Trade and Poverty Reduction in Mozambique

1. USAID/Maputo, June 10, 2004 Trade and Poverty Reduction in Mozambique Bruce Bolnick Nathan Associates

2. DTIS: Trade-Poverty Linkages • Diagnostic Trade Integration Study for the Integrated Framework • TOR for Mozambique: Clearly define trade and poverty linkages • Link to the PRSP (PARPA) • Evolution of poverty • Impacts of imports and exports • Analysis of effects of future changes in trade policy (or market access) • Indicators linking trade to poverty reduction

3. Agenda • Trade and poverty: - Mainstream view - Critical appraisal - Synthesis • Poverty in Mozambique (briefly) • Trade policy in the PARPA • Impact of trade on poverty in Mozambique • Strengthening trade-poverty linkages

4. Trade Promotion  Poverty Reduction The mainstream view: • Higher growth  poverty reduction • Openness  higher growth • Trade has no systematic effect on variations around mean Ergo: Openness  poverty reduction

5. Trade  Poverty = Controversy • Wide perception that globalization and trade harm the poor • Example: Too hot to handle: The absence of trade policy from PRSPs - Paul Ladd, Christian Aid, 2003: Rapid trade liberalization has “forced poor people to compete…, undermining their livelihoods and increasing their vulnerability.”

6. Trade  Poverty: Critical considerations • Rodrik: Trade  Growth?? Spurious Causality? Inference for trade policy? • Losers & gainers, from both imports and exports • Transitional costs, “de-industrialization” • Political economy of trade policy  the “losers” often win • Natural resource “trap” • Many exceptions to empirical link between export growth and poverty reduction (UNCTAD, 2004) • General equilibrium analysis  fairly small aggregate effects

7. TradePoverty:View from the bottom • How does trade liberalization look to a poor household? • Income, jobs, opportunities • Price of goods consumed • Remittances • Public services (revenue effects) • Institutional development • Risks, vulnerabilities • Tapestry of gains and losses • Expectations and perceptions

8. TradePoverty: Synthesis • For poor countries, trade is critical to growthand poverty reduction • But impediments and costs must be taken seriously into account • Bear in mind the costs of not adjusting ! • Winners and losers • Protectionism is a retrogressive way to deal with the impediments and costs • Waiting until “conditions are conducive” is self-defeating

9. TradePoverty: Synthesis • Implication: • Facilitate the gains • Mitigate the costs • Manage the risks • Monitor the impacts

10. Poverty in Mozambique: IAF 2002/03 • Quality of the IAF findings • Definition of poverty line • Main results • Poverty reduction ahead of PARPA target National: 69.4%  54.1% Rural: 71.3%  55.3% Urban: 62.0%  51.5% • But still, poverty is pervasive and severe. Daily reality for over 10 million people • Corroborated by other data

11. Example Bicycle ownership  Similar trends for - Radio ownership • Improved roof • Access to latrine • Access to water • Children in school

12. Trade policy in PARPA 2001-05 • Very little discussion of trade policy • Too hot to handle in Mozambique? - PRSP as a participatory process • Decision: focus on the fundamentals  Trade policy in next PARPA?

13. Trade-Poverty links in Mozambique: Basic considerations • Need for export-led growth • Public interest vs “special interests” • Efficiency and sustainability • Role of mega-projects • Predominant issue today = Impact on agriculture, rural households • For the future: Off-farm opportunities

14. Trade-Poverty links in Mozambique: Specific policies/sectors • Cashew • Maize • Sugar • Cotton • Tobacco • Rice proposal • Garments (second hand clothes)

15. Trade-Poverty links in Mozambique: Scenarios to consider • Implementation of SADC trade protocol • Reduction in top duty rate to 20% • Flat-rate import duty (say, 10%) • SACU option • OECD market access for agricultural products and garments

16. Strengthening trade-poverty links Facilitate the gains • Strengthen the investment climate • Red tape (Doing Business findings) • Financial system • Legal/judicial institutions • Corruption • Facilitate exports • Customs reform • VAT refunds • Infrastructure • Export financing • Product quality standards • Agronomy research • Maintain competitive exchange rate !

17. Strengthening trade-poverty links Mitigate the costs • Scarce resources! • Targeted safety net programs • Rural food for work • Special adjustment assistance (e.g., cashew processing) • Training programs (private sector emphasis)

18. Strengthening trade-poverty links Manage the risks • Political stability • Macroeconomic stability • Export diversification • Forex reserves/exchange rate policy • Sound banking system

19. Strengthening trade-poverty links Monitor the impacts • Macroeconomic indicators • Real per capita household consumption • Existing survey resources • International price data • Special purpose data • Poverty Observatory as forum • Training for press and civil society

20. Conclusion Will trade liberalization serve to reduce poverty in Mozambique? Can the IF help the people of Mozambique benefit from trade?