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The Earnings Effects of Multilateral Trade Liberalization: Implications for Poverty in Developing Countries

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Author Info

  • Hertel, Thomas W.
  • Maros Ivanic
  • Paul Preckel
  • John Cranfield

Abstract

Poverty reduction is an increasingly important consideration in the deliberations over multilateral trade liberalization. However, the analytical procedures used to assess the impacts of multilateral trade liberalization on poverty are rudimentary, at best. Most poverty studies have focused on a single country using detailed household survey data. When it comes to multi-country, global trade liberalization analyses, researchers are often forced to resort to a discussion of average, or per capita effects, suggesting that if per capita real income rises, then poverty will fall. As we show in this paper, such an inference can be misleading. Our paper combines results from a new international, cross-section consumption analysis, with earnings data from household surveys, to analyze the implications of multilateral trade liberalization for poverty in Indonesia. This method could readily be extended to analysis of poverty impacts in the other thirteen countries in our sample. By emphasizing the earnings-side of the poverty story, we complement earlier studies of poverty that have tended to emphasize consumption determinants, often to the exclusion of earnings impacts. Specifically, we stratify households according to their primary source of income, identifying those that are specialized (95% or more of their income) in agriculture enterprises, non-agriculture enterprises, wage/salary labor, and transfers. Together, these account for more than half of the population. All other households are considered to be diversified, and therefore less vulnerable to trade shocks. We find that, following global trade liberalization, the national headcount measure of poverty in Indonesia is reduced by a small amount in the short run, and significantly more in the long run. We also decompose the poverty changes in Indonesia associated with different countries’ trade policies. We find that liberalization in other countries’ policies leads to a reduction in national poverty in Indonesia, while liberalization of Indonesia’s own trade policies leads to an increase in the poverty headcount. However, the aggregate reduction in Indonesia’s national poverty headcount masks a more complex set of impacts among different groups. In the short run, the poverty headcount actually rises slightly for self-employed, agricultural households, as agricultural profits fail to keep up with increases in consumer prices. In the long run, the poverty headcount falls for all earnings strata in Indonesia, as the increased demand for unskilled workers lifts incomes for the formerly self-employed, some of whom move into the wage labor market.

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Bibliographic Info

Paper provided by Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University in its series GTAP Working Papers with number 1208.

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Date of creation: 2004
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Handle: RePEc:gta:workpp:1208

Note: Working Paper No. 16
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Cited by:
  1. Hussein, Zekarias & Golub, Alla A. & Hertel, Thomas W., 2012. "Climate Change Mitigation Policies and Global Poverty," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 124689, Agricultural and Applied Economics Association.
  2. Keeney, Roman & Beckman, Jayson, 2009. "WTO negotiations on agriculture and the distributional impacts for US rice farm households," Food Policy, Elsevier, vol. 34(1), pages 70-80, February.
  3. Gabriel Sánchez & María Laura Alzúa & Inés Butler, 2008. "Impact of Technical Barriers to Trade on Argentine Exports and Labor Markets," CEDLAS, Working Papers 0079, CEDLAS, Universidad Nacional de La Plata.
  4. Susan Stone & Anna Strutt & Thomas Hertel, 2010. "Assessing Socioeconomic Impacts of Transport Infrastructure Projects in the Greater Mekong Subregion," Working Papers id:2959, eSocialSciences.
  5. Fan, Linlin & Nogueira, Lia & Baylis, Katherine R., 2013. "Agricultural Market Reforms and Nutritional Transition in Rural China," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. 150203, Agricultural and Applied Economics Association.
  6. Surabhi Mittal, 2007. "OECD Agricultural Trade Reforms Impact On India's Prces and Producer's Welfare," Working Papers id:1072, eSocialSciences.
  7. Harry G. Broadman, 2005. "From Disintegration to Reintegration : Eastern Europe and the Former Soviet Union in International Trade," World Bank Publications, The World Bank, number 7511, October.
  8. Harris, Richard G. & Robertson, Peter E., 2013. "Trade, wages and skill accumulation in the emerging giants," Journal of International Economics, Elsevier, vol. 89(2), pages 407-421.
  9. Verma, Monika & Hertel, Thomas W., 2009. "Commodity Price Volatility and Nutrition Vulnerability," 2009 Annual Meeting, July 26-28, 2009, Milwaukee, Wisconsin 49344, Agricultural and Applied Economics Association.
  10. Francois, Joseph & Rojas-Romagosa, Hugo, 2011. "Household inequality, social welfare, and trade," Journal of Development Economics, Elsevier, vol. 96(2), pages 422-431, November.
  11. Carmen Fillat & Joseph Francois, 2004. "National and International Income Dispersion and Aggregate Expenditures," Tinbergen Institute Discussion Papers 04-093/2, Tinbergen Institute.
  12. Joseph Francis Francois & Hugo ROJAS-ROMAGOSA, 2008. "Equity and International Trade," Economics working papers 2008-14, Department of Economics, Johannes Kepler University Linz, Austria.
  13. Valenzuela, Ernesto & Hertel, Thomas W. & Ivanic, Maros & Nin Pratt, Alejandro, 2004. "Evaluating Poverty Impacts of Globalization and Trade Policy Changes on Agricultural Producers," 2004 Annual meeting, August 1-4, Denver, CO 20242, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).

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