Methodology of Examining
the Nexus between
Trade Liberalization, Growth and Poverty:
Some Thoughts
Dr. Selim Raihan
Assistant Professor
Department of Economics
University of Dhaka
Presented at the Inception Workshop on
Mainstreaming International Trade into National Development Strategy:
A Pilot Project in Bangladesh and India
7-8 February, 2007, Kolkata
For the analysis of the
relationship between trade
liberalisation, growth and
poverty we need to explore the
mechanism of the relationship.
2
If there are absence of any
structural rigidities in the
economy…
3
4
5
Impacts on Growth
• Short run impact: Factors of production may be
unable to move to the expanding sectors from
the contracting sectors. Therefore, the loss in
growth due to the contraction of the import
competing sectors may be higher than the gain
in growth due to the expansion of the exportoriented sectors. As a result, a negative impact
on economic growth is a possibility.
• Long run impact: In the long run, if resources
can be reallocated to the more efficient sectors,
then there might be a positive impact on
economic growth. There may also be some
gains trough productivity increase.
6
Poverty Impact (Head-Count)
• Household Income
• Poverty Line income
Influenced by
the changes in
the prices of
goods and
services
7
Households’ Initial Endowments
of Labour, Capital, Land, Transfer,
Remittances are very important.
8
Income Composition of the Households
Household
Categories
Rural
Landless
Marginal farmers
Small farmers
Large farmers
Non-agriculture
Urban
Illiterate
Low education
Medium education
High education
All
Percentage Contributions to the Household Income from
Skilled Unskilled
NonLand
Dividends
IntraPublic Remittances
labour
labour agricultural
household transfers
capital
transfers
Total
3.19
4.73
17.07
9.88
23.01
90.63
59.16
37.67
5.28
40.45
0.00
24.80
24.57
34.43
27.79
0.00
2.01
15.67
49.74
4.79
-.
-
5.30
8.38
4.26
0.41
2.96
0.37
0.35
0.10
0.01
0.38
0.51
0.57
0.66
0.24
0.61
100.00
100.00
100.00
100.00
100.00
1.69
7.31
30.82
20.08
16.06
67.41
41.07
1.20
0.26
35.08
28.79
41.27
58.75
59.72
35.00
0.00
6.69
7.88
14.95
10.32
0.06
0.20
0.02
1.66
2.94
0.37
1.14
2.52
0.05
0.26
0.74
3.43
0.53
0.40
0.45
0.18
0.21
0.43
100.00
100.00
100.00
100.00
100.00
Source: Household Income and Expenditure Survey 2000 for Bangladesh.
Note: ‘-’ denotes not applicable to this household category.
9
If there are significant
structural rigidities in the
economy…
10
• Trade liberalization in this case will not
necessarily lower the prices of imports.
• As resources are not sufficiently freely
mobile among sectors, the loss in growth
will be likely to be higher than the gain in
growth.
• Impacts on factor prices will not be
straightforward.
11
Different Methods
• Econometric Studies: Ex Post Analysis
• CGE Studies: Ex Ante Analysis
12
Econometric Studies
• Cross country Studies: Generalization for all
countries. Fail to show the differences in the
country contexts. No conclusive evidences.
• Single country studies: Use of macro time
series data. Problem of time series data. No
conclusive evidences.
• Studies on manufacturing sectors: No
conclusive evidences.
• Theoretical problem: In most cases ad hoc
model.
13
Raihan (2005), “Trade Liberalisation and Growth: A
Dynamic Panel Econometric Study on Bangladesh
Manufacturing Industries”.
Dependent variable: lnYit
Explanatory
variables
Model includes
TRLIB1
Model includes
TRLIB2
Model includes
TRLIB3
Model includes
TRLIB4
Model includes
TRLIB5
0.611
(0.44)
-0.294
(0.61)
-0.137
(0.53)
0.256
(0.52)
-0.294
(0.61)
lnY it-1
-0.347***
(0.06)
-0.337***
(0.06)
-0.335***
(0.07)
-0.337***
(0.05)
-0.347***
(0.06)
lnKit
0.142***
(0.04)
0.145***
(0.04)
0.116***
(0.03)
0.148***
(0.04)
0.142***
(0.04)
lnLit
0.337***
(0.11)
0.335***
(0.11)
0.275***
(0.08)
0.317***
(0.101)
0.337***
(0.11)
lnKit-1
0.107***
(0.03)
0.109***
(0.08)
0.088***
(0.02)
0.106***
(0.03)
0.107***
(0.03)
lnL it-1
0.209**
(0.09)
0.206**
(0.09)
0.193**
(0.08)
0.198**
(0.08)
0.209**
(0.09)
lnTRLIB1it
-0.374
(0.40)
-
-
-
-
lnTRLIB1it-1
0.061
(0.14)
-
-
-
-
lnTRLIB2it
-
-0.002
(0.02)
-
-
-
lnTRLIB2it-1
-
-0.365
(0.24)
-
-
-
lnTRLIB3it
-
-
-0.194***
(0.03)
-
-
lnTRLIB3it-1
-
-
-0.137
(0.05)
-
-
lnTRLIB4it
-
-
-
0.041
(0.01)
-
lnTRLIB4it-1
-
-
-
0.005
(0.01)
-
TRLIB5
-
-
-
-
-0.157*
(0.09)
R2 (adjusted)
0.36
0.36
0.38
0.38
0.37
Observations
567
567
567
567
567 15
Constant
CGE Studies
• Policy simulation
• Useful for ex ante analysis
• If carefully designed –
theoretically consistent
16
CGE Studies (cont..)
• Most of the static CGE models in the context of
Bangladesh has shown negative impact of trade
liberalization on economic growth and poverty
(e,g. Khondker and Raihan (2004), Raihan and
Khondker (2005), Khondker, Raihan and Mujeri
(2005), etc.).
• It has, however, been argued that the impacts of
trade liberalisation are rather dynamic in nature
and, thus the medium and long-run impacts are
likely to be different from the short-run impacts.
17
CGE Studies (cont..)
• Dynamic CGE model for Bangladesh
Raihan (2005): First intertemporal dynamic
CGE model for Bangladesh economy.
Annabi, Khondker, Raihan, Cockburn and
Decaluwe (2006): First recursive dynamic
CGE model for Bangladesh economy.
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Some thoughts on the Nexus between
Trade Liberalization and Poverty
•
One of the principal mechanism through which
trade liberalisation operates is the price
mechanism.
•
The consumers and producers are affected by
the changes in the prices of the commodities
they buy from and sell in the market.
•
We can examine whether trade liberalisation has
any effect on the changes in these prices.
•
From the Household Expenditure Surveys (HES)
we can calculate the unit prices of the products
the consumers buy from and the sellers sell in
the market.
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Some thoughts (cont..)
• To perform the poverty analysis we can identify
the bottom 10 percent of the households and the
basket of commodities they consume and sell.
• We can examine the changes in the unit prices
of this basket.
• We can also disaggregate the households
between moderate and extreme poor, between
rural and urban households, between
agricultural and non-agricultural households, etc.
20
Some thoughts (cont..)
It is very plausible that the changes in the prices
of the commodities are influenced by not only
the trade policy but also by a number of
governmental policy and structural variables. In
order to isolate the actual effect of trade
liberalisation on the changes in unit prices we
need to perform some type of decomposition
analysis.
21
Some thoughts (cont..)
•
Trade liberalisation also affects poverty through its
impact on government revenue. If liberalisation of trade
is accompanied by a decline in government tariff
revenue then it may reduce the level of government
expenditure for health, education and other poverty
alleviation programmes.
•
It is, therefore, important to examine the trend and
pattern of government revenue and expenditure after
the liberalisation of trade.
•
However, the pattern of government expenditure is
affected by not only the availability of funds but also
some other factors. It is thus required to isolate the
actual effect of trade liberalisation on the level and
pattern of government expenditure. A type of
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decomposition analysis is required in this regard.
Some thoughts (cont..)
• In Bangladesh and India most of the poor rely on
labour markets for the bulk of their income. Thus the
effects of trade liberalisation on wages and
employment are important, especially those of
unskilled workers.
• If reform boosts the demand for labour-intensive
products, it boosts the demand for labour and either
(or both) of wages or employment will increase.
• However, if the poor are mostly in completely
unskilled families, while it is semi-skilled labour that
receives the boost, poverty will be unaffected – or,
possibly, worsened.
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Some thoughts (cont..)
• It is also important where the various wage rates lie
relative to the poverty line. If wages are pushed up from
subsistence to higher levels, or if the expanding sectors
offer above poverty-line wages, then poverty will be
alleviated.
• On the other hand, if poverty is measured by counting
individuals below the poverty line - the headcount index and wages do not cross critical thresholds, recorded
poverty could be unaffected, despite changes in welfare.
• The effects of trade liberalisation on wages and
employment can be examined by estimating the labour
demand function using the national and sectoral data.
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Some thoughts (cont..)
• Linking WTO issues and RTAs with
poverty:
– Agricultural liberalization and poverty: Raihan
et al (2007), Sahay (2006)
– DFQF market access for LDCs: Raihan et al
(2007).
– NAMA and poverty: Raihan et al (2007).
– MFA phase out: Raihan and Khondker (2005)
– SAFTA: Raihan et al (2007)
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