This book stems from a project designed to assess the impacts of potential trade reforms on poverty reduction in selected low-income countries and the complementary policies needed in conjunction with these reforms. The project was a joint venture of the Groupe d'Economie Mondiale, Sciences Po (Paris), the Yale Center for the Study of Globalization, and the Development Research Group of the World Bank.
In an introductory chapter, Ernesto Zedillo, writing at the end of 2006, first reviews the events leading up to the November 2001 WTO Doha Ministerial Meeting and then goes on to address the impasse that has occurred in implementing the Doha Round negotiations. He sees three options for dealing with the impasse: (1) extend the time horizon to conclude the round; (2) adopt a ‘Doha-lite’ package of minimum agreements and conclude the round in about a year; and (3) declare the round dead. He favors the Doha-lite option as the most feasible, given the uncertainties of US legislative authority and the difficulties in motivating WTO members to table their offers in a timely manner. If the Round were declared dead, there would be great stress on the trading system and encouragement of potentially damaging policies by countries seeking their own national interests. While the options noted have their pros and cons, it is of course obvious that the Doha negotiating process has remained stalled, and it is by no means certain if and when it may be revived. Nonetheless, Zedillo stresses the usefulness of this volume of country studies of the effects of trade liberalization on incomes in poor countries.
In the first main chapter, the editors provide an overview of the challenges to reducing poverty through trade reform. They emphasize that many smaller and poorer countries may face significant adjustment costs from freer trade and difficulties in implementing needed economic reforms to enhance their domestic productive capacity, efficiency, and international competitiveness. In focusing on the effects of changes in trade policy on the poor, it is noted that there may be direct effects on incomes and consumption and indirect effects on investment incentives, innovation, and economic growth. In focusing only on direct effects, it is stressed that the effects on the poor may vary depending on country and household characteristics.
Seven of the poorest countries spanning three regions were selected for analysis: Africa (Ethiopia, Madagascar, and Zambia); Asia (Cambodia and Vietnam); and Latin America (Bolivia and Nicaragua). In part, these countries were chosen because they had good data on household incomes and expenditure. In Chapter 2, Kee, Nicita, and Olarreaga present a partial equilibrium, multi-product, multi-country model that they use to estimate the impact of alternative Doha Round scenarios on world prices, exports, and imports at the six-digit level of the Harmonized System of Goods Classification. The modeling choice was dictated by the infeasibility of using a computable general equilibrium (CGE) approach due to data constraints. The results of their global model provide the basis for estimating the impacts on wages, employment, and domestic prices at the household level in the individual countries.
Two Doha Round scenarios are run: business as usual, which involves a 40% reduction in the bound tariffs of WTO members, with applied tariffs that vary depending on the difference between current applied and bound levels; a reduction of all tariff peaks to a maximum of 50%; a 40% in the aggregate measure of agricultural support; elimination of agricultural export subsidies; and a 2% of imports improvement in trade facilitation. A second ambitious scenario is run that involves removal of all tariffs and subsidies, the same degree of trade facilitation, and a 50% reduction in the restrictiveness of existing nontariff measures. The business-as-usual scenario yields a global welfare increase of $46–$72 billion, with $23 billion being captured by developing countries, while the ambitious scenario yields a global increase of $253–$285 billion, with developing countries capturing $112 billion. Liberalization of services barriers are not taken into account. These global welfare estimates seem fairly low compared to CGE modeling estimates based, for example, on studies carried out at the University of Michigan that included services liberalization. It is unlikely, however, that the welfare estimates used in the country studies would be changed materially if the estimates were larger than the ones used.
A common methodology is employed in each of the country studies. Changes in the prices and demand for the internationally traded products are first translated into changes in domestic prices and export supply; the increase in supply is distributed across households based on available survey data; the impact on employment is mapped on to households; and all of the changes are fed into a household welfare function to measure changes in real income and poverty. Each country study contains very useful and informative data on the breakdown of household incomes and expenditures, making it possible to see clearly how the different income groups would be affected by trade liberalization and other changes in policies. Especially interesting is the use of agricultural household modeling and the matching of changes in output and employment. The individual country studies thus reflect sophisticated micro-econometric analysis, making it possible to identify the similarities and differences between the various impacts on different income groups and in the aggregate. The main results are as follows:
• For Ethiopia, multilateral trade liberalization would have a negative, though small, impact on the poor, in the absence of complementary policies, because of the increased cost of the consumption baskets of households. There would be small but beneficial effects if domestic policy reforms accompanied trade liberalization, although the poor households would benefit less than the non-poor.
• Madagascar would have limited benefits from multilateral trade liberalization since its main export products would not increase significantly, domestic supply responses would be limited, and the existing domestic infrastructure and underdeveloped markets would impede development.
• There would be limited benefits from multilateral trade liberalization for Zambia. The benefits would be enhanced if complementary policies were introduced, such as more agricultural extension services, privatization of cotton marketing, and better targeted employment programs.
• The business-as-usual Doha scenario would have a negligible impact on Cambodia's poor, while the ambitious scenario combined with elimination of Cambodian tariffs would be beneficial due to increased production of rice and consumption of food. There could also be benefits if Cambodia's exports of textiles were increased and if rice production technology and lower transactions costs were achieved.
• The overall poverty rate in Vietnam would not be greatly affected by multilateral trade liberalization since there would be a redistribution of wealth from urban to rural population and from rice consumers to rice producers and sellers. Some benefits could be realized if Vietnam's textile exports increased.
• Effects on Bolivia would depend on the extent to which multilateral trade liberalization increased Bolivian manufacturing and agricultural exports.
• Nicaragua would benefit to some extent from an ambitious Doha scenario, particularly if its exports of manufactures increased. Improvements in agricultural extension services and road infrastructure could foster greater welfare if market-oriented production were to displace subsistence agriculture.
In the concluding chapter, Hoekman is cognizant of the findings that trade liberalization will not have a significant impact on global poverty and on the poorest countries. He stresses accordingly the need for expansion of grant-based funding to enhance productive capacity and productivity by means of a large-scale program of ‘aid for trade’ that will go along with complementary policies of domestic reform. There has been some progress in developing an aid-for-trade framework at the multilateral level, but more needs to be done whether or not the Doha negotiations can be revived and concluded. Hoekman urges also that more emphasis be placed on the identification and realization of development goals rather than using trade policies to provide special treatment for poor countries. This could be accomplished by using the WTO to assist developing countries to pursue national objectives that do not distort trade.
In the final analysis, it thus appears that trade liberalization will not have a significant impact on global poverty and benefit the lowest income groups in poor countries. While aid-for-trade has much to recommend it, the fact remains that domestic economic reforms are the key to raising living standards and economic welfare in poor countries. In this respect, as some of the country studies show, apart from the trade effects, the data and modeling that have been developed and implemented could be fruitfully applied in analyzing the impacts of economic reforms in the world's poor countries.
