Trade policies, household welfare and poverty alleviation: Case studies from the Virtual Institute academic network

By: Cristian Ugarte* (email: Cristian.Ugarte@unctad.org)

virtual institute UNCTAD

This book is the culmination of a three-year capacity-building project conducted by the Virtual Institute, UNCTAD’s programme for academic cooperation. Co-funded by the United Nations Department of Economic and Social Affairs and the Government of Finland, the goal of the project was to provide researchers in developing and transition economies with the knowledge and tools necessary to conduct empirical analyses of the effect of trade on poverty, so that they may assist national policymakers in the design of pro-poor trade policies.

Increased integration of developing countries into the global economy has sparked a debate in academic and policy circles about the relationship between trade liberalization and poverty. Do the poor benefit as their countries gain access to new export markets? Or do they suffer as trade liberalization exposes domestic markets to increased import competition?

The research in this compendium uses a methodology based on household-level surveys to examine short-term effects of global price changes or trade policies on household consumption, production and labour income, and, subsequently, on household welfare and poverty.

The studies collected in this volume examine the welfare and poverty consequences of external trade shocks and domestic trade-related policies for households in the Philippines, the former Yugoslav Republic of Macedonia, Argentina, China, Costa Rica, Peru, Nigeria and Viet Nam. One set of studies examines the welfare impact of the recent increases in global food prices. The other set analyses the welfare effects of trade policy and exchange rate changes.

The analysis yields several insights about the relationship between changes in commodity prices or trade policies and poverty. Most importantly, they provide additional support for the conclusion that it is not possible to generalize about how higher consumer or producer prices affect the poor and that effects of price changes on poverty are case-specific. In fact, welfare changes depend on the exposure of poor households to price fluctuations as producers and consumers of the good, the exposure of these households to price shocks through their labour incomes, and the magnitude of the price changes. For example, while the rural poor tend to be harmed by increases in the price of rice in the Philippines, they benefit from an increased price of maize in the former Yugoslav Republic of Macedonia. This difference stems from the fact that the rural poor in the Philippines tend to be net consumers of rice, while the rural poor in the former Yugoslav Republic of Macedonia are net producers of the commodity that experienced a large price increase. Similarly, poor households in Nigeria, which spend a large portion of their budget on agricultural products, benefit from the availability of cheaper imported goods following the reduction of import tariffs, while producers of the same products suffer reductions in welfare as a result of increased import competition.

The welfare analysis developed in some case studies in this volume may be particularly useful for ex-ante evaluation of a price or policy change and in terms of short-term household welfare responses to price fluctuations. Such ex-ante assessments provide a useful policy tool that can be undertaken using existing household-level surveys to better understand the potential short-term effects of policy changes on the distribution of income as is done in the study on Costa Rica, for example, which examines the potential effects of the Dominican Republic-Central America-United States Free Trade Agreement (CAFTA-DR) prior to its full implementation.

Several studies in this volume also conclude that transmission of price or policy changes to consumer or producer prices depends on the structure of commodity markets, the local supply chain, the distance from the border and the development of market institutions, among other factors. The studies on Viet Nam and Argentina, for instance, suggest that poor farmers or poor consumers may not always necessarily be the main beneficiaries of policies intended to reduce poverty. The middlemen or intermediaries are at times better positioned to capture benefits from price changes. The studies therefore underline the need to explore institutional characteristics that affect price transmission throughout the supply chain in order to enhance the potential positive impact of trade liberalization on poverty.