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FEATURE STORY

Trade, Poverty, and Shared Prosperity

January 6, 2015

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From left to right: Chico Ferreira, Ana Revenga, Aaditya Mattoo, Alan Winters, and Branko Milanovic


STORY HIGHLIGHTS
  • Trade integration is a critical catalyst for development, but can generate unequal gains
  • Trade impacts on household welfare by changing the prices and availability of consumption goods and altering income earning opportunities
  • Trade can help achieve the twin goals provided that policy makers manage its distributional impact—ideally through appropriate domestic policies

On December 10-11, the World Bank’s research department held the Trade, Poverty, and Shared Prosperity Conference. The two-day event convened leading academics and senior policy experts to dissect the relationship between trade and household welfare, and identify policies that can accelerate progress toward the Bank’s twin goals of reducing extreme poverty and boosting shared prosperity.

Participants addressed a range of questions that included: Does openness exacerbate volatility? How do labor mobility costs vary across different countries? How do food prices affect poverty? The conference’s agenda included sessions on household welfare and poverty, the labor market, and crime and conflict.

“Trade liberalization has tremendous potential to catalyze development,” said World Bank Director of Research Asli Demirguc-Kunt, who delivered the conference’s opening remarks. “But how will increased integration impact poverty and inequality? How can globalization be harnessed to reduce poverty and boost shared prosperity?”

The sessions began with researchers exploring the ways in which greater integration into the global economy affects prices, consumption, and income. Benjamin Faber (University of California, Berkeley) analyzed data drawn from barcode scans to study the impact of foreign supermarket entry on local social welfare in Mexico. Faber found that these supermarkets reduced the cost of living, resulting in gains of 7 percent of the initial social welfare level. “20 percent of these gains came from the pro-competitive effect on the prices of domestic retailers, while 80 percent of the effect was due to the direct price index effect of foreign entry,” Faber said. Will Martin (World Bank) discussed the way that rising food prices can disproportionately burden poor populations in the short-term, while benefiting them, as producers of agricultural products and sellers of unskilled labor, in the long-term.

Countries with more flexible labor markets face lower adjustment costs and hence are able to respond more easily to global economic pressures. Erhan Artuc (World Bank) compared the costs of labor mobility in different countries in Latin America and in Sub-Saharan Africa. Artuc found that in low-income countries the costs are high, while high-income countries enjoy low moving costs and a high speed of adjustment. The source of this high cost in lower-income countries could be due to “their industrial structure and the skill composition of workers.” Ann Harrison (Wharton School, University of Pennsylvania) presented research on how globalization has contributed to American workers shifting from manufacturing jobs to lower-paid services jobs. Harrison concluded that globalization has “little impact on wages at the industry level, so policy makers need to focus on occupational exposure.” 

 



" Endowing the poor with bargaining power over natural resource rents helped reduce poverty. "
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Paulo Bastos

Senior Economist, Development Research Group


The gains from trade are more likely to be distributed evenly in the presence of inclusive institutions. Paulo Bastos (World Bank) demonstrated how the dismantling of the Apartheid regime in South Africa was especially advantageous to underprivileged communities subsequently able to share natural resource rents. Bastos argued that “endowing the poor with bargaining power over natural resource rents helped reduce poverty.”

In a departure from more staid formats, the final panel—which featured representatives from both research and operations—staged a lively debate about the merits of pursuing distributional goals through trade policy. Moderator Aaditya Mattoo (World Bank) assigned panelists Alan Winters (University of Sussex), Branko Milanovic (City University of New York), Ana Revenga (World Bank), and Francisco Ferreira (World Bank) roles in the debate, which laid out the challenges of building the goal of shared prosperity into trade policy.

Highlighting the potentially unequal impact of liberalization, Winters argued that “opening an economy does not increase volatility per se, but does alter the way shocks reverberate through the economy.” Panelists warned that trade policy is a long-term tool that can be captured by political groups for their own agenda, making it difficult to apply in service of the twin goals. However, given that trade liberalization can generate unequal gains, the consequences that trade policy can have on the bottom 40 percent must be taken into consideration and addressed through policy approaches that include taxes and transfer instruments.

Senior Director of the World Bank Group Global Practice on Trade and Competitiveness Anabel Gonzalez brought the event to a close and summarized the findings in the context of World Bank trade strategy. “Policy should be efficiency seeking, but it does not happen in a vacuum,” she cautioned. Gonzalez encouraged the experts assembled to ask, “How do we enable poor people to trade?” She outlined the challenges that poor people living in remote areas experience when they try to gain market access, including violence, the instability of fragile states, and gender-specific dangers, and encouraged experts to include these issues in their research agendas.


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