Trade Policy and WTO Accession for Economic Development: Application to Russia and the CIS Module 2 Openness, Growth and Poverty by Giorgio Barba Navaretti and Marcello Spanò December 13, 2004

2 Main questions addressed  Which are the channels through which trade openness affects the economic activities of a given country?  What are the effects of trade openness on growth?  What are the effects of trade openness on poverty and income distribution?

3 Structure of this lecture Trade openness and growth: theoretical predictions Trade openness, poverty and inequality: theoretical predictions Trade openness, growth and convergence: cross- country evidence Trade openness, poverty and income distribution: cross-country evidence Evidence from country studies

4 Trade openness and growth: theoretical predictions Lesson 3A Trade openness provides a conducive environment and a necessary condition for faster long term growth through: –Efficient allocation of resources –Exploitation of scale economies –Acccess to foreign technologies Lesson 4A But trade openness in itself cannot always be a sufficient condition for faster growth because of: –Patterns of specialisation –Agglomeration effects

5 Trade openness poverty and inequality: theoretical predictions Lesson 5A: Trade openness can reduce absolute poverty through: –Growth –Changes in relative factor and product prices Lesson 6A: Effects on relative poverty and income distribution can be controversial: –Winners and loosers

6 Figure 1. The microeconomic links between trade policy and poverty

7 Does openness affect growth? Cross country evidence Lesson 3B. According to cross country evidence, –trade openness is associated to faster growth. –There is no evidence of sustainable development miracles without export expansion and integration into world markets. –Several contributions also find evidence that trade openness has a positive causal effect on growth. –There is no evidence of the contrary, that protection and trade barriers favour long term sustainable growth.

8 Countries open to trade grow faster Does openness affect growth? Cross country evidence

9 Causal links: evidence from multivariate econometric analysis: –Studies in the Nineties find that the effect is positive (Levine and Renelt 1992, Edwards 1993, Sachs and Warner 1995, Frankel and Romer, 1999) –Reaction: these studies questioned on methodological ground (estimation method and measures of openness) by Rodriguez and Rodrik (2000) –Counter reaction: Whithin country effect positive (Wacziarg and Welch, 2002) No evidence of opposite effect (trade lib harms growth) – Lindert and Williamson, 2003 Does openness affect growth? Cross country evidence

10 Does openness affect convergence? Cross country evidence Lesson 3 C: According to cross country analysis, those developing countries that managed to grow faster than rich countries and to converge to their income level are open to trade

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12 Does openness affect convergence? Cross-country evidence Problem: convergence in clubs (e.g. Argentina) –Lesson 4B. According to cross country evidence, although trade openness is conducive to faster growth, in itself it is not always a sufficient condition to achieve faster growth and convergence of income levels.

13 Does openness affect poverty and income distribution? Cross country evidence Lesson 5B In countries open to trade, growth has a positive effect on poverty and on average income distribution. Lesson 5C The largest reductions in absolute poverty in the last twenty years have occurred in countries open to trade. Lesson 6C However, cross country evidence is not conclusive on the broad effects of trade on relative poverty and inequality

14 Does openness affect poverty and income distribution?Cross country evidence Lesson 5B In countries open to trade, growth has a positive effect on poverty and on average income distribution.

15 Lesson 5C The largest reductions in absolute poverty in the last twenty years have occurred in countries open to trade. Does openness affect poverty and income distribution?Cross country evidence

16 Country studies: trade liberalization strategies Lesson 7 Country studies show that there are different models of successful trade liberalisation EPZ (Mauritius) Pegged exchange rate is a bad strategy (Chile) Active export promotion (Korea)

17 Country studies: micro effects Pro-competitive effects on firms (Chile, Columbia) Volatility of employment (Chile and Columbia) Food insecurity (Mexico)