Trade Liberalization and the Structure of Poverty in Developing Countries

“Globalization increases poverty” is a common assertion made by critics of globalization. The proliferation of low-wage jobs and higher food prices are some of the arguments brought forward in support of this argument. One of the hallmarks of globalization is the systematic dismantling of barriers to trade. Advocates of trade liberalization – particularly industrialized country agriculture reform – argue that the ensuing rise in world prices for agriculture products will boost rural incomes, thereby reducing poverty in the poorest countries, where the bulk of world poverty resides. Who is right? The goal of this paper is take a systematic look at the structure of poverty across a range of developing countries in Africa, Asia and Latin America, and explore how national poverty rates in some of the poorest countries in the world are likely to be affected by global trade liberalization.Our analysis of the structure of poverty is based on national household surveys from 14 developing countries. While we consider both spending and earnings effects of trade liberalization, it is argued that the earnings effects will generally be the dominant factor. This is particularly true in the short run for households that are highly specialized in their earnings patterns. Consider the case of a self-employed farm household. Assuming that trade liberalization results in higher farm prices, we expect the short run effect on the returns to family labor and land to be positive, and somewhat larger in percentage terms (the so-called “magnification effect”). Furthermore, if this household is not employed off-farm, then the farm profitability effect translates directly into an income effect, and this is likely to be sufficient to lift some of the farm households out of poverty. Of course this same effect can work in reverse, with commodity price declines increasing poverty. This makes specialized households highly vulnerable to trade policy shocks. In addition to agriculture-specialized households, we focus on self-employed non-agriculture specialized households, households specialized in wage labor and those relying on transfer payments for 95% or more of their income. Together, these four types of specialized households account for an average of 56% of the poor in the 14 countries examined. Thus a majority of the poor have specialized earnings patterns and are likely to be disproportionately affected by trade liberalization. The same is not true of the non-poor, where a majority of the households are diversified, and are therefore less vulnerable to sector-specific commodity price changes. We also find that the poor are over-represented among the agriculture-specialized households. With this background, we turn to an examination of the broad effects of multilateral trade liberalization on relative commodity prices and factor returns across the 14 countries in question. We distinguish between per capita effects – or the impact of trade liberalization on the “average” household in each country, and the effects on the poorest households. Our per capita results are quite similar to other studies of multilateral trade liberalization, with most countries gaining modestly, while a few gain substantially and a few lose due to the erosion of benefits from existing preferences. Some argue that this “rising tide will lift all boats” and so the positive per capita gains from trade liberalization will reduce poverty. However, we show that the short run impact of trade liberalization on different household groups is quite varied, and not always positive. First of all, global trade liberalization tends to raise food prices – particularly for staples, relative to non-food prices. This is true in all but 2 of the countries in our sample. This food price hike has an adverse effect on the poor, relative to the per capita household, since they spend a disproportionate share of their income on food. Also, the short run earnings impacts are quite varied, with agricultural profits rising relative to per capita income in 11 of the 14 countries, while relative non-agricultural profits and wages fall in many of these countries. Thus the overall impact on poverty depends on the structure of poverty in each country – hence our emphasis on this topic. We proceed to systematically explore the impact of trade liberalization on poverty utilizing a recently developed analytical framework that combines the detailed household survey data with a global economic model in order to measure the poverty impacts of trade liberalization on the five different household strata in each country. Each of the first four strata corresponds to one of the groups of earnings-specialized households, while the fifth encompasses the diversified households in each country. We conduct our analysis at the level of one hundred income percentiles, ranging from poorest to richest in each stratum. In this way, we uncover the differential impact of trade liberalization, by country, stratum and by income level. We also calculate the change in poverty rates, both at the stratum and national levels. Our findings emphasize the differential short run poverty impacts of multilateral trade liberalization on poverty across countries, across strata, and within strata, thereby highlighting the links between the structure of poverty and the national impacts of trade liberalization.