Trade-Induced Changes in Economic Inequalities: Assessment Issues and Policy Implications for Developing Countries S. Chabe-Ferret, J. Gourdon, M.A. Marouani, T. Voituriez ABCDE World Bank Conference, Tokyo May 29 Session 1-2

Question What are the distributive aspects of trade liberalisation which are worth documenting and further exploring to better help governments and donors integrate trade policies in development strategies?

Three emerging consensus 1.Increasing openness has been reflected in a growing wage gap between skilled and unskilled workers  wage-induced inequalities among developing countries relatively well-endowed with workers lacking basic education ;  losers (in relative terms) from trade openness likely be the poorest.

To begin with, 3 emerging consensus 2.Global trade liberalisation scenarios provide estimates of average gains for developing countries, though some of the poorest countries seem to be net losers in short term.  losers (in relative terms) from trade openness likely to be the poorest, still.

To begin with, 3 emerging consensus 3.All these distributive and detrimental effects of trade liberalisation are expected to vanish in long term, thanks to innovation, productivity and growth.  the basic issue raised by trade-induced inequalities is a political economy issue, not a development matter as such.

Implications Let’s assume that trade liberalisation is expected to be poverty and inequality alleviating in the long run while inducing a short run increase in poverty or in inequality for some d.ing countries What do governments and donors need to know that research has not provided yet ?

The method Literature review Outcome : knowledge gaps Particularity : literature is re-organised according to the different acceptations of fairness implied by the inclusion of the “Development” objective in the world trade liberalisation agenda.

What does a (pro-)development trade liberalisation agenda mean? It should correct past unfairness in trade regime,  which raises the broad issue of country level ex post assessment. It should equally reduce poverty  which points toward household level ex ante assessment. Last, because development is basically a dynamic process, the distributive-dynamic effects of trade liberalisation shall also be considered.

Summary of findings

Ex post country-level assessment Consistent evidence that trade liberalisation is associated with increases in inequality.  trade liberalisation increases inequality in countries relatively well- endowed with capital and with highly skilled workers ;  trade liberalisation increases inequality in countries relatively well- endowed with non (primary) educated workers. Education and capital endowment as overriding determinants so that trade liberalization is accompanied by reduced income inequality in low-income countries.

Ex post country-level assessment Issue mostly political :  Inequalities’ increase very likely in some d.ing countries : the beautiful story told by the factors proportion theory of trade does not seem to hold.  How cope with short term inequalities before investment in education bears fruits?  Unforeseen effects of South-South trade liberalisation?

Ex ante hh level assessment Welfare direct effects (induced by product price changes) and income indirect effects (induced by factor price changes, part. wages) entangled. Determining which of these two effects dominates is an empirical matter. Preliminary result: unilateral liberalisation in d.ing countries would be poverty increasing, while developed countries liberalisation would be poverty decreasing. Issue here mostly empirical: more empirical evidence needed.

Dynamic assessment The Development goal stresses the shortcomings of available models and tools. Shortcomings are known: no market failure, no dynamics in most trade models. Because development is dynamics with market failures, correcting for such shortcomings should be gaining momentum. A few exception does exist, with dynamic unemployement, imperfect information, incomplete risk markets. They challenge systematic long-term trade lib. gains for all countries.

Dynamic assessment Main issue here is conceptual: modelising adjustment costs in a second best economy, e.g. where such costs turn out to be perennial features

Conclusion Political, empirical and methodological issues are very challenging Ignoring them bears several risks  Entertain false expectations over trade liberalisation  Indirectly support conservative stance on protectionism in OECD countries  Restrict trade-induced inequalities to a mere political economy problem. Problem is indeed broader. Development issue as such. Adressing such issues implies to take risk, e.g. broaden the scope of policy options and replicate successfull strategies whatever their orthodoxy