INTERAMERICAN DEVELOPMENT BANK Integration and Trade Sector The trade and poverty nexus in Latin America LATN Plenary Meeting Buenos Aires - November 17, 2008 PAOLO GIORDANO

In Latin America anxiety is eroding the consensus for trade integration... Source: Latinobarometro (different years) LAC: ATTITUDES TOWARD TRADE INTEGRATION (% Population in Favor)

... and in the developed economies there is a perception that free trade should be more pro-poor Source: The German Marshall Fund (2006) 0%20%40%60%80%100% Believe that poor countries benefit from free trade Agree to promote free trade with poor countries Agree to provide assistance to poor countries EuropeUSA 75% 72% 77% 75% 70% 56%

Outline 1.Trade and Poverty: an elusive question ? 2.Transmission Channels 3.Empirical Evidence in LAC 4.Toward a Policy Agenda 5.The LATN proposal

The trade and poverty debate: a dialogue of the deaf when terms are not well defined Trade : Free trade vs. globalization Technological change, FDI, capital flows, migrations, etc. Trade policy measures vs. trade outcomes Poverty : Poverty vs. inequality Relative vs. absolute measures (national and global) Monetary measures vs. basic needs Measurement issues Necessary to clearly define the variables under analysis

Outline 1.Trade and Poverty: an elusive question ? 2.Transmission Channels 3.Empirical Evidence in LAC 4.Toward a Policy Agenda 5.The LATN proposal

Prices Employment Government/ Fiscal Policy Wages/ Salaries Consumption Consumption/ Income Consumer or producer? Weight in consumption basket Market structure (comp, olig, mono) Are markets integrated? Labor mobility? Skills of households Full employment or unemployment? Levels of informality Private sector competitiveness Fiscal dependence on trade tariffs Is tax reform progressive or regressive? Are social safety nets in place? Transmission channels of standard trade theory do not work as expected in LAC

Overall, standard theory does not tell the whole story Initial conditions: Labor-intensive sectors enjoyed past protection > adjustment costs are significant Skill biased technological change: Technological change (often embodied in FDI) favored high-skilled labor > wage inequality increased Shifting comparative advantages: LAC opened-up parallel to the global integration of labor-intensive economies (eg. India,China) > LAC comp. advantage is no longer in labor-intensive goods

Outline 1.Trade and Poverty: an elusive question ? 2.Transmission Channels 3.Empirical Evidence in LAC 4.Toward a Policy Agenda 5.The LATN proposal

An IDB – DFID partnership for Trade and Poverty The Trade and Poverty Trust Fund is financed by

Ex-post evidence Trade, Growth & Poverty: positive but small link > but protectionism is certainly anti-poor Trade & Inequality: mixed results > tech. change, FDI and capital acc.t opening may be regressive Need of flanking measures: > compensatory and complementary policies Source: Giordano and Florez (2008)

Ex-ante simulations -0.6% -0.4% -0.2% 0.0% 0.2% 0.4% 0.6% ColombiaPeruBolivia GDP Poverty Andean - US FTAs (%) CAFTA (%) Source: Ganuza, Morley, Robinson and Vos (2004) Source: Giordano and Watanuki (2008)

Outline 1.Trade and Poverty: an elusive question ? 2.Transmission Channels 3.Empirical Evidence in LAC 4.Toward a Policy Agenda 5.The LATN proposal

Lessons learned for policymaking The effects of Trade on Poverty are: Long-termed Indirect y specific Contingent on internal conditions Potential negative short-term effects Sustain momentum Research & dialogue Complementary policies Compensatory policies Support to negotiations & implementation Knowledge generation Regional policy dialogue Aid for Trade

Outline 1.Trade and Poverty: an elusive question ? 2.Transmission Channels 3.Empirical Evidence in LAC 4.Toward a Policy Agenda 5.The LATN proposal

The LATN proposal: a prioritization Micro-econometrics: marginal returns (Andean, C. America) CGE: IDB-INT multi-region model w. micro-simulations (Andean, C. America) Price transmission: a daunting task (country / product specific) Value chains governance cases studies: generalization issues Compensatory / complementary policies: effectiveness evaluation >> identification of operational proposals / quick wins >> policy dialogue

Food for thoughts Trade and poverty: is it the appropriate question ? The debate is launched: how to maintain momentum ? Aid for Trade: how to contribute to its implementation ? LATN network: which is the comparative advantage ?

INTERAMERICAN DEVELOPMENT BANK Integration and Trade Sector Thank you LATN Plenary Meeting Buenos Aires - November 17, 2008