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Student No. 6256082 Globalisation & Economic Development April 2014
1
The Impacts of Trade Liberalisation Upon Poverty in Brazil
Introduction
This paper discusses the impact of trade liberalisation –hereinafter referred to as
liberalisation- upon poverty in Brazil between 1988 and 2009, during which time Brazil’s
poverty headcount ratio at both the $1.25 and $2 a day level declined almost 60%
(World Bank, 2014). This timeframe enables discussion surrounding both the short and
long-term effects of Brazil’s ‘Washington Consensus’ style trade policies. The discussion
will be organised as follows. Section 1 introduces economic trade theory and discussion
surrounding the connection between liberalisation and poverty reduction. Section 2
briefly considers the complexities pertaining to the conceptualisation and measurement
of poverty. Section 3 summarises Brazil’s initial liberalisation reform while section 4
reviews some of the empirical literature that focuses upon the impacts of liberalisation
upon Brazilian poverty. Evidence discussed in this paper does not imply a causal
relationship between Brazil’s trade liberalisation and poverty. However, it is suggested
that the immediate effects of liberalisation appeared to contribute to a rise and/or sustain
poverty levels, while in the long run liberalisation has -to some extent- contributed
toward poverty reduction in Brazil.
1.Trade Liberalisation and Poverty: Theory and Relationship
“Identifying the relationship between poverty and trade liberalization poses a
tremendous challenge.” (Goldberg & Pavcnik, 2004:10)
The impact of liberalisation upon poverty is theoretically and empirically analysed
through two distinct types of neo-classical argumentation: static and dynamic (Bhagwati
& Srinivasan, 2002). The static argument centres around the idea that poverty is
affected through effects on demand and, thus, real wages of workers possessing labour
but no financial or human capital. This argument links to the Heckscher-Ohlin (HO)
Stolper-Samuelson (SS) models which theorise that liberalisation should assist in
reducing poverty in developing countries that utilise their comparative advantage to
export (unskilled) labour intensive goods (2002). The dynamic argument links trade with
poverty through the channel of economic growth. The principle argument for this is that
trade stimulates growth and growth reduces poverty (2002) with Berg and Krueger
Student No. 6256082 Globalisation & Economic Development April 2014
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(2003:25) stating that trade liberalisation has no “systematic effects on the poor beyond
its effect on overall growth”. Both theories include a number of assumptions; namely, the
HO model assumes capital is immobile while the SS model assumes an economy
consists of just two broad sectors. The two-step liberalisation-growth-poverty process is
problematic also. Firstly the relationship with liberalisation and growth is complex;
secondly it assumes growth automatically translates into poverty reduction.
Ravallion (2005) notes that an extensive literature using different data sets, regression
specifications and control variables attempting to disaggregate the impact of
liberalisation upon growth/poverty exists, often producing differing results. One such
study is that of McCulloch et al., (2001)1 who consolidate various liberalisation-growth-
poverty linkages into three channels: enterprise (whereby households are affected by
changes in trade policy through profits, wages and employment) distribution (via the
transfer of border price changes to consumers), and government (where government
revenues are affected and thus the scope for pro-poor expenditures). Rodrik and
Rodriguez (2000:265) discredit searching for any such liberalisation-growth-poverty
relationship claiming trade policy indicators such as reduced tariff levels “…are highly
correlated with other sources of poor economic performance.” However, refuting
Rodrik’s claim Bhagwati & Srinivasan (2002) state that adopting an outward looking as
opposed to an import-substituting strategy requires macroeconomic stability to be
maintained and this should, therefore, be regarded as endogenous to liberalisation-
oriented policies.
The above demonstrates the lack of consensus amongst scholars to the liberalisation-
poverty relationship, apparent also with regards to poverty measurement as discussed
below.
2.Poverty Measurement
“…whether liberalisation is seen as good or bad for poverty reduction depends in part on
how poverty is measured.” (Conway, 2004:10)
Multiple poverty measurement frameworks exist, namely the Multidimensional Poverty
Index (MPI); arguably a more holistic measurement than the World Banks’ favoured
poverty headcount ratio (PHR) income approach. Moreover, national poverty lines often 1 Cited from Conway_(2004:11-12).
Student No. 6256082 Globalisation & Economic Development April 2014
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use alternative methods of measurement. The distinctions between these
measurements -among others- can often produce varied and/or distorted results,
including a large margin of error or downward bias in poverty estimates (Wade, 2004). 2
Figure 1 illustrates how different approaches toward poverty measurement can lead to
substantial variances in poverty incidence for Brazil. Furthermore, calculating poverty at
the aggregate level can be inadequate, particularly in Brazil where poverty is heavily
characterised by geography, urban/rural divisions (Ferreira, et al., 2001) and race
(Telles, 2004:112). The dissimilarities in poverty measurement –including its
disaggregation- problematize the way in which liberalisation’s impact upon poverty can
be evaluated empirically.
The difficulties in identifying the true liberalisation-poverty relationship are all applicable
to the Brazilian case. Whilst this paper does not attempt resolve these matters, it is
necessary to be aware of such limitations before discussing liberalisation’s impact upon
poverty in Brazil.
3.Brazilian Trade Liberalisation
Trade reforms represented an opening of the Brazilian economy to the world after many
decades pursuing an import substitution industrialisation (ISI) development strategy
(Barros, 2009). The first restructurings occurred as early as 1988, although the bulk of
change occurred with the arrival of the Collor government in 1990 who installed the
2 Wade notes that the Economic Commission for Latin America (ECLAC) uses a calories-and-demography poverty line, which estimates the poverty rate as much higher than the standard income approach.
Figure-1: Brazilian Poverty in 2006 – Survey: PNDS (OPHI, 2013)
Student No. 6256082 Globalisation & Economic Development April 2014
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trade tariff as the primary trade instrument (Castilho et al., 2012). Figure 2 illustrates the
drastic decline in tariff rates, from 51% in 1987 to 25.3% in 1991, and 12% by 1994.
Moreover, in 1991 Brazil joined with Argentina to create MERCOSUR, inviting Paraguay
and Uruguay to join the initiative that primarily promoted the free movement of goods
and services between the countries (Ibid.:2). These initial trade reforms culminated in
Brazil’s accession to the World Trade Organisation in 1995 (WTO, 2014). Since then,
Brazil has instigated various bilateral agreements; namely free trade agreements with
Chile, Peru and Israel3 in 1996, 2005 and 2010 respectively (Pereira, 2006).
4.Trade Liberalisation’s Impact upon Brazilian Poverty
Discussion primarily focuses upon the short-run static outcomes, which (generally) are
empirically more manageable than long-run dynamic outcomes stimulated through
growth (Goldberg & Pavcnik, 2004). That said, the long-term trend in poverty reduction
and its relationship to liberalisation/growth will be briefly discussed also.
Using national poverty line data Castilho et al., (2012) study liberalisation’s impact on
household income poverty across Brazilian states (1987-2005). Their significant finding
implies that -within urban areas of states- a fall of one percentage point in their trade
3 See_http://mfa.gov.il/MFA/PressRoom/2010/Pages/Brazil-has-given-its-final-approval-for-%20free-trade-agreement-with-Mercosur-15-Mar-2010.aspx
Figure-2: Brazilian tariffs overtime. (Castilho et al., 2012:823).
Student No. 6256082 Globalisation & Economic Development April 2014
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policy indicator4 would lead to a 0.65 and 0.28 percentage point increase in the PHR
and poverty-gap respectively; the negative effect being concentrated between 1987-
1996 when the bulk of Brazilian trade reform occurred. They observe no significant
effect within rural areas across the whole timeframe but do find a possible positive effect
on poverty occurred between 1997 and 2005.
The authors propose that one potential reason for these contrasting effects is due to the
urban population suffering unemployment from manufacturing industries where greater
tariff reductions were initiated. In comparison, the agricultural sector held a strong
comparative advantage where an abundance of natural resources and labour saw
agricultural exportation intensify (Fonseca & Rayp, 2011), exemplified by the sector’s
trade surpluses of $10-15 billion annually in the 1990s (Barros, 2009:8). Findings of
Green et al. (2001) also support this theory, highlighting that manufacturing employment
fell from its consistent 15%-plus share between 1985-1989 to 12.6% in 1998. In terms of
wages, Ferreira et al., (2007) claim the tariff reductions in the manufacturing sector
between 1988-1995 led to a decline in the relative prices of those goods, consequently
diminishing skilled worker wages relative to those of the unskilled; thus helping to
mitigate the poverty rate.
The above clearly aligns to traditional HO-SS trade theory. However, alternative
empirical evidence convincingly contests the above and contradicts the predicted
outcomes of the HO-SS models. Menezes-Filho and Muendler (2011) show that
unskilled workers made unemployed from import competing industries during the
liberalisation phase were not absorbed by exporters nor comparative-advantage
industries for many years; thus enlarging the informal labour market where earnings are
ordinarily less (Pavcnik et al., 2004). Carneiro and Arbache (2002) go further, stating
that greater liberalisation led to the importation of more capital goods and technology
across all sectors, subsequently leading to increasing demand for skilled labour and the
displacement of the less skilled. This finding correlates with those of Green et al.
(2001:1936) who show a significant and substantial rise in the returns to higher
education from 1992 onward compared to returns to primary and secondary education
4 This is a weighted average of national industry-level tariffs, where the weights correspond to the initial share of employment by industry within each state.
Student No. 6256082 Globalisation & Economic Development April 2014
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where a downward trend occurred. Maia (2001) 5 identifies the extent to which
liberalisation impacted on the employment market estimating the importation of cheaper
more efficient technologies, contributed to a net loss of 5.4 million jobs across sectors.
Turning attention to the agricultural sector and rural poor specifically, Cassel and Patel
(2003) highlight the damaging effects liberalisation had upon smallholder producers in
being unable to compete with large-scale operations due to lower producer prices and
reduced state entitlements which prioritised export-oriented agriculture. Moreover, how it
affected the 4.8 million small family farmers (predominantly poor) who –through lower
prices- were discouraged from production for local markets –a vital source of their
income.6 In terms of wages, between 1989-1999 skilled workers’ real per capita wages
in the agricultural sector rose by 106% compared to 64% of unskilled workers (RAIS,
2010).7
These findings contradict traditional trade theory. To explain this, one can look at the
shortcomings of the HO-SS models. The HO model assumes capital is immobile while
the SS model assumes that an economy is made up of just two broad sectors. How this
applies to the Brazilian case is described below.
Alongside trade-liberalisation was financial-liberalisation also, opening the Brazilian
economy to large influxes of foreign direct investment (FDI) with net inflows increasing
from $989 million to $32 billion between 1990-1998 (World Bank, 2014). The
combination of reforms amplified mechanisation within the agricultural sector, which
instigated a substantial migration of formal/skilled workers to the poorer North-eastern
Brazilian states where many new foreign-owned and exporting agribusinesses began to
locate and operate (Nissanke & Thorbecke, 2010; Fonseca & Rayp, 2011). Conversely,
liberalisation is claimed to have contributed to the rural exodus of the poor “…with
conditions so intolerable in rural Brazil that millions of people (.) fled to the unwelcoming
cities.” (Cassel & Patel, 2003:21). This contrast in migration flows of skilled/unskilled
labour may help to partially explain the findings of Castilho et al. highlighted at the
beginning of this section.
The overall impact that the influx of skill-biased technology and mechanisation had upon
unskilled labour (and thus poverty) across sectors was partially neutralised however by 5 As cited by Carneiro & Arbache 6 Cited from World Bank(2003) 7 As cited by Fonseca and Rayp(2011)
Student No. 6256082 Globalisation & Economic Development April 2014
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the growth experienced within the services sector, which was consistently more pro-poor
than both agriculture and industry during the immediate years following liberalisation
(Ferreira et al., 2009).
Figure 3 illustrates World Bank PHR data (1988-2009). A notable increase in poverty
levels occurred as the first tariff adjustments were enacted (1988) before stagnating at
both the $1.25 and $2 a day levels during the immediate years following Brazil’s main
liberalisation reforms (1990-1994). These data suggest that the abovementioned
immediate effects of liberalisation upon the labour market may have contributed to a rise
and/or sustained Brazil’s poverty levels.
Figure-3-Source- World Bank (2014)-Missing values for 1991,1994,20008
The Long Run
“…trade liberalization reforms in the early 1990s (…) also led to a significant increase in
the degree of openness in the economy, particularly since 2000, with significant impact
on per capita growth”.
(Adrogué, Cerisola & Gelos 2006:14)
8 Noteworthy is the sharp poverty reduction in 1995; largely attributable to the ‘Real Plan’, a stabalisation plan
enacted in 1994 to reverse the hyperinflationary pressures facing the Brazilian economy (Pereira, 2006:4).
0
5
10
15
20
25
30
35 Brazilian Poverty Headcount Ratio (%)
$1.25 a day
$2 a day
Year
%
Student No. 6256082 Globalisation & Economic Development April 2014
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Figure 3 shows a long-run decline in poverty levels from 2003 onwards, more so at the
$2 a day level. The immediate effects of liberalisation and importation of skill-biased
technologies may have induced the displacement of unskilled labour and increased
poverty, but it is claimed that it also rapidly increased productivity across sectors;
bringing an estimated 6% increase “…in total factor productivity growth rate and a
similar impact on labour productivity” (Ferreira & Rossi, 2003:1). Moreover the
competiveness of the opened economy is said to have been “a remarkable source of
productivity change among Brazilian manufacturers between 1990-1998.” (Muendler,
2004:38).
Between 1991 and 2011 Brazil achieved an average export growth rate of 7.9% (9.5%
since 2000)9 with the country’s total value of exports increasing four-fold from $32.9
billion in 1991 to $125.7 billion in 2011 10 (World Bank, 2014); also achieving
substantially improved trade surpluses. 11 A distinct pattern between increased
productivity, export growth, economic growth and poverty reduction may be clear;
however, deciphering liberalisation’s role in this process is highly complicated. It could
be argued that improved productivity –initiated by liberalisation- has, in the long-run,
enabled Brazilian exporters to exploit an extended price and demand boom for many
primary commodities and manufactured goods (Mayer, 2010); partially contributing to a
sustained period of strong economic growth. This sustained economic growth, has
subsequently improved government revenues, which have enabled the propagation of
social assistance programs such as Bolsa-Familia, a programme which has benefitted
more than 11 million poor Brazilian families since its introduction in 2003 (Barros, 2009).
These linkages are complicated however. To imply trade liberalisation is the primary
cause of a trade volumes increase is debateable, as increased trade volumes can be
affected by various exogenous factors such as world demand and/or lower
transportation costs (Rodrik & Rodriguez, 2001). Moreover, how growth translates into
poverty reduction through equitable distribution of government expenditure depends
heavily upon institutional quality (Rodrik et al., 2004).
9 Appendix:1A 10 Appendix:1B 11 See http://www.brazilcouncil.org/news/brazil-posts-2009-trade-surplus-246-billion
Student No. 6256082 Globalisation & Economic Development April 2014
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Conclusion
This paper has discussed the impacts of trade liberalisation upon poverty in Brazil,
primarily the short-run static effects upon the labour market and wage differentials in the
immediate years following Brazilian trade reform as well as briefly discussing the
potential long-run dynamic effects connecting trade, growth and poverty.
The empirical literature discussed in this paper presents contrasting findings; the
confliction arguably arising due to the differences in methodology and the use of
alternative poverty data sets by scholars; problems of which were discussed in sections
1 and 2. The evidence indicates some impacts appear to have been harmful to Brazil’s
poor in the immediate years following liberalisation, while other impacts may have
contributed to poverty reduction in the long run. On the one hand liberalisation led to an
influx of skill-biased technology, displacing a vast number of unskilled workers from
manufacturing industries who were not absorbed by the agricultural sector, which had
also become more mechanised for large-scale export-oriented production. This and the
demand for skilled labour across sectors increased wage divergence between
skilled/unskilled labour, led to an enlargement of the informal sector and contributed to
the migration of many rural poor to urban areas. These effects contradict the predicted
outcomes of traditional trade theory as stipulated by the HO-SS models. One possible
explanation for this is that accompanying trade liberalisation were financial liberalisation
measures that encouraged large FDI capital inflows into Brazil, something unaccounted
for in the HO model.
In the long run, improved total factor and labour productivity -initiated through
liberalisation- has partially enabled Brazil to take advantage of a recent extended price
and demand boom for many primary commodities and manufactured goods; contributing
to a sustained period of economic growth. Increased government revenues during this
time have enabled the propagation of social assistance programs, making a significant
contribution to poverty reduction in Brazil since 2003. Therefore, one may argue that
liberalisation in the 1990s has indirectly helped in the mitigation of poverty in more
recent years.
Overall, it has been noted that isolating the impacts of trade liberalisation upon poverty
in Brazil is a highly complex task. Numerous other liberalising reforms, monetary and
Student No. 6256082 Globalisation & Economic Development April 2014
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fiscal policy adjustments occurring alongside trade reforms within Brazil, as well as
various exogenous factors have no doubt impacted upon Brazilian poverty in recent
decades. However, the evidence discussed in this paper suggests that the immediate
effects of trade liberalisation appeared to contribute to a rise and/or sustain Brazilian
poverty levels, while in the long run liberalisation has -to some extent- contributed
toward poverty reduction in Brazil.
Word Count: 2712
References
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NISSANKE, M., & THORBECKE, E. (2010). Globalization, Poverty, and Inequality in Latin America: Findings from Case Studies. World Development. 38, 797-802. PAVCNIK, N., & GOLDBERG, P. K. (2004). Trade, Inequality, and Poverty: What Do We Know?: Evidence from Recent Trade Liberalization Episodes in Developing Countries. Cambridge, Mass, National Bureau of Economic Research. PAVCNIK, N., BLOM, A., GOLDBERG, P., & SCHADY, N. (2004). Trade Liberalization and Industry Wage Structure: Evidence from Brazil. The World Bank Economic Review. 18, 319-344. PEREIRA, L. V. (2006). Brazil Trade Liberalization Program. Coping with Trade Reforms: A Developing-Country Perspective on the WTO Industrial Negotiations. Palgrave MacMillan, Houndmills and New York. RAVALLION, M. (2004). Looking beyond averages in the trade and poverty debate. Washington, D.C., World Bank, Development Research Group, Poverty Team. RODRÍGUEZ, F., & RODRIK, D. (2000). Trade Policy and Economic Growth: A Skeptic's Guide to the Cross-National Evidence. NBER/Macroeconomics Annual. 15, 261-325. RAIS (2010) The Annual Value of Social Information), Available at www.rais.gov.br Acess: september-december 2010. RODRIK, D., SUBRAMANIAN, A., & TREBBI, F. (2004). Institutions rule: the primacy of institutions over geography and integration in economic development. Journal of economic growth, 9(2), 131-165. TELLES, E. E. (2004). Race in another America: the significance of skin color in Brazil. Princeton, N.J., Princeton University Press. WADE, R. H. (2004). Is globalization reducing poverty and inequality? World Development. 324, 567-589. WORLD TRADE ORGANISATION. http://stat.wto.org/CountryProfile/WSDBCountryPFView.aspx?Country=BR&Language=S. Accessed on 02/04/2014. WORLD BANK DATA, World Development Indicators. http://data.worldbank.org/data-catalog/world-development-indicators. Accessed on 03/04/2014.
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Appendix:
1A
1B
64330
70793 76045
83952
96791
105822 111157
118047 118691
107860
120284 125684
60000
75000
90000
105000
120000
135000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
$US (Millions)
Year
Exports of goods and services (constant 2000 US$)
Exports of goods and services (constant 2000 US$)
6.58
16.55
11.68
4.01
-‐2.03 -‐0.42
11.02
4.91 5.71
12.86
10.05
7.42
10.40
15.29
9.33
5.04 6.20
0.55
-‐9.13
11.52
4.49
-‐10
-‐7.5
-‐5
-‐2.5
0
2.5
5
7.5
10
12.5
15
17.5
Grow
th (%
)
Year
Exports of goods and services in Brazil (annual % growth)
Exports of goods and services