Trade Liberalisation and Poverty: What have we learned in fifteen years?

1. Trade Liberalisation and Poverty: What have we learned in fifteen years? L Alan Winters Professor of Economics, University of Sussex CEPR, IZA, GDN

2. Trade Liberalisation and Poverty: What have weI learned in fifteen years? L Alan Winters Professor of Economics, University of Sussex CEPR, IZA, GDN

3. What is the issue? Antwerp

4. Conclusion from 1999 Trade Liberalisation • generally stimulates growth • and through it poverty alleviation BUT • it creates losers • some of whom may be, or may become, poor

5. Therefore Public Policy should: • proceed with liberalisation, • predict the poverty impacts, • possibly pre-empt them, and • protect the poor with general anti-poverty policies Antwerp

6. Trade and Growth: Levels vs. Changes • Income • Higher vs. growing more rapidly • Permanent vs. transitory growth effects Y” Log (y) Y’ Y Event time

7. Empirical challenges • Defining and measuring openness Binary (Sachs/Warner); (X=M)/GDP Averages – weights, Anderson-Neary • Establishing causation Liberalisation → growth or vice versa? • Separating openness from other policies the attributionproblem Antwerp

8. What have we learned (I) Case studies • No closed economy has developed post WW2 • Nineteenth century and 1930s low relevance • Five common features of successful growers: • Macro stability • High savings and investment • Use markets to allocate resources • Committed, credible, capable government • Fully exploited world economy Growth Commission (2008) Antwerp

9. What have we learned? (II) Instruments • Frankel and Romer (AER, 1999) gravity • Many followers; not always successful • Noguer and Siscart (2005, JIE) • More countries in gravity instruments → clarity • But see Bazzi and Clemens (AEJ-MAC, 2013) • Strong critique of weak instruments • Country size is treacherous - little time variance • Be serious about the exclusion restriction • This includes GMM and system GMM too! Antwerp

10. Exclusion • Deaton (2010, JEL) • instrumentation requires a narrative • Bazzi and Clemens • Many studies take the form: growth = f(x, W); x=g(Z) • If you estimate: growth = h(y, W*); y=m(Z) • You strictly have to reject every one of them! Antwerp

11. Other instruments • Feyrer (2009, NBER WP) • Time varying instrument for trade • Importance of difference in sea distance and air distance becomes more significant as air travel cheapens • Romalis (2007, NBER WP) • US tariffs (also time varying), but • Commodity structure; • Relates trade policy level to output growth Antwerp

12. What have we learned (III) time series • Mixed results • Gries, Kraft & Meierrieks (2009, WD) • GMM • Individual African economies • Granger-Hsaio causation • Wacziarg & Welch (2008, WBER) • 13 country statistical case studies • Kneller, Morgan & Kanchanahatakij (‘08, WE) • Panel of event studies Antwerp

13. What have we learned (IV) Conditions • Heterogeneity of country studies • E.g. Chang, Kaltani & Loayza (2009, JDE) and Bolaky and Freund (JDE, 2008) • Interactions of openness with Antwerp

14. Income, Openness and Regulation(Bolaky-Freund; JDE 2008)Less regulated half More regulated half

15. Weaker effects of liberalisation in poor countries Benefits for low-income Africa uncertain Linear interaction – where is it identified from in the sample space? Conditions are highly correlated, tested 1-by-1 Is it just catching Africa in 1980s/1990s Is Africa different in 2000s/2010s? Antwerp

16. What have we learned (V) Productivity • Selectivity • Imported inputs (Amiti & Koenings (2007, AER) and AER P&P 2009 • Learning by Exporting (Fernandes & Isgut, 2005, WB; Blalock & Gertler, 2004, JDE) • Learning to Export (Iacovone, 2009, WB) Antwerp

17. What does this mean for policy? Vast majority of growth policy is not trade policy; try to make trade policy simple and unobtrusive Treat as decision, not a hypothesis test Antwerp

18. Policy-Relevant Growth Econometrics g = Xα + Zγ + βt X ‘maintained’ variables; Z ‘optional’ variables t is tariff level Hypothesis testing H0 : β=0 against H1 : β≠0 Trade policy ‘affects’ growth if t-statistic on β > 2 Issues:(a)uncertainty about β (specification as well as sampling ), (b) relative size of g andβt Antwerp

19. Decision Approach • Have to decide • Balance of evidence and priors • Costs of different errors • Cost of uncertainty Antwerp

20. Distribution of growth increments Kneller et al (2008) Sample of 47 events Antwerp

21. Cost of error • ‘We know of no credible evidence … that suggests that trade restrictions are systematically associated with higher growth rates’ Rodriguez and Rodrik (2001, p.317) Antwerp

22. Growth and Poverty • Large literature – not dealt with here • One influential study Antwerp

23. Shares in Long-run Poverty Reduction(Kraay, JDE 2006, cross-section) 23

24. The Microeconomics/Distribution • Conclusion from 1999 • Trade Liberalisation • creates losers • some of whom may be, or may become, poor • Much is uncertain, but not all Antwerp

25. Conceptual Framework Winters World Economy (2002) 25

26. Two approaches CGE Modelling supplemented with modules or satellite accounts for personal incomes Hertel, Tarr, Cockburn Clear, quantitative, perfect attribution,necessary ex ante But not strongly grounded in data and outcomes Frontier is ex post studies Based on actual outcomes, messy, difficult Start with a hybrid to point up the issues Antwerp

27. Uses the framework on Mercosur Welfare = f(prices, incomes); SOE traded prices changed by tariffs etc Non-traded prices and wages = f(traded prices) Estimates based on theory, then simulates Porto (JIE, 2006) Antwerp

28. Antwerp

29. …and sons • Nicita (JDE, 2009) • Mexico • Expenditure main effect • Marchand (JDE, 2012) • India • Consumption dominates Antwerp

30. Empirical Use of the Framework • Identity, definition; LHS unobservable • Observable equivalent Δ(real consumption) Δrcj = ….. β (Σiwjidlnτi )+ uj • Second order effects – Omitted variables • Parameter heterogeneity – Errors of observation Δrcj = ….. β (exposure) + uj • Partial studies: pass-through; wage effects, ε Antwerp

31. Topalova (AEJ-AE, 2010) • India, 1990s reforms • Real consumption or poverty rate by region (77) and district (450) • Regressed on employment-weighted tariffs and fixed effects; hence, • Import-based • D-i-D – only relative effects • Greater exposure → worse poverty outcomes Antwerp

32. Refinements • Standard robustness tests • Agricultural wages/returns main channel • Harm is associated with lack of mobility – regional and sectoral = big issue for the poor • i.e alternatives to agriculture weakened • Inflexible labour laws are a key factor • Export exposure → liberalisation reduces poverty (Topalova, 2007) Antwerp

33. Off-shoots • Hasan et al (REcStat, 2007) state level data and add data on NTBs: reverse result • Krishna et al (NBER, 2010): • reverse result for ‘leading’ regions; strong in laggards • Castilho (WD, 2012) Brazil: • using same exposure variable, same result • using exports → lib. helps; imports → lib. hurts • McCaig (JIE, 2011) Vietnam • Exposure to US tariff cuts reduces poverty Antwerp

34. Wages – skills gap • Largeliterature – generally suggests liberalisation increases the skills premium • Amiti and Cameron (JIE, 2012): Indonesia • Unskilled abundant • Firm-level data – estimate within-firm effects; • Tariffs on inputs and outputs • Tariff cuts for outputs – insignificant effects • Tariff cuts for inputs – closes skills gap • Stolper-Samuelson type of effect? Antwerp

35. Conclusion from 19992013 Trade Liberalisation • generally stimulates growth • and through it poverty alleviation • Generally more secure, but maybe with a few more caveats for low income countries

36. Conclusion from 19992013 • BUT, it creates losers • some of whom may be, or may become, poor • Conclusion re-inforced • High-quality empirics – more precise and focussed, but all partial in one way or another • Role of segmentation strongly evident

37. Therefore Public Policy should: • proceed with liberalisation, • predict the poverty impacts, • possibly pre-empt them, especially by increasing mobility and flexibility, and • protect the poor with general anti-poverty policies Antwerp

38. Thank you Antwerp

39. Do border price shocks get transmitted to poor households? Are markets created or destroyed? How well do households respond? Do the spillovers benefit the poor? Does trade liberalisation increase vulnerability? Winters, McCulloch and McKay JEL (2004) Households and Markets 39

40. Wages and Employment Does liberalisation raise wages or employment? Is transitional unemployment concentrated on the poor? Government Revenue and Spending Does liberalisation actually cut government revenue? Do falling tariff revenues hurt the poor? 40