the question of whether those laidoff following trade liberalization are dispro-portionately poor To answer this wouldrequire information on the characteristics of



those losing their jobs including their re-employability Enterprise surveys report theresponses of firms to trade liberalization buttypically give little information on the char-acteristics of their employees while house-hold surveys which do provide thisinformation cannot easily be matched toenterprises The latter do however gener-ally suggest that in many low-income coun-tries very few of the poorest are employeesin the formal manufacturing sector

Evidence is available on the relationshipbetween public sector job loss and povertyAlthough this job loss is not a direct conse-quence of trade liberalization it does dealwith transitional unemployment resultingfrom a shock to the formal sector and so mayinform us also about the effects of trade lib-eralization Thus for example in Ecuadoremployees dismissed from the Central Bankearned on average only 55 percent of theirprevious salary fifteen months later (MartinRama and Donna MacIsaac 1999) Evidencefrom Zambia (Neil McCulloch RobertBaulch and Milasoa Cherel-Robson 2001)suggests that job shedding occurred in thepublic sector at the lower end of the earn-ings distribution although it does not showdefinitively whether these people were poornor what happened to them following theirretrenchment In Ghana Stephen Younger(1996) finds that most retrenched civil ser-vants were able to find new work but at sub-stantially lower income levels suggesting anincrease in poverty although the income lev-els and incidence of poverty among theirhouseholds after retrenchment were notsubstantially different from the average forthe whole country

Thus retrenchment from the public sec-tor typically does lead to transitional unem-ployment (which may be quite long lastingas seen in the case of Guinea where theaverage duration of unemployment was twoyears Bradford Mills and David Sahn 1995)andor lower income levels However thereis very little evidence on whether transi-tional unemployment is disproportionately

concentrated among the poor or onwhether this loss of employment (even iftemporary) is an important cause of pov-erty And we do know that in low-incomecountries the majority of the poor are notlikely to be directly affected by retrench-ment because they are not working in theformal sector in the first place (althoughsome may be indirectly affected by loss oftransfers or remittances)

It is likely that adjustment costs will begreater the more protected the sector wasoriginally and the greater the shock In locallabor markets large losses of employmentcan have (negative) multiplier effects onincome and markets can become dysfunc-tional because even normal turn-over ceasesas incumbents dare not resign for fear of notfinding a new job Thus major reformsmdashegtransition or concentrated reforms such asclosing the only plant in a townmdashseem like-ly to generate larger and longer-lived transi-tional losses through unemployment thanmore diffuse reforms On the other hand itis precisely the sectors with highest protec-tion or the economies with most widespreaddistortion that offer the greatest long-runreturns to reform Martin Rama and KinnonScott (1999) analyse the effects of retrench-ing the only plant in a series of one-planttowns in Kazakhstan They estimate that fora reduction in the employment in the plantequal to 1 percent of the local labor forcelabor income in the town falls by 15 per-cent This is essentially a Keynesian multi-plier effect The hysteresis of the labormarket would serve to deepen and prolong itfurther

6 Government Revenue and Spending

The final link from trade liberalization topoverty is via the government accountTrade reforms potentially reduce revenuesand especially for low income countries thiscould unbalance the government budgetThis section considers first how large therevenue losses typically are and second


33 This reliance may reflect various factors includingdifficulties in administering a tax system effectively and therelatively small share of the formal sector (Ebrill Stotskyand Gropp 1999)

34 The revenue maximizing tariff will be t=(es-ed)-es(1+ed) where t is the ad valorem tariff rate es is the elas-ticity of import supply and ed is the elasticity of importdemand (Ebrill Stotsky and Gropp 1999)

whether adjustment to declines in tariff rev-enues when they occur typically hit the pooreither via replacement taxation or expendi-ture reductions We make the point that theextent to which such policy changes impacton the poor is essentially a political decisionWhile recognizing the administrative diffi-culties of raising alternative revenues or cut-ting expenditures more generally it is notinevitable that the burden falls on the poor

61 Does Liberalization Actually CutGovernment Revenue

A key concern about trade liberalization isthat it will reduce government revenue Theshare of trade taxes in total revenue is nega-tively associated with the level of economicdevelopment with many low-income coun-tries earning half or more of their revenuefrom trade taxes33 Neil McCulloch L AlanWinters and Xavier Cirera (2001) show thatof the 96 countries for which these data areavailable over 1994ndash96 58 report a shareexceeding 5 percent with an unweightedaverage of 203 percent and sixteen coun-tries report a share of over 25 percent

Neither theory nor evidence suggests asimple link between trade reform and rev-enues however Theoretically a number offactors are important (David Greenaway andChris Milner 1991) In the case of tariffsrevenue will increase with liberalization ifthe initial tariff level exceeds its revenuemaximising level34 It can also increase in themany instances where reforms involve thereplacement of quantitative restrictions bytariffs provided as is usual that the govern-ment did not previously capture the quotarent associated with the restriction RodFalvey (1994) shows that a welfare-improv-ing revenue-enhancing (WIRE) tariff

35 The compensated radial elasticity of good j is definedas the proportionate reduction in purchases of product jwith respect to a common proportionate increase in alltaxes holding utility constantmdashsee George Fane (1991)

reform will always exist unless the compen-sated radial elasticities of all goods are thesame (which is highly unlikely in practicegiven that tariffs reflect protective as well asrevenue-raising motives)35 Howeverdesigning such a package is well beyondmost governments (Sebastian Edwards1997) especially since short and long-runresponses may differ (David Bevan 2000)And of course once the condition is approx-imately met reductions in tariff rates will cut revenues

Improvements in collection efficiency canalso increase revenue Official ad valoremtariff rates are often substantially higherthan the ratio of tariff revenue to import val-ues (collected rates) Lant Pritchett andGeeta Sethi (1994) find for a sample ofdeveloping countries that official rates andcollected rates are only weakly correlatedand that the divergence between themincreases with the level of the official tariffEvasion and exemptions are the key factorshere and tightening them up can yield sub-stantial revenue gains For instance accord-ing to official estimates the revenueforegone via tariff exemptions in Tanzania in1986 was almost equivalent to total revenuecollected (Greenaway and Milner 1991)Trade reforms that simplify tariff structuresalso often have favourable revenue effectsby simplifying administration and reducingopportunities and incentives for evasion(which of course are also reduced by lowerlevels of tariffs) This is one of the mainpractical motivations behind proposals foruniform tariff rates

Turning to the empirical evidenceGreenaway and Milner (1991) focus on fivecountries which received World BankStructural Adjustment Loans (SALs) requir-ing important trade policy reforms Three ofthese countries experienced revenueenhancement (Mauritius Kenya and


36 The revenue enhancing cases also involved signifi-cant changes in tariff exemption arrangements but this wasalso at least formally true of the revenue depleting cases

Jamaica) and two revenue depletion(Morocco and Cocircte drsquoIvoire) The authorsidentify a number of clues as to why Firstrevenue tends to fall if the existing tariffs arebelow the revenue maximising rate as inMorocco and Cocircte drsquoIvoire but not in theother three countries Second in all the rev-enue enhancing cases some kind of tempo-rary tariff surcharge was introduced whenquantitative restrictions were removed in therevenue depleting cases no such taxes wereintroduced Third the induced changes in theimportexport base appear to have beenimportant particularly in the case ofMauritius And finally of the two cases whereexport incentives were planned the Mauritianreforms were successful because they wereadministratively simple funded by the intro-duction of other nontrade taxes and theexchange rate was allowed to depreciate Inthe other casemdashCocircte drsquoIvoiremdashnone of theseconditions applied and the reforms failed36

Liam Ebrill Janet Stotsky and ReintGropp (1999) draw a similar set of lessonsfrom detailed studies of trade liberalization inArgentina Malawi Morocco the PhilippinesPoland and Senegal Furthermore in a cross-country panel regression they found thatcountries that reduced tariffs over the period1980ndash92 did not have significantly lower rev-enue from import tariffs as a proportion ofGDP than those that did not On the otherhand those which dismantled quantitativerestrictions did have significantly higher rev-enue from import tariffs as a proportion ofGDP than those that did not

Detailed individual country studies bearall this out Graham Glenday (2000) forexample examines the impact of Kenyan lib-eralization between 1989ndash99 on import dutyrevenues The simple average import dutyrate was approximately halved over this peri-od and import licensing requirements andforeign exchange controls were abolished

37 CGE models have also been used to explore theimplication of trade reform for revenue stability (egChristina Dawkins and John Whalley 1997)

However duty as a share of imports rose asdid import duty revenues as a proportion ofGDP The expansion of the revenue baseappears to have been an important factorhere along with tighter exemption manage-ment increased duty rates on oil productsand certain agricultural commodities and ashift in imports towards high duty classesHowever improvements in customs admin-istration and the introduction of a preship-ment inspection program could also haveaccounted for some of the improvement

62 Do Falling Tariff Revenues Hurt thePoor

The previous section suggests that tradereforms need not have revenue costsHowever designing revenue-neutral pack-ages is complex and liable to error and even-tually as tariffs approach zero so too mustrevenue Hence this section briefly consid-ers responses to falling tariff revenues Froma trade policy perspective such considera-tions are central for fiscal crises are one ofthe strongest correlates of the reversal oftrade liberalization

The first response is to seek alternativenon-trade sources of revenue Clearly theimpact of replacement taxes upon the poordepends on the choice of fiscal instrumentand in general there is no economic reasonwhy the burden should fall on the poorestNonetheless both the evidence and commonsense suggest caution particularly wheresimple low cost trade tax instruments arereplaced by more complex and higher costdomestic ones (See World Bank 1988 on thecostyield ratios of different taxes) SomeCGE models suggest that the welfare signifi-cance of tariff revenue losses depends on thenature of the replacement taxes introduced(Denise Konan and Keith Maskus 2000 andHarrison Rutherford and Tarr 2002)37 Butthere is little ex post evidence on these issues


38 Tony Killick (1995) provides an excellent shortreview of the findings of such work Howard White (1997)provides a comprehensive review of the literature whileLyn Squire (1991) and Rolph van der Hoeven (1996) pro-vide reviews of the linkages between adjustment andpoverty in the 1980s

The alternative response to a fall in rev-enue is to cut public expenditure There is alarge literature describing the effects ofstructural adjustment in developing coun-tries on poverty and the impact felt via pub-lic expenditure and social sector expenditurein particular38 But the evidence for adjust-ment resulting in cuts in social expenditureis mixed at best (Jacques van der Gaag 1991David Sahn 1992) While there have beenmajor declines in social expenditure in somecountries the consensus is that social expen-ditures have been relatively protected espe-cially compared with capital expendituresVan der Gaag (1991) examines spending inthe three years before and after donorfinanced adjustment programmes beganand finds no pattern of increase or decreasein real levels of total and social sector expen-ditures Similarly David Sahn Paul Doroshand Stephen Younger (1997) argue thatexcept in a very few cases those declines insocial expenditure that have occurred havenot been ldquopart of an extended attempt tobalance the governmentrsquos fiscal positionrdquo

The East Asian crisismdasha shock far greaterthan any trade shockmdashalso provides evi-dence that with political will and carefulplanning social sector spending can be pro-tected World Bank (2001) reports Korearsquoslarge expansion of social spending in the faceof the crisis while Lisa Cameron (2002)reports the success of Indonesiarsquos targetedscholarships at keeping up school enrol-ments in the face of declining incomes

There is strong evidence that socialexpenditures in many developing countriesare not well targeted to the poor (FlorenciaCastro-Leal et al 1999) and Peter Lanjouwand Martin Ravallion (1999) show how someschooling and anti-poverty programmes inIndia are captured by the nonpoor

However this does not necessarily meanthat cuts on social expenditures have lessimpact upon the poor in fact conventionalmethods for assessing benefit incidence canunderestimate the gains to the poor fromhigher public outlays and underestimate thelosses from cuts (Lanjouw and Ravallion1999) Thus there are latent dangers even inthe absence of direct evidence

In summary there is no direct evidencerelating trade liberalization to reductions insocial spending However the evidence fromother circumstances suggests that despitethe dangers reductions in public expendi-tures of importance to the poor are notinevitable even if trade liberalization doesresult in losses of revenue Alternativesources of revenue are not necessarily easyto mobilize but they are generally availableand the evidence suggests that with politicalwill social spending and especially that ori-ented towards the poor may be substantiallyshielded Moreover if liberalization assistseconomic growth this should become easierthan it was in the face of decline and crisisNonetheless care needs to be taken if tradeliberalization is going to be pursued in apolitical context in which replacement taxa-tion is likely to be regressive or where socialexpenditures are likely to be cut

7 Conclusions

The evidence surveyed in this paperdemonstrates that there can be no simplegeneral conclusion about the relationshipbetween trade liberalization and povertyTheory provides a strong presumption thattrade liberalization will be poverty-alleviat-ing in the long run and on average Theempirical evidence broadly supports thisview and in particular lends no support tothe position that trade liberalization general-ly has an adverse impact Equally howeverit does not assert that trade policy is alwaysamong the most important determinants ofpoverty reduction or that the static andmicro-economic effects of liberalization will


39 McCulloch Winters and Cirera (2001) give a thor-ough discussion of the practical dimensions of such pre-dictions

always be beneficial for the poor Trade lib-eralization necessarily implies distributionalchanges it may well reduce the well-beingof some people (at least in the short term)and some of these may be poor

Thus while there are many causes for opti-mism that trade liberalization will contributepositively to poverty reduction the ultimateoutcome depends on many factors includingits starting point the precise trade reformmeasures undertaken who the poor are andhow they sustain themselves Even withinmost of the individual causal channels thatwe have identified the outcome will varyfrom case to case Lest this seem toodepressing however let us be clear that weare not saying that these things are unknow-able They are substantially predictableusing the framework and evidence laid outhere and the largest impacts may be rela-tively easy to predict provided that analystsgarner the basic information required39

A number of key points emerge from thisreview Although there remains a residualambiguity about the links between trade andgrowth there is strong evidence for the ben-eficial impact of trade liberalization on pro-ductivity Concerns that trade liberalizationhas generally adverse effects on the employ-ment or wages of poor people or on govern-ment spending on the poor due to fallingfiscal revenues are not well founded eventhough specific instances of each of theseproblems can be identified The analysis alsohighlights the importance of local institu-tions in determining the price effects of lib-eralization notably the transmission ofborder price changes to local levels

But there is also a surprising number ofgaps in our knowledge about trade liberaliza-tion and poverty and important questions forfurther research Despite the fact that manyof the concerns about trade liberalization arefocused on those who become unemployed

as a result of it we know very little about thetransitional unemployment that results fromthis There is also relatively little empiricalevidence about the effects of trade liberal-ization as distinct from other factors onpoverty dynamics at the household level andon how households respond to adverseshocks or potential opportunities In addi-tion while the importance of institutions indetermining price transmission has beenstressed there is little information about themanner in which border price changes aretransmitted to local levels and how this maydiffer between the poor and non-poorFinally much analysis is based on a welfaremodel which assumes small price changesbut as stressed in the article many of the bigwelfare effects come from discrete changes(market creation and destruction) Again welack empirical evidence on how this happensand the role that trade liberalization plays

Although policy has not been our princi-pal focus in this paper we make threepoints First we have repeatedly stressedthat the impact of trade liberalization onpoverty will depend on the environment inwhich it is carried out including the policiesthat accompany it Trade liberalizationshould not be seen in isolation and addi-tional policies will sometimes be needed toenhance its impact including on povertyBut this is emphatically not to say that com-plementary policies are always necessary toenable trade liberalization to have poverty-reducing effectsmdashagain it depends oncountry context

Second there is quite a lot of evidencethat poorer households may be less able thanricher ones to protect themselves againstadverse effects or to take advantage of posi-tive opportunities created by policy reformIn such circumstances there will be animportant role for complementary policiesto accompany trade reform both tostrengthen social protection for losers and toenhance the ability of poorer households toexploit potentially beneficial changes Suchpolicies are likely to be desirable even in the

absence of trade reforms but they mightbecome more important if trade reforms dohave important adjustment effects on thepoor or near poor Of course trade liberaliza-tion may be beneficial for the poor even inthe absence of such complementary policiesand so the lack of such measures is notalways a good argument for postponing tradereforms But clearly it is preferable for thereto be a careful analysis of each countryrsquos cir-cumstances so that appropriate lsquoflankingrsquomechanisms can be devised to accompanythe liberalization

Finally although trade liberalization maynot be the most powerful or direct mecha-nism for addressing poverty in a country itis one of the easiest to change While manypro-poor policies are administratively com-plex and expensive to implement the mostimportant bits of trade reformmdashtariffreductions and uniformity and the abolitionof nontariff barriersmdashare easy to do and willfrequently save resources Thus tradereform may be one of the most cost effec-tive anti-poverty policies available to gov-ernments Certainly the evidence suggeststhat with care trade liberalization can bean important component of a ldquopro-poorrdquodevelopment strategy

REFERENCES

Ades Alberto and Rafael Di Tella 1997 ldquoNationalChampions and Corruption Some UnpleasantInterventionist Arithmeticrdquo Econ J 107 pp1023ndash42

mdashmdashmdash 1999 ldquoRents Competition and CorruptionrdquoAmer Econ Rev 894 pp 982ndash93

Aghion Philippe Eve Caroli and Cecilia Garcia-Pentildealosa 1999 ldquoInequality and Economic GrowthThe Perspective of the New Growth Theoriesrdquo JEcon Lit 374 pp 1615ndash60

Ahluwalia Montek S 1976 ldquoInequality Poverty andDevelopmentrdquo J Devel Econ 3 pp 307ndash42

Anderson James E and Peter J Neary 1996 ldquoA NewApproach to Evaluating Trade Policyrdquo Rev EconStud 63 pp 107ndash25

Atkinson Anthony B and Andrea Brandolini 2001ldquoPromise and Pitfalls in the Use of lsquoSecondaryrsquo Data-Sets Income Inequality in OECD Countries as aCase Studyrdquo J Econ Lit 393 pp771ndash800

Aw BeeYan Sukkyun Chung and Mark J Roberts1999 ldquoProductivity and Turnover in the ExportMarket Micro Evidence from Taiwan and SouthKoreardquo NBER

Badiane Ousmane 1997 ldquoMarket Integration and theLong Run Adjustment of Local Markets to Changesin Trade and Exchange Rate Regimes Options forMarket Reform and Promotion Policiesrdquo IFPRI dis-cus paper 11

Badiane Ousmane 1998 ldquoMarketing Policy Reformand Competitiveness Why Integration andArbitrage Costs Matterrdquo IFPRI discus paper 22

Badiane Ousmane and Mylegravene Kherallah 1999ldquoMarket Liberalisation and the Poorrdquo Quart J IntAgr 38 pp 341ndash58

Baldwin Robert E 2002 ldquoOpenness and GrowthWhatrsquos the Empirical Relationshiprdquo in Conferenceheld May 24-25 2002 International Seminar onInternational Trade in Challenges to GlobalizationAnalyzing the Economics Robert E Baldwin and LAlan Winters eds NBER

Banerjee Abhijit V and Andrew F Newman 1994ldquoPoverty Incentives and Developmentrdquo Amer EconRev 842 pp 211ndash15

Barrett Christopher B and Paul A Dorosh 1996ldquoFarmersrsquo welfare and changing food prices Non-Parametric Evidence from Rice in MadagascarrdquoAmer J Agr Econ 78 pp 656ndash69

Basu Parantap and Darryl McLeod 1992 ldquoTerms ofTrade Fluctuations and Economic Growth inDeveloping Economiesrdquo J Devel Econ 37 pp89ndash110

Baulch Bob 1997 ldquoTransfer Costs Spatial Arbitrageand Testing for Food Market Integrationrdquo Amer JAgr Econ 79 2 pp 477ndash87

Benjamin Dwayne 1992 ldquoHousehold CompositionLabor Markets and Labor Demand Testing forSeparation in Agricultural Household ModelsrdquoEconometrica 602 pp 287ndash322

Besley Tim 1995 ldquoNonmarket Institutions for Creditand Risk Sharing in Low-Income Countriesrdquo JEcon Perspect 93 pp 115ndash27

Bernard Andrew and Charles Jones 1996ldquoProductivity Across Industries and Countries TimeSeries Theory and Evidencerdquo Rev Econ Statist781 pp 135ndash46

Bevan David 2000 ldquoFiscal Implications of TradeLiberalizationrdquo in Trade and Fiscal Adjustment inAfrica D Bevan et al eds NY St Martinrsquos Press

Bevan David Paul Collier and Jan W Gunning 1990ldquoEconomic Policy in Countries Prone to TemporaryTrade Shocksrdquo in Public Policy and EconomicDevelopment M F G Scott and D Lal eds OxfordClarendon Press pp 36ndash53

Beyer Harald Patricio Rojas and Rodrigo Vergara1999 ldquoTrade Liberalization and Wage Inequalityrdquo JDevel Econ 591 pp 103ndash23

Bigsten Arne and Paul Collier 1995 ldquoLinkages fromAgricultural Growth in Kenyardquo in Agriculture on theRoad to Industrialization J W Mellor edBaltimore John Hopkins U Press

Bigsten Arne Paul Collier Stefan Dercon MarcelFafchamps B Gauthier J W Gunning JHabarurema R Oostendorp C Pattillo MSoderbom F Teal and A Zeufack 2000 ldquoExportsand Firm Level Efficiency in African ManufacturingrdquoCentre for Study of African Economies work paper200016 pp 1ndash23 U Oxford


Bond Marian 1983 ldquoAgricultural Responses to Pricesin Sub-Saharan African Countriesrdquo IMF Staff Papers304 pp 703ndash26

Booth David F Lugngira P Masanja A Mvungi RMwaipopo J Mwami and A Redmayne 1993Social Economic and Cultural Change inContemporary Tanzania A People Oriented FocusStockholm Swedish Int Devel Authority

Bourguignon Franccedilois William H Branson and JaimeDe Melo 1992 ldquoAdjustment and Income DistributionA Micro-Macro Model for Counterfactual Analysisrdquo JDevel Econ 38 pp 17ndash39

Brock William A and Steven N Durlauf 2001ldquoGrowth Empirics and Realityrdquo World Bank EconRev 152 pp 229ndash72

Bruno Michael Martin Ravallion and Lyn Squire1998 ldquoEquity and Growth in Developing CountriesOld and New Perspectives on the Policy Issuerdquo inIncome Distribution and High-Quality Growth VTanzi and K Chu eds Cambridge MA MIT Press

Cameron Lisa A 2002 ldquoDid Social Safety NetScholarships Reduce Drop-Out Rates during theIndonesian Economic Crisisrdquo work paper 2800World Bank Washington DC

Castro-Leal Florencia Julia Dayton Lionel Demeryand Kalpana Mehra 1999 ldquoPublic Social Spendingin Africa Do the Poor Benefitrdquo World Bank ResObserver 141 pp 49ndash72

Chambers Robert 1989 ldquoEditorial IntroductionVulnerability Coping and Policyrdquo IDS Bulletin 202pp 1ndash7

Cockburn John 2001 ldquoTrade Liberalization andPoverty in Nepal A Computable GeneralEquilibrium Micro Simulation Analysisrdquo CREFAwork paper (01-18)

Coe David T Elhanan Helpman and Alexander WHoffmaister 1997 ldquoNorth-South RampD SpilloversrdquoEcon J 107440 pp 134ndash49

Cogneau Denis and Anne-Sophie Robilliard 2000ldquoGrowth Distribution and Poverty in MadagascarLearning from a Microsimulation Model in aGeneral Equilibrium Frameworkrdquo Washington DCIFPRI Trade and Macroecon Division

Cragg Michael and Mario Epelbaum 1996 ldquoWhy HasWage Dispersion Grown in Mexico Is It theIncidence of Reforms or the Growing Demand forSkillsrdquo J Devel Econ 511 pp 99ndash116

Currie Janet and Ann E Harrison 1997 ldquoSharing theCosts The Impact of Trade Reform on Capital andLabor in Moroccordquo J Lab Econ 153 pp S44ndash71

Datt Gaurav and Martin Ravallion 1998 ldquoFarmProductivity and Rural Poverty in Indiardquo J DevelStud 344 pp 62ndash85

Dawkins Christina and John Whalley 1997 ldquoTaxStructure and Revenue Instability Under ExternalShocks Some General Equilibrium Calculations forCocircte drsquoIvoirerdquo Rev Devel Econ 11 pp 23ndash33

Deaton Angus 1988 ldquoQuantity Quality and theSpatial Variation of Pricerdquo Amer Econ Rev 783pp 418ndash30

mdashmdashmdash 1997 The Analysis of Household Surveys AMicroeconometric Approach to Development PolicyBaltimore and London John Hopkins U Press forWorld Bank


Deininger Klaus and Pedro Olinto 2000 ldquoAssetDistribution Inequality and Growthrdquo World BankPolicy Research work paper 2375

Deininger Klaus and Lyn Squire 1996 ldquoA New DataSet Measuring Income Inequalityrdquo World BankEcon Rev 103 pp 565ndash91

de Janvry Alain Marcel Fafchamps and ElisabethSadoulet 1991 ldquoPeasant Household Behaviour withMissing Markets Some Paradoxes Explainedrdquo EconJ 101 pp 1400ndash17

Delgado Christopher L 1996 ldquoAgriculturalTransformation The Key to Broad-Based Growthand Poverty Alleviation in Africardquo in Agenda forAfricarsquos Economic Renewal B Ndulu and N van deWalle et al eds New Brunswick NJ Transaction

Delgado Christopher L Jane Hopkins and Valerie AKelly with Peter Hazell Anna A McKenna PeterGruhn Behjat Hojjati Jayashree Sil and Claude1998 ldquoAgricultural Growth Linkages in Sub-SaharanAfricardquo Research Report 107 Washington DCIFPRI

Del Ninno Carlo and Paul A Dorosh 2001 ldquoAvertinga Food Crisis Private Imports and Public TargetedDistribution in Bangladesh After the 1998 FloodrdquoAgr Econ 253 pp 337ndash46

Dercon Stefan 1995 ldquoOn Market Integration andLiberalisation Method and Application toEthiopiardquo J Devel Stud 321 pp 112ndash43

Dollar David 1992 ldquoOutward-Oriented DevelopingEconomies Really Do Grow More RapidlyEvidence from 95 LDCs 1976-1985rdquo Econ DevelCult Change 403 pp 523ndash44

Dollar David and Aart Kraay 2002 ldquoGrowth Is Goodfor the Poorrdquo J Econ Growth (US) 73 pp 195ndash225

Dorosh Paul and Alberto Valdes 1990 ldquoEffects ofExchange Rate and Trade Policies in Agriculture inPakistanrdquo IFPRI Research Report 82 WashingtonDC

Easterly William and Aart Kraay 2000 ldquoSmall StatesSmall Problems Income Growth and Volatility inSmall Statesrdquo World Devel 2811 pp 2013ndash27

Easterly William Roumeen Islam and Joseph EStiglitz 2000 ldquoShaken and Stirred ExplainingGrowth Volatilityrdquo in Annual World Bank Conferenceon Development Economics 2000 B Pleskovic and NStern eds Washington DC World Bank

Ebrill Liam Janet Stotsky and Reint Gropp 1999ldquoRevenue Implications of Trade LiberalizationrdquoOccasional Paper 42 IMF Washington DC

Edmonds Eric and Nina Pavcnik 2002 ldquoDoesGlobalization Increase Child Labor Evidence fromVietnamrdquo NBER work paper 8760

Edwards Sebastian 1988 ldquoTerms of Trade Tariffsand Labor Market Adjustment in DevelopingCountriesrdquo World Bank Econ Rev 22 pp 165ndash85

mdashmdashmdash 1997 ldquoTrade Reform Uniform Tariffs and theBudgetrdquo in Macroeconomic Dimensions of PublicFinance MI Blejer and T Ter-Minassian edsLondon and NY Routledge

mdashmdashmdash 1998 ldquoOpenness Productivity and GrowthWhat Do We Really Knowrdquo Econ J 108447 pp383ndash98

Edwards Sebastian and Alejandro Cox Edwards 1996ldquoTrade Liberalization and Unemployment Policy

Issues and Evidence from Chilerdquo Cuadernos Econ33 pp 227ndash50

Edwards Sebastian and Daniel Lederman 2002 ldquoThePolitical Economy of Unilateral TradeLiberalization The Case of Chilerdquo in GoingAlonendashThe Case for Relaxed Reciprocity in FreeingTrade J Bhagwati ed Cambridge MA MIT Press

Ellis Frank 1993 Peasant Economics FarmHouseholds and Agrarian Development CambridgeCambridge U Press

mdashmdashmdash 1998 ldquoHousehold Strategies and RuralLivelihood Diversificationrdquo J Devel Stud 351 pp1ndash38

Elson Diane and Barbara Evers 1997 ldquoGender AwareCountry Economic Reportsrdquo work paper 2 UgandaU Manchester Grad School Social SciencesGenecon Unit

Esfahani Hadi Salehi 1991 ldquoExports Imports andEconomic Growth in Semi-IndustrializedCountriesrdquo J Devel Econ 351 pp 93ndash116

Fafchamps Marcel and John Pender 1997ldquoPrecautionary Saving Credit Constraints andIrreversible Investment Theory and Evidence fromSemi-Arid Indiardquo J Bus Econ Statist 152 pp180ndash94

Falvey Rod 1994 ldquoRevenue Enhancing TariffReformrdquo Weltwirtsch Arch 1301 pp 175ndash90

mdashmdashmdash 1999 ldquoFactor Price Convergencerdquo J IntEcon 49 pp 195ndash210

Fane George 1991 ldquoPiecemeal Tax Reforms and theCompensated Radial Elasticities of Tax Basesrdquo JPublic Econ 45 pp 263ndash70

Feenstra Robert C and Gordon Hanson 1995ldquoForeign Investment Outsourcing and RelativeWagesrdquo in Economy of Trade Policy Essays inHonour of Jagdish Bhagwati R C Feenstra G MGrossman and D Irwin eds Cambridge MA andLondon MIT Press

Feenstra Robert C Dorsati Madani Tzu-Han Yangand Chi-Yuan Liang 1997 ldquoTesting EndogenousGrowth in South Korea and Taiwanrdquo NBER workpaper 6028

Feliciano Zadia 1996 ldquoWorkers and TradeLiberalisation The Impact of Trade Reforms inMexico on Wages and Employmentrdquo Industrial andLabor Relations Review 383 pp 95-115

Ferreira H G Francisco and Julie Litchfield 1999ldquoCalm After The Storms Income Distribution andWelfare in Chile 1987ndash1994rdquo World Bank EconRev 13 pp 509ndash38

Ferriera Pedro C and Joseacute Luis Rossi 2001 ldquoNewEvidence on Trade Liberalization and ProductivityGrowthrdquo Ensaios Econo da EPGE 433

Fields Gary 1989 ldquoChanges in Poverty and Inequalityin Developing Countriesrdquo World Bank ResObserver 4 pp 167ndash86

Frankenberg Elizabeth James P Smith and DuncanThomas 2003 ldquoEconomic Shocks Wealth andWelfarerdquo J Human Res 322 pp280ndash321

Frankel Jeffrey A and David Romer 1999 ldquoDoesTrade Cause Growthrdquo Amer Econ Rev 893 pp379ndash99

Frankel Jeffrey and Andrew K Rose 2002 ldquoAnEstimate of the Effect of Common Currencies on

Trade and Growthrdquo Quart J Econ 117469 pp437ndash66

Friedman Jed and James Levinsohn 2002 ldquoTheDistributional Impacts of Indonesiarsquos FinancialCrisis on Household Welfare A ldquoRapid ResponserdquoMethodologyrdquo World Bank Econ Rev 16 pp397ndash423

Galor Oded and Joseph Zeira 1993 ldquoIncomeDistribution and Macroeconomicsrdquo Rev Econ Stud601 pp 35ndash52

Gilbert Christopher L and Panos Varangis 2002ldquoGlobalization and International Commodity Tradewith Specific Reference to the West African CocoaProducersrdquo Conference May 24ndash25 Int Seminar onInt Trade in Challenges to Globalization Analyzingthe Economics Robert E Baldwin and L AlanWinters eds NBER

Gisselquist David and Jean-Marie Grether 2000 ldquoAnArgument for Deregulating the Transfer ofAgricultural Technologies to Developing CountriesrdquoWorld Bank Econ Rev 141 pp 111ndash27

Glenday Graham 2000 ldquoTrade Liberalization andCustoms Revenues Does Trade Liberalization Leadto Lower Customs Revenues The Case of KenyardquoAfrican Econ Policy Discus Paper 44 JFK SchoolGovt Harvard U

Glewwe Paul and Dennis de Tray 1989 ldquoThe Poor inLatin America During Adjustment A Case Study ofPerurdquo Living Standards Measurement Study workpaper 56 World Bank Washington DC

Glewwe Paul and Gillette Hall 1998 ldquoAre SomeGroups More Vulnerable to Macroeconomic Shocksthan Others Hypothesis Tests on Panel Data fromPerurdquo J Devel Econ 56 pp 181ndash206

Goetz Stephen J 1992 ldquoA Selectivity Model ofHousehold Food Marketing Behavior in Sub-Saharan Africardquo Amer J Agr Econ 74 pp 444ndash52

Greenaway David and Chris Milner 1991 ldquoFiscalDependence on Trade Taxes and Trade PolicyReformrdquo J Devel Stud 27 pp 95ndash132

Griliches Zvi and Jacques Mairesse 1998 ldquoProductionFunctions The Search for Identificationrdquo inEconomics and Economic Theory in the TwentiethCentury The Ragnar Frisch Centennial SymposiumCambridge MA Cambridge U Press

Grimard Franque 1997 ldquoHousehold ConsumptionSmoothing Through Ethnic Ties Evidence fromCote drsquoIvoirerdquo J Devel Econ 532 pp 391ndash422

Grossman Gene M and Elhanan Helpman 1991Innovation and Growth in the Global EconomyCambridge MA and London MIT Press

Guillaumont Patrick Sylviane Guillaumont Jeanneneyand Jean-Francois Brun 1999 ldquoHow InstabilityLowers African Growthrdquo J African Economies 81pp 87ndash107

Haggblade Steven Peter Hazell and James Brown1989 ldquoFarm-Nonfarm Linkages in Rural Sub-Saharan Africardquo World Devel 178 pp 1173ndash201

Hanson Gordon and Ann Harrison 1999 ldquoWho GainsFrom Trade Reform Some Remaining Puzzlesrdquo JDevel Econ 591 pp125ndash54

Harriss Barbara 1987 ldquoDiscussion Regional GrowthLinkages from Agriculturerdquo J Devel Stud 232 pp275ndash89


Harrison Anne 1996 ldquoOpenness and Growth ATime-Series Cross-Country Analysis for DevelopingCountriesrdquo J Devel Econ 482 pp 419ndash47

Harrison Anne and Ana L Revenga 1998 ldquoLaborMarkets Foreign Investment and Trade PolicyReformrdquo in Trade Policy Reform Lessons andImplications J Nash and W Takacs edsWashington DC World Bank

Harrison Glenn W Thomas F Rutherford and DavidG Tarr 2002 ldquoTrade Policy Options for Chile TheImportance of Market Accessrdquo World Bank EconRev 161 pp 49ndash79

Harrison Glenn W Thomas S Rutherford David GTarr and Angelo Gurgel 2003 ldquoRegional Multilateraland Unilateral Trade Policies of MERCOSUR forGrowth and Poverty Reduction in Brazilrdquo workpaper 3051 World Bank Washington DC

Hay Donald 2001 ldquoThe Post-1990 Brazilian TradeLiberalisation and the Performance of LargeManufacturing Firms Productivity Market Shareand Profitsrdquo Econ J 111473 pp 620ndash41

Hazell Peter B R and Steven Haggblade 1991ldquoRural-Urban Growth Linkages in Indiardquo Indian JAgri Econ 464 pp 515ndash29

Hazell Peter B R and Behjat Hojjati 1995ldquoFarmNon-Farm Growth Linkages in Zambiardquo JAfrican Economies 43 pp 406ndash35

Hazell Peter B S and Ailsa Roell 1983 ldquoRuralGrowth Linkages Household Expenditure Patternsin Malaysia and Nigeriardquo Research Report 41Washington DC IFPRI

Head Judith 1998 ldquoEk Het NiksndashI Have NothingThe Impact of European Union Policies on WomenCanning Workers in South Africardquo U Capetown

Heltberg Rasmus and Finn Tarp 2002 ldquoAgricultureSupply Response and Poverty in MozambiquerdquoFood Policy 272 pp 103ndash24

Henson Spencer J Rupert J Loader Alan SwinbankMaury Bredahl and Nicole Lux 2000 Impact ofSanitary and Phytosanitary Measures on DevelopingCountries Centre Food Econ Research UReading

Hertel Thomas W Paul V Preckel John A LCranfield and Maros Ivanic 2001 ldquoPoverty Impactsof Multilateral Trade Liberalizationrdquo Purdue U

Hirschman Albert O 1958 The Strategy of EconomicDevelopment New Haven Yale U Press

Ianchovichina Elena Alessandro Nicita and IsidroSoloaga 2001 ldquoTrade Reform and HouseholdWelfare The Case of Mexicordquo work paper 2667World Bank Washington DC

IFAD 2001 Rural Poverty Report 2001 The Challengeof Ending Rural Poverty Oxford Oxford U Press

Irwin Douglas A and Tervio Marko 2002 ldquoDoesTrade Raise Income Evidence from the TwentiethCenturyrdquo J Int Econ 58 pp 1ndash18

Jacoby Hanan and Emmanuel Skoufias 1997 ldquoRiskFinancial Markets and Human Capital in aDeveloping Countryrdquo Rev Econ Stud 643 pp311ndash36

Jalan Jyotsna and Martin Ravallion 1997 ldquoGeographicPoverty Traps A Micro Model of ConsumptionGrowth in Rural Chinardquo J Appl Econometrics 174pp 329ndash46

Jalan Jyotsna and Martin Ravallion 1999 ldquoAre thePoor Less Well Insured Evidence on Vulnerabilityto Income Risk in Rural Chinardquo J Devel Econ 581pp 61ndash81

Jonsson Gunnar and Arvind Subramanian 2001ldquoDynamic Gains from Trade Evidence from SouthAfricardquo IMF Staff Papers 481 pp 187ndash224

Jones Charles I 2001 ldquoComment on lsquoTrade Policy andEconomic Growth A Scepticrsquos Guide to the Cross-National Evidencersquo by Francisco Rodriguez andDani Rodrikrdquo in Macroeconomics Annual 2000 BenBernanke and Kenneth S Rogoff eds MIT Press forNBER Cambridge MA

Kabeer Naila 2000 The Power to Choose BangladeshiWomen and Labour Market Decisions in Londonand Dhaka pp 464 NY Verso

Kennedy Eileen and Bruce Cogill 1987 ldquoIncome andNutrition Effects of the Commercializati on ofAgriculture in South Western Kenyardquo ResearchReport 63 Int Food Policy Research InstituteWashington DC

Killick Tony 1995 ldquoStructural Adjustment andPoverty Alleviation An Interpretative SurveyrdquoDevel Change 26 pp 305ndash31

Kim Euysung 2000 ldquoTrade Liberalization andProductivity Growth in Korea ManufacturingIndustries Price Protection Market Power andScale Efficiencyrdquo J Devel Econ 621 pp 55ndash83

Knowles Stephen 2001 ldquoInequality and EconomicGrowth The Empirical Relationship Reconsideredin the Light of Comparable Datardquo CREDIT ResPaper 0103 U Nottingham

Kochar Anjini 1995 ldquoExplaining HouseholdVulnerability to Idiosyncratic Income Shocksrdquo AmerEcon Rev 852 pp 159ndash64

Konan Denise E and Keith E Maskus 2000 ldquoAComputable General Equilibrium Analysis ofEgyptian Trade Liberalization Scenariosrdquo inRegional Partners in Global Markets Limits andPossibilities of the Euro-Med Agreements A Galaland B Hoekman eds CEPR London

Kraay Aart 1997 ldquoExports and EconomicPerformance Evidence from a Panel of ChineseEnterprisesrdquo mimeo Devel Research GroupWorld Bank

Krueger Anne O 1978 ldquoLiberalization Attempts andConsequences Liberalization Direction of Bias andEconomic Growthrdquo in Foreign Trade Regimes andEconomic Development Vol X pp 277ndash300NBER NY

mdashmdashmdash 1983 Trade and Employment in DevelopingCountries Volume 3 Synthesis and ConclusionsNBER NY

mdashmdashmdash 1990 ldquoAsian Trade and Growth LessonsrdquoAmer Econ Rev Papers and Proceedings 802 pp108ndash11

mdashmdashmdash 1992 The Political Economy of AgriculturalPricing Policy in A Synthesis of the PoliticalEconomy in Developing Countries World BankCompar Study vol 5 Baltimore Johns Hopkins UPress

Kurosaki Takashi 1995 Risk attitudes ConsumptionPreferences and Crop Choices in the PakistanPunjab PhD Stanford U


Lal Deepak 1986 ldquoStopler-Samuelson-Rybczynski inthe Pacific Real Wages and Real Exchange in thePhilippines 1956ndash1978rdquo J Devel Stud 21 pp181ndash204

Lall Sanjaya 1999 The Technological Response toImport Liberalization in Sub-Saharan AfricaLondon Macmillan

Lambert Sylvie 1994 ldquoLa Migration CommeInstrument de Diversification Intrafamiliale desRisques Application au Cas de la Cote drsquoIvoirerdquoRevue Econ Devel 2 pp 3ndash38

Lambert Sylvie and Thierry Magnac 1997 ldquoImplicitprices and Recursivity of Agricultural HouseholdsrsquoDecisionsrdquo CREST work paper 9731

Lanjouw Peter and Martin Ravallion 1999 ldquoBenefitIncidence Public Spending Reforms and theTiming of Program Capturerdquo World Bank EconRev 132 pp 257ndash73

Larson Donald Rita Butzer Yair Mundlak and AlCrego 2000 ldquoA Cross-Country Database for SectorInvestment and Capitalrdquo World Bank Econ Rev141 pp 371ndash91

Lee Jong-Wha 1996 ldquoGovernment Interventions andProductivity Growthrdquo J Econ Growth 13 pp391ndash414

Levine Ross and David Renelt 1992 ldquoA SensitivityAnalysis of Cross-Country Growth RegressionsrdquoAmer Econ Rev 824 pp 942ndash63

Levinsohn James 1999 ldquoEmployment Responses toInternational Liberalization in Chilerdquo J Int Econ472 pp 321ndash44

Levinsohn James Steven Berry and Jed Friedman1999 ldquoImpacts of the Indonesian Economic CrisisPrice Changes and the Poorrdquo NBER work paper7194

Levy Santiago and Sweder van Wijnbergen 1992ldquoAgricultural Adjustment and the Mexico-USAFree Trade Agreementrdquo in Open EconomiesStructural Adjustment and Agriculture I Goldinand L A Winters eds Cambridge U PressCambridge

Lipton Michael 1968 ldquoThe Theory of the OptimisingPeasantrdquo J Devel Stud 43 pp 327ndash51

Lloyd Peter 2000 ldquoGeneralizing the Stopler-Samuelson Theorem A Tale of Two Matricesrdquo RevInt Econ 84 pp 597ndash613

Lloyd Tim Wyn Morgan Tony Rayner and CharlotteVaillant 1999 ldquoThe Transmission of WorldAgricultural Prices in Cote drsquoIvoirerdquo J Int TradeEcon Devel 81 pp 125ndash41

Lokshin Michael and Martin Ravallion 2000 ldquoShort-Lived Shocks with Long-Lived Impacts HouseholdIncome Dynamics in a Transition Economyrdquo mimeoWorld Bank

Loacutepez Ramoacuten John Nash and Julie Stanton 1995ldquoAdjustment and Poverty in Mexican AgricultureHow Farmersrsquo Wealth Affects Supply ResponserdquoWorld Bank Policy Research work paper 1494

Lucas Robert E 1988 ldquoThe Mechanics of EconomicDevelopmentrdquo J Monet Econ 22 pp 3ndash42

Lumenga-Neso Olivier Marcelo Olarreaga andMaurice Schiff 2001 ldquoOn lsquoIndirectrsquo Trade-RelatedRampD Spillovers and Growthrdquo CEPR Discus paper2871 London

Lutz Matthias and Hans W Singer 1994 ldquoThe Linkbetween Increased Trade Openness and the Termsof Trade An Empirical Investigationrdquo World Devel22 pp 1697ndash709

Martin Will and Devashish Mitra 2001 ldquoProductivityGrowth and Convergence in Agriculture andManufacturingrdquo Econ Devel Cult Change 492 pp403ndash22

MacBean Alasdair I 1966 Export Instability andEconomic Development Cambridge MA HarvardU Press

Marquez Gustavo and Carmen Pageacutes-Serra 1998ldquoTrade and Employment Evidence from LatinAmerica and the Caribbeanrdquo WP-366 Inter-American Devel Bank Washington DC

Matusz Steven J and David Tarr 1999 ldquoAdjusting toTrade Policy Reformrdquo World Bank Policy Researchwork paper 2142

McCulloch Neil Bob Baulch and Milasoa Cherel-Robson 2001 ldquoPoverty Inequality and Growth inZambia during the 1990srdquo Discus paper 2001123World Institute for Devel Econ Research Helsinki

McCulloch Neil L Alan Winters and Xavier Cirera2001 Trade Liberalization and Poverty AHandbook London Centre Econ Policy Research

McKay Andrew Oliver Morrissey and CharlotteVaillant 1997 ldquoTrade Liberalization and AgriculturalSupply Response Issues and Some Lessonsrdquo EuropJ Devel Res 92 pp 129ndash47

McKay Andrew L Alan Winters and Abbi MamoKedir 2000 ldquoA Review of Empirical Evidence onTrade Trade Policy and Povertyrdquo Report for DeptInt Development London

Mellor John W 1976 The New Economics of GrowthA Strategy for India and the Developing WorldIthaca Cornell U Press

mdashmdashmdash 1983 ldquoForewordrdquo in Rural Growth LinkagesHousehold Expenditure Patterns in Malaysia andNigeria P B S Hazell and A Roell eds WashingtonDC IFPRI Research Report 41

Mellor John and Sarah Gavian 1999 ldquoTheDeterminants of Employment Growth In EgyptmdashThe Dominant Role of Agriculture and the RuralSmall Scale Sectorrdquo mimeo Abt AssocCambridge MA

Mellor John W and Bruce F Johnston 1984 ldquoTheWorld Food Equation Interrelations amongDevelopment Employment and FoodConsumptionrdquo J Econ Lit 222 pp 524ndash31

Michaely Michael Demetris Papageorgiou andArmeane M Choksi 1991 Liberalizing ForeignTrade Backwell Oxford

Mills Bradford F and David E Sahn 1995 ldquoReducingthe Size of the Public Sector Workforce InstitutionalConstraints and Human Consequences in GuineardquoJ Devel Stud 31 pp 505ndash28

Milner Chris Oliver Morrissey and NicodemusRudaheranwa 2001 ldquoPolicy and Non-Policy Barriersto Trade and Implicit Taxation of Exports inUgandardquo J Devel Stud 372 pp 67ndash90

Milner Chris and Peter Wright 1998 ldquoModellingLabour Market Adjustment to Trade Liberalizationin an Industrializing Economyrdquo Econ J 108 pp509ndash28


Minot Nicholas 1998 ldquoDistributional and NutritionalImpact of Devaluation in Rwandardquo Econ DevelCult Change 462 pp 379ndash402

Minot Nicholas F and Francesco Goletti 1998 RiceMarket Liberalization and Poverty in VietnamWashington DC Int Food Policy Res Institute

Morduch Jonathan 1994 ldquoPoverty and VulnerabilityrdquoAmer Econ Rev 84 pp 221ndash25

Moreira Maurigravecio M and Sheila Najberg 2000ldquoTrade Liberalization in Brazil Creating orExporting Jobsrdquo J Devel Stud 363 pp 78ndash100

Mundlak Yair and Donald F Larson 1992 ldquoOn theTransmission of World Agricultural Pricesrdquo WorldBank Econ Rev 63 pp 399ndash422

Nadal Alejandro 2000 The Environmental and SocialImpacts of Economic Liberalization on CornProduction in Mexico Oxfam GB (UK) and WWFInt (Switzerland)

Newbery David M and Nicholas H Stern 1987 TheTheory of Taxation for Developing Countries NYand Oxford Oxford U Press for World Bank

Niimi Yoko Puja Vasudeva-Dutta and L AlanWinters 2003 ldquoTrade Liberalization and PovertyDynamics in Vietnamrdquo work paper 17 PovertyResearch Unit U Sussex Brighton England

Oxfam 2002 Rigged Rules and DoubleStandardsndashTrade Globalization and the FightAgainst Poverty Oxfam Int

Oxfam-IDS 1999 ldquoLiberalization and Povertyrdquo FinalReport to DFID London

Pack Howard 1988 ldquoIndustrialization and Traderdquo inHandbook of Development Economics H Cheneryand TN Srinivasan eds Vol I Elsevier Science BV

Papageorgiou Demetris Michael Michaely andArmeane M Choksi eds 1991 Liberalizing ForeignTrade Vol 1ndash7 Oxford Blackwell

Parker Ronald L Randall Riopelle and William R Steel1995 Small Enterprises Adjusting to Liberalization inFive African Countries Washington DC World Bank

Parris Brett 1999 Trade for Development Making theWTO Work for the Poor World Vision Int

Pritchett Lant 1996 ldquoMeasuring OutwardOrientation in Developing Countries Can It BeDonerdquo J Devel Econ 492 pp 307ndash35

Pritchett Lant and Geeta Sethi 1994 ldquoTariff RatesTariff Revenue and Tariff Reform Some NewFactsrdquo World Bank Econ Rev 8 pp 1ndash16

Pritchett Lant Asep Suryhadi and Suryhadi Sumarto2000 ldquoQuantifying Vulnerability to Poverty AProposed Measure with Application to IndonesiardquoWorld Bank Policy Research work paper 2437Washington DC

Rama Martin 1994 ldquoThe Labour Market and TradeReform in Manufacturingrdquo in The Effects ofProtectionism on a Small Country M Connolly andJ de Melo eds World Bank Regional and SectoralStudies Washington DC

Rama Martin and Donna MacIsaac 1999 ldquoEarningsand Welfare after Downsizing Central BankEmployees in Ecuadorrdquo World Bank Econ Rev 13pp 89ndash116

Rama Martin and Kinnori Scott 1999 ldquoLabor Earningsin One-Company Towns Theory and Evidence fromKazakhstanrdquo World Bank Econ Rev 13 pp185ndash209

Ravallion Martin 1988 ldquoExpected Poverty underRisk-Induced Welfare Variabilityrdquo Econ J 98Decpp 1171ndash82

mdashmdashmdash 1995 ldquoGrowth and Poverty Evidence forDeveloping Countries in the 1980srdquo Econ Letters48 pp 411ndash17

mdashmdashmdash 1998 ldquoOn Reform Food Prices and Poverty inIndiardquo Econ Polit Weekly 33Jan 10ndash16 pp 29ndash36

mdashmdashmdash 1999 ldquoOn Protecting the Poor from FiscalContractionsrdquo mimeo Washington DC World BankDevel Research Group and U Sciences SocialesARQADE Toulouse

mdashmdashmdash 2001 ldquoGrowth Inequality and Poverty LookingBeyond Averagesrdquo World Devel 29 pp 1803ndash15

Ravallion Martin and Guarav Datt 2002 ldquoWhy HasEconomic Growth Been More Pro-Poor in SomeStates of India Than Othersrdquo J Devel Econ 682pp 381ndash400

Ravallion Martin and Dominique Van de Walle 1991ldquoThe Impact on Poverty of Food Pricing Reforms AWelfare Analysis for Indonesiardquo J Pol Modeling 13pp 281ndash99

Razin Assaf and Andrew K Rose 1992 ldquoBusiness-Cycle Volatility and Openness An ExploratoryCross-Sectional Analysisrdquo in Capital Mobility TheImpact on Consumption Investment and Growth LLeiderman and A Razin eds CambridgeCambridge U Press pp 48ndash82

Reardon Thomas 1997 ldquoUsing Evidence ofHousehold Income Diversification to Inform Studyof the Rural Nonfarm Labor Market in AfricardquoWorld Devel 255 pp 735ndash47

Reimer Jeffrey J 2002 ldquoEstimating the PovertyImpacts of Trade Liberalizationrdquo Policy Researchwork paper 2790 World Bank Washington DC

Reinikka Ritva and Paul Collier eds 2001 UgandarsquosRecoverymdashThe Role of Farms Firms andGovernment Washington DC World Bank

Renkow Mitch 2000 ldquoPoverty Productivity andProduction Environment A Review of theEvidencerdquo Food Policy 25 pp 463ndash78

Revenga Ana 1997 ldquoEmployment and Wage Effectsof Trade Liberalization The Case of MexicanManufacturingrdquo J Lab Econ 153 pt 2 S20ndashS43

Roberts Mark J and James R Tybout 1996 IndustrialEvolution in Developing Countries Oxford OxfordU Press

Robbins Donald and T H Grindling 1999 ldquoTradeLiberalisation and the Relative Wages for More-Skilled workers in Costa Ricardquo Rev Devel Econ 32pp 140ndash54

Rodriguez Francisco and Dani Rodrik 2001 ldquoTradePolicy and Economic Growth A Scepticrsquos Guide tothe Cross-National Evidencerdquo NBERMacroeconomics Annual 2000 Cambridge MAMIT Press pp 261ndash324

Rodrik Dani 1997 Has Globalization Gone Too FarWashington DC Institute Int Econ

mdashmdashmdash 1998 ldquoWhy Do More Open Economies haveBigger Governmentsrdquo J Polit Econ 106 pp997ndash1032

mdashmdashmdash 1999 ldquoWhere Did All the Growth GoExternal Shocks Social Conflict and GrowthCollapsesrdquo J Econ Growth 44 pp 385ndash412


Romer David 1993 ldquoOpenness and Inflation Theoryand Evidencerdquo Quart J Econ 1084 pp 870ndash903

Romer Paul 1994 ldquoNew Goods Old Theory and theWelfare Cost of Trade Restrictionsrdquo J Devel Econ43 pp 5ndash38

Rosenzweig Mark R and Kenneth I Wolpin 1993ldquoCredit Market Constraints ConsumptionSmoothing and the Accumulation of DurableProduction Assets in Low-Income CountriesInvestments in Bullocks in Indiardquo J Polit Econ1012 pp 223ndash44

Sachs Jeffrey D and Andrew M Warner 1995ldquoEconomic Convergence and Economic PoliciesrdquoBrookings Pap Econ Act 1 pp 1ndash95

Sahn David 1992 ldquoPublic Expenditures in Sub-Saharan Africa during a Period of EconomicReformsrdquo World Devel 205 pp 673ndash93

Sahn David Paul A Dorosh and Stephen Younger1997 Structural Adjustment ReconsideredEconomic Policy and Poverty in Africa CambridgeCambridge U Press

Sahn David and Alexander Sarris 1991 ldquoStructuralAdjustment and the Welfare of Rural SmallholdersA Comparative Analysis from Sub-Saharan AfricardquoWorld Bank Econ Rev 5 pp 259ndash89

Schiff Maurice and Claudio E Montenegro 1997ldquoAggregate Agricultural Supply Response inDeveloping Countries A Survey of Selected IssuesrdquoEcon Devel Cult Change 452 pp 393ndash410

Sen Amartya 1993 ldquoCapability and Well-Beingrdquo inThe Quality of Life Martha Nussbaum and A Seneds Clarendon Press Oxford

Sharma Kishor Sisira Jayasuriya and EdwardOczkowski 2000 ldquoLiberalization and ProductivityGrowth The Case of Manufacturing Industry inNepalrdquo Oxford Devel Stud 282 pp 205ndash22

Singh Inderjit Lyn Squire and John Strauss 1986 ldquoASurvey of Agricultural Household Models RecentFindings and Policy Implicationsrdquo World BankEcon Rev 11 pp 149-79

Smith James P Duncan Thomas ElizabethFrankenberg Kathleen Beegle and Graciela Teruel2002 ldquoWages Employment and Economic ShocksEvidence from Indonesiardquo J Population Econ 15pp 161ndash93

Smith Lisa C and Jean-Paul Chavas 1999 ldquoSupplyResponse of West African Agricultural HouseholdsImplications of Intrahousehold PreferenceHeterogeneityrdquo IFPRI Food Consumption andNutrition Division discus paper 69

Squire Lyn 1991 ldquoIntroduction Poverty andAdjustment in the 1980srdquo World Bank Econ Rev52 pp 177ndash85

Strauss John and Duncan Thomas 1998 ldquoHealthNutrition and Economic Developmentrdquo J EconLit 362 pp 766ndash817

Srinivasan PV and Shikha Jha 2001 ldquoLiberalizedTrade and Domestic Price Stability The Case of Riceand Wheat in Indiardquo J Devel Econ 65 pp 417ndash41

Srinivasan TN and Jagdish Bhagwati 2001 ldquoOutward-Orientation and Development Are RevisionistsRightrdquo in Trade Development and Political EconomyEssays in Honour of Anne O Krueger Deepak Lal andR H Snape eds London Palgrave pp 3ndash26

Suryahadi Asef Widyanti Wenefrida and SudarnoSumarto 2003 ldquoShort-Term Poverty Dynamics inRural Indonesia during the Economic Crisisrdquo J IntDevel 152 pp 133ndash44

Svaleryd Helena and Jonas Vlachos 2002 ldquoMarketsfor Risk and Openness to Trade How Are TheyRelatedrdquo J Int Econ 572 pp 369ndash95

Taylor Alan M 1998 ldquoOn the Costs of Inward-LookingDevelopment Price Distortions Growth andDivergence in Latin Americardquo J Econ Hist 581pp 1ndash28

Thomas Duncan Elizabeth Frankenberg KathleenBeegle and Graciela Teruel 1999 ldquoHouseholdBudgets Household Composition and the Crisis inIndonesia Evidence from Longitudinal HouseholdSurvey Datardquo mimeo paper for 1999 PopulationAssoc America Meetings NY March 25ndash27

Townsend Robert M and Rolf A E Mueller 1998ldquoMechanism Design and Village Economies FromCredit to Tenancy to Cropping Groupsrdquo Rev EconDynam 11 pp 119ndash72

Tybout James R 2000 ldquoManufacturing Firms inDeveloping Countries How Well Do They Do andWhyrdquo J Econ Lit 381 pp 11ndash44

Tybout James Jaime de Melo and Vittorio Corbo1991 ldquoThe Effects of Trade Reforms on Scale andTechnical Efficiency New Evidence from Chilerdquo JInt Econ 313ndash4 pp 231ndash50

Tybout James R and Daniel Westbrook 1995 ldquoTradeLiberalization and the Dimensions of EfficiencyChange in Mexican Manufacturing Industriesrdquo JInt Econ 39 pp53ndash78

Udry Christopher 1995 ldquoRisk and Saving in NorthernNigeriardquo Amer Econ Rev 855 pp 1287ndash300

mdashmdashmdash 1996 ldquoGender Agricultural Productivity andthe Theory of the Householdrdquo J Polit Econ 104pp 1010ndash46

van der Gaag Jacques 1991 ldquoPoverty in theDeveloping World Assessment of the PastProspects for the Futurerdquo Europ Econ Rev 35 pp343ndash49

van der Hoeven Rolph 1996 ldquoStructural Adjustmentand Poverty Review of Experiences in the 1980srdquo inEconomic Reforms and Poverty Alleviation in IndiaCH Hanumantha Rao and H Linnemann edsSage Publications pp 90ndash118

von Braun Joachim 1989 ldquoCommercialisation ofSmallholder Agriculture- Policy Requirements forCapturing Gains for the Malnourished Poorrdquo IFPRIWashington DC

von Braun Joachim David Hotchikiss and MaartenImmink 1989 ldquoNon-Traditional Export Crops inGuatemala Effects on Production Income andNutritionrdquo IFPRI Research Report 73 WashingtonDC

Wacziarg Romain 2001 ldquoMeasuring the DynamicGains from Traderdquo World Bank Econ Rev 153 pp393ndash427

Watkins Kevin 1997 ldquoGlobalisation andLiberalisation- Implications for PovertyDistribution and Inequalityrdquo UNDP occasionalpaper 32

Wei Shang-Jin 2000 ldquoNatural Openness and GoodGovernmentrdquo NBER work paper 7765



White Howard 1997 Poverty and Adjustment in Sub-Saharan Africa A Review of the Literature TheHague Institute of Social Studies

White Howard and Edward Anderson 2001ldquoGrowth versus Distribution Does the Pattern ofGrowth Matterrdquo Devel Policy Rev 193 pp267ndash89

Winters L Alan 2000a ldquoTrade and Poverty Is Therea Connectionrdquo in Trade Income Disparity andPoverty Ben David D H Nordstrom and L AWinters eds Special Study 5 Geneva WTO

mdashmdashmdash 2000b ldquoTrade Liberalization and PovertyrdquoDiscus paper 7 Poverty Research Unit U Sussex

mdashmdashmdash 2002a ldquoTrade Liberalization and PovertyWhat Are the Linksrdquo World Econ 259 pp1339ndash67

mdashmdashmdash 2002b ldquoTrade Policies for PovertyAlleviationrdquo in Development Trade and the WTO AHandbook B Hoekman A Mattoo and P Englisheds World Bank pp 28ndash38

mdashmdashmdash 2003 ldquoDoha and World Poverty Targetsrdquo inThe New Reform Agenda Proceedings of the Annual

Bank Conference on Development Economics BPleskovic and N Stern eds 2003 Oxford U PressOxford pp 91ndash121

Wood Adrian 1997 ldquoOpenness and Wage Inequalityin Developing Countries- The Latin AmericanChallenge to East Asian Conventional WisdomrdquoWorld Bank Econ Rev 111 pp 33ndash57

Wood Adrian and Cristobal Ridao-Cano 1999 ldquoSkillTrade and International Inequalityrdquo Oxford EconPap 51 pp 89ndash119

World Bank 1988 World Development Report 1988NY Oxford U Press

mdashmdashmdash 2001 World Development Report 20002001Oxford U Press NY

mdashmdashmdash 2002 Global Economic Prospects and theDeveloping Countries Washington DC World Bank

Younger Stephen 1996 ldquoLabor Market Consequencesof Retrenchment for Civil Servants in Ghanardquo inEconomic Reform and the Poor in Africa DavidSahn ed Clarendon Press Oxford


this it turns out can only be partial foroften there are no direct studies of thepoverty effects of trade and trade liberaliza-tion In these cases we have sought evidencefrom experiences that might have parallelswith trade liberalization such as domesticmarket liberalization and public sectorretrenchments This latter process howeverhas sometimes threatened to open up toolarge a literature so a good deal of selectionand judgement has been exercised to keepthe output manageable

The paper is explicitly empirical in focusWe report theoretical work if it informsempirical studies but our emphasis is prima-rily on the study of ex post data pertaining toactual instances of trade liberalization andrelated shocks We include a little of the com-putable general equilibrium (CGE) model-ling literature which while fundamentallytheoretical does at least rely on some data

The paper starts with a brief account ofour analytical framework which providesthe organizational framework for the paperWe then survey the evidence on trade liber-alization and poverty under four headingsmacro-economic aspects (growth and fluctu-ations) households and markets wages andemployment and government revenue andspending While for each component tradeliberalization can facilitate poverty allevia-tion in none of them can an unambiguousgeneralization be made either in theory orempirically

The ambiguity arises partly because of theheterogeneity of poverty there are manyreasons why people are poor and even with-in broadly defined groups there are huge dif-ferences in the circumstances of individualhouseholds The conclusions of much of thework surveyed below are conditional onthese circumstances so a crucial part of anyspecific analysis must be to identify the dif-ferent characteristics of the poor includinginformation about their consumption pro-duction and employment activitiesOutcomes will also depend on the specifictrade reform measures being undertaken

4 Amartya Sen (1993) discusses many of the centralissues and World Bamk (2001) provides a discussion of dif-ferent concepts

and the economic environment in whichthey take place Given the variety of factorsto take into account it will hardly be surpris-ing that there are no general comparativestatic results about whether trade liberaliza-tion will increase or reduce poverty Simplestatements about ldquothe poorrdquo will lose infor-mation at best and simple generalizationsabout all countries will just be wrong

An important aspect of any analysis ofpoverty is the definition and measurement ofpoverty itself Poverty is a complex and mul-tidimensional phenomenon and there isconsiderable controversy in the literatureabout how it should be defined and meas-ured4 However the majority of the empiri-cal economic literature on poverty especiallyin relation to this issue adopts an absoluteincome or consumption metric Thereforewhile recognizing that there are many legiti-mate approaches to the measurement ofpoverty the evidence that we review focuseson this approach Much of the methodologi-cal discussion is likely to generalize to otherdimensions of poverty

Finally it is worth emphasizing that ourconcern is with poverty not inequality Sincetrade liberalization tends to increase theopportunities for economic activity it canvery easily increase income inequality whileat the same time reducing povertyConsequently statements about its effectson inequality cannot be translated directlyinto statements about its impact on absolutepoverty There may be sound positive andnormative reasons for interest in inequalitybut they are not the concerns of this paper

2 An Analytical Framework

As argued already we approach the ques-tion of trade liberalization and poverty byconstructing an analytical framework intowhich to slot the various pieces of theory andevidence This section briefly outlines such a


























































































































l) asPm




































































































































































































7 Conclusions













REFERENCES




























































































































































































































































































































































































l) asPm




































































































































































































7 Conclusions













REFERENCES

































































































































































































































































































































































































































































7 Conclusions













REFERENCES














































































































































































































































































REFERENCES



































































































































































































































































trade liberalization and poverty- the evidence so far

Documents