Estimating the Poverty Impacts of Trade Liberalization

Abstract

As a new round of World Trade Organization negotiations is being launched with greater emphasis on developing country participation, a body of literature is emerging which quantifies how international trade affects the poor in developing countries. This survey summarizes and classifies thirty-five studies from this literature into four methodological categories: cross-country regression, partial-equilibrium/cost-of-living analysis, general-equilibrium simulation, and micro-macro synthesis. These categories encompass a broad range of methodologies in current use. The continuum of approaches is bounded on one end by econometric analysis of household expenditure data, which is the traditional domain of poverty specialists, and sometimes labeled the "bottom-up" approach. On the other end of the continuum are computable general equilibrium models based on national accounts data, or what might be called the "top-down" approach. Another feature of several recent trade/poverty studies- and one of the primary conclusions to emerge from the October 2000 Conference on Poverty and the International Economy sponsored by Globkom and the World Bank - is recognition that factor markets are perhaps the most important linkage between trade and poverty, since households tend to be much more specialized in income than they are in consumption. Meanwhile, survey data on the income sources of developing-country households has become increasingly available. As a result, this survey gives particular emphasis to the means by which studies address factor market linkages between trade and poverty. The general conclusion is that any analysis of trade and poverty needs to be informed by both the bottom-up and top-down perspectives. Indeed, recent "two-step" micro-macro studies sequentially link these two types of frameworks, such that general equilibrium mechanisms are incorporated along with detailed household survey information. Another methodology similar in spirit and also increasingly used involves the incorporation of large numbers of surveyed households into a general-equilibrium simulation model. Although most of these studies have so far been limited to a single region, these approaches can be readily adapted for multi-region modeling so that trade-poverty comparisons can be made across countries within a consistent framework.

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