Trade and poverty addis - june 2013

Does Trade Reduce Poverty?A View from Africa

Raju Jan Singh (World Bank)Maëlan Le Goff (CEPII)

June 5 - 6, 2013

Trade and Regulation in Services in Africa, Addis Ababa

Introduction

• Trade liberalization promoted as a key component in development strategies. It potentially affects poverty through its effects on both growth and income distribution.

• However, theoretically and empirically, the impact of trade openness on poverty reduction is ambiguous.

• The literature on the trade-poverty relationship in Africa is almost non-existent.

MOTIVES

Introduction

1- Empirically examine the effect of trade openness on poverty in Africa.

2- Remove uncertainty regarding the effect of TO on poverty by testing whether the poverty reduction effect of greater trade openness depends on a variety of structural characteristics, including some that are subject to reform.

Define general policy guidelines to help trade liberalization policies alleviate poverty in Africa.

OBJECTIVES (1)

Introduction

More precisely, we examine the possible role played by:

• financial development: can help the poor create market activities by easing the provision of important inputs + may diminish rising income risks when they switch from producing subsistence-local goods to producing tradable goods.

• education level: indicates whether the poor have enough skills to gain from trade liberalization, to interact with markets and how vulnerable they are to change.

• institutional quality: can promote the effect of trade on growth

OBJECTIVES (2)

legoff

trade liberalisation is more likely to be poverty reducing when the poor have access to credits or to primary education.

Literature review

• Two broad strands of argumentation when discussing the effects of freer trade on poverty: static and dynamic (Bhagwati and Srinivasan, 2002)

• The static approach based on the Stolper-Samuelson theorem (the abundant factor should see an increase in its real income when a country opens up to trade) + changes in prices.

• The dynamic approach: economic growth is key to sustained poverty alleviation and trade liberalization is argued to lead to the needed increases in productivity to sustain growth (Berg and Krueger, 2003; Grossman and Helpman, 1991; Lucas, 1988).

IN THEORY

Literature reviewIN THEORY

1. Factors may not be as mobile as assumed;

2. Informal sector may crowd out formal employment;

3. Skill-biased technological change;

4. Natural resources instead of labor-intensive sectors.

Literature reviewEMPIRICAL STUDIES

1. Employment effects of freer trade policies

were generally rather limited (Krueger, 1983);

2. Cross-country studies on poverty seem to show that at best the benefits of greater trade openness have bypassed the poor (Beck et al., 2007; Dollar and Kraay, 2001; Guillaumont-Jeanneney and Kpodar, 2011; Kpodar and Singh, 2011; Singh and Huang, 2011).

Literature reviewCONCLUSIONS

suggesting that trade liberalization may require a combination with other policies 1. Policies that would encourage investment, allow

effective conflict resolution, and promote human-capital accumulation (Winters et al., 2004: Bolaky and Freund, 2008);

2. Domestic political structures and institutions (such as oligarchic or predatory regimes) may prevent the poor from benefiting from globalization (Sindzingre; 2005);.

3. (a) Macroeconomic stability and a sound investment climate; and (b) protection for workers, maintenance of high-quality working conditions, and facilitation of labor transitions (Newfarmer and Sztajerowska, 2012)

Empirical Analysis

• 30 African countries

• Over the period 1981 to 2010

• Data averaged over five-year periods (1981-1985; 1986-1990; 1991-1995; 1996-2000; 2001-2005; 2006-2010)

SAMPLE

Empirical Analysis

• Poverty measureThe poverty headcount index (% of the population living with income or consumption per person below the $1.25 poverty line) – World Bank Global Poverty Index Database

• Trade opennessThe sum of exports and imports as a share of GDP (rather than a legalistic measure of liberalization)- WDI

• Control variables- Gross Domestic Product per Capita- WDI- Primary completion rate- UNESCO- Private credit as a share of GDP- IFS- Inflation- WDI- Law and order- ICRG

DATA AND VARIABLE DEFINITIONS

Empirical Analysis

• Our point of departure :

EMPIRICAL MODEL (1)

tiittititi XTOPoverty ,,2,1,

- Poverty is the log of the poverty headcount index- X is the matrix of control variables- TO is our measure of trade openness

Empirical Analysis

• We then allow the poverty reduction effect of openness to vary with some country characteristics by estimating the following model :

EMPIRICAL MODEL (2)

tiittititititi xTOXTOPoverty ,,,3,2,1,

- Poverty is the log of the poverty headcount index- X is the matrix of control variables- TO is our measure of trade openness- x represents alternatively: financial development, education level

and institution quality

Note: all variables are included in log, except the variable of institutional quality

Empirical Analysis

• Presence of unobserved period- and country-specific effects

• Most explanatory variables could be jointly endogenous with poverty (simultaneity or reverse causation)

Use of the System Generalized Method-of-Moment (GMM) estimator developed by Blundell and Bond (1998).

METHODOLOGY

-20

24

Lo

g o

f p

ove

rty

he

ad

coun

t

2 3 4 5 6Log of trade openness

Bottom group Linear prediction (bottom group)Top group Linear prediction (top group)

-20

24

Lo

g o

f p

ove

rty h

ead

coun

t



-20

24

Lo

g o

f p

ove

rty h

ead

coun

t



Empirical AnalysisRESULTS-FIRST LOOK

Financial developmen

t

Education level

Institutional quality

Poverty headcount (log)(1) (2) (3) (4)

Trade openness (log) 0.390(0.91)

2.670**(1.99)

5.037*(1.75)

2.402**(2.09)

GDP per capita (log) -0.888**(-2.45)

-0.818**(-2.10)

-0.863***(-3.70)

-0.553**(-2.14)

Inflation (log) 0.157*(1.84)

0.184*(1.84)

0.058(0.58)

0.119(1.40)

Education (log) -0.778**(-2.36)

-0.447(-1.50)

4.884*(1.74)

-0.425(-1.55)

Law and order 0.152(1.03)

0.014(0.09)

-0.097(-0.70)

2.917**(2.18)

Private Credit/GDP (log) -0.192(-0.81)

3.778*(1.69)

-0.034(-0.23)

-0.276(-1.46)

Private Credit/GDP *Trade openness -0.928*(-1.72)

Education* Trade openness -1.310*(-1.80)

Law and order *Trade openness -0.725**(-2.08)

Constant 11.059***(2.97)

-0.148(-0.02)

-8.339(-0.82)

-0.065(-0.01)

Observations 64 64 64 64Number of countries 30 30 30 30Sargan/Hansen test 0.59 0.47 0.82 0.57AR(2) 0.29 0.47 0.64 0.75

Empirical AnalysisRESULTS (1)


Results of the basic equation estimation (columns 1):

• Control variables: results are consistent with previous empirical literature:- Gross Domestic Product per capita- negative- Percentage of primary school complete- negative- Inflation- positive- Private credit as a share of GDP- non significant- Law and order- non significant

• Trade openness: greater trade openness is associated with higher levels of poverty, albeit not in a significant way



2.670**(1.99)

5.037*(1.75)

2.402**(2.09)


-0.818**(-2.10)

-0.863***(-3.70)

-0.553**(-2.14)


0.184*(1.84)

0.058(0.58)

0.119(1.40)

Education (log) -0.778**(-2.36)

-0.447(-1.50)

4.884*(1.74)

-0.425(-1.55)


0.014(0.09)

-0.097(-0.70)

2.917**(2.18)


3.778*(1.69)

-0.034(-0.23)

-0.276(-1.46)




Constant 11.059***(2.97)

-0.148(-0.02)

-8.339(-0.82)

-0.065(-0.01)




Trade poverty relationship and development of the financial system:

• Better access to credit allows poor people to benefit more from trade openness

• The poor can benefit from trade when domestic private credit overcomes the threshold of 17.7% as a share of GDP (sample average=21.2%).



2.670**(1.99)

5.037*(1.75)

2.402**(2.09)


-0.818**(-2.10)

-0.863***(-3.70)

-0.553**(-2.14)


0.184*(1.84)

0.058(0.58)

0.119(1.40)

Education (log) -0.778**(-2.36)

-0.447(-1.50)

4.884*(1.74)

-0.425(-1.55)


0.014(0.09)

-0.097(-0.70)

2.917**(2.18)


3.778*(1.69)

-0.034(-0.23)

-0.276(-1.46)




Constant 11.059***(2.97)

-0.148(-0.02)

-8.339(-0.82)

-0.065(-0.01)




Trade poverty relationship and human capital level:

• The beneficial impact of an increase in trade openness is larger when the investment in human capital is stronger;

• Trade openness starts being favorable to the poor when primary completion rate exceeds 46.7% (sample average= 55%)



2.670**(1.99)

5.037*(1.75)

2.402**(2.09)


-0.818**(-2.10)

-0.863***(-3.70)

-0.553**(-2.14)


0.184*(1.84)

0.058(0.58)

0.119(1.40)

Education (log) -0.778**(-2.36)

-0.447(-1.50)

4.884*(1.74)

-0.425(-1.55)


0.014(0.09)

-0.097(-0.70)

2.917**(2.18)


3.778*(1.69)

-0.034(-0.23)

-0.276(-1.46)




Constant 11.059***(2.97)

-0.148(-0.02)

-8.339(-0.82)

-0.065(-0.01)




Trade poverty relationship and the country’s institutional environment:

• The negative association between trade and poverty could diminish with improvements in the respect of rule of law and even reverse;

• Trade openness could be favorable to the poor when institutional quality reaches 3.3 (sample average=2.9)

Concluding Remarks

• While on average trade does not seem to be associated with lower poverty in Africa, this observation hides important non-linearities.

• More openness results in a reduction in poverty when financial sector is deeper, education levels higher, and governance stronger.

• Trade liberalization should therefore not be seen in isolation and additional policies will sometimes be needed to enhance its impact on poverty.

• If these services are not developed, could the countries import them?

Thank you for your attention

Business

Trade and poverty addis - june 2013