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

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.