Conference on the impact of Trade Liberalisation and Poverty Rebeca Grynspan Director UN Economic Commission for Latin America and the Caribbean (ECLAC) Woodrow Wilson International Center for Scholars April 15, 2005

In the last 25 years… Latin America has undergone a strong process of economic reforms There were great expectations that trade (and the reforms) will bring high economic growth and poverty reduction. Little attention to the specific conditions of the region: middle income countries, with very high initial inequality, on a demographic transition

LAC: Economic Reform Index Total Finantial reform Fiscal reform Trade reform Capital Account reform Privatization

Average Tariff NMF > 100% 29% 10% Regional Average Tariff, weighted by Preferential Agreements, decreased to 5% Fall of Import Tariffs in Latin America Countries

Fall of Import Tariffs in Central America

Trade Openness Coefficient Ar Bo Br Cl Co Cr Ec Sv Gt Ht Hn Mx Ni Pa Pr Pe Do Uy Ve Weighted Average Weighted Average Simple Average Simple Average Resulting Trade Openness

Export Flows by Preferential Trade Agreements, 1991

Export Flows by Preferential Trade Agreements, 2004

Results: Unprecedented exports and FDI growth Growth was resumed after the crisis and it was associated to export growth From 1990 to 2004 the percentage of the population living in poverty declined

Ar Bo Br Cl Co Cr Ec Sv Gt Ht Hn Mx Ni Pa Py Pe Do Uy Ve GDP growth, average Export growth, average LAC: Economic growth and exports

Poverty and Extreme poverty in LAC % of total population Extreme povertyNot extreme poverty

But The rate of growth was mediocre and lower than in the past, volatility of GDP and consumption was very high at the same time that coverage of the social security systems declined Relation between exports and growth, growth and employment and growth and poverty has weakened. Inequality raised: wage inequality, income inequality, social inequality, rural-urban inequality, regional inequality, inequality between age groups. Inequality matters: initial inequality and its evolution Increased structural heterogeneity of the productive structure. Low increase in value added Unemployment raised in the south and informality raised in the north. Productivity increases very slow and not across all sectors Poverty is still higher than in 1980 in relative terms, and raised in absolute terms from 135 millions in the 80´s to 200 millions in the 90´s to 222 millions in 2004

Most countries resume growth at a slower rate than in the past

… menos estables que lo esperado. Fenómeno El Niño Huracán Mitch 98. Terremotos en El Salvador y sequía generalizada

Fuente: de Ferranti et. al. (2000) Porcentaje PIB Consumo Privado Volatilidad del crecimiento del PIB y consumo privado en América Latina: (Ten-Year Window, mediana regional)

Inequality worsen Latin America: relation betwen average income of the richest 10% and the lower 40%

LAC is the most unequal continent of the world Gini coefficients América Latina y el Caribe Highest inequality 50% of the countries Media Lowest gini coefficient

Extreme povertyNot extreme poverty Index of GDP P.C. Growth is becoming increasingly less efficient to combat poverty Poverty and Extreme poverty in LAC (millions) and per capita GDP index

Poverty: Total poverty Extreme poverty

Share of selected regional groups and developing economies in world exports of manufactures and manufacturing value added, 1980 and 1997 (Percentage share) Share in world Share in world exports of manufactures manufacturing value added Region/economy Source: International Yearbook of Industrial Statistics, various issues; World Bank, World Development Indicators 2000 (table 4.3); UN/DESA, Commodity UNCTAD secretariat calculations, based on UNIDO, Handbook of Industrial Statistics (various issues); UNIDO, Trade Statistics database; and UN/DESA, Monthly Bulletin of Statistics (various issues). Note:Calculations in current dollars. Value-added data are based on the definition of manufactures used in industrial statistics, while export data are based on the definition of manufactures used in trade statistics. However, calculating the share in world manufactured exports based on the definition of manufactures used in industrial statistics yields very similar results for countries for which comprehensive data are available. aExcluding China. b1984. Developed countries Developing countries Latin America South and East Asia6.0 a NIEs ASEAN China1.1 b India Turkey

Conclusions: Research points to positive effects of the reform but small gains (high political costs), but we have to recognize that the impact of trade liberalization on poverty is country-specific There is disappointment with the results (also medium income groups, nor only the poor). Assumptions of the Washington consensus proofed basically wrong Low growth and rising inequality limited the effects on poverty (despite an important increase in social expenditure) and continue to be the main challenges faced by the region. Inequality matters. Remember a lot of people moves around the poverty line, so impoverishment is also a concern.

Conclusions: Trade agreements will continue to be pushed for: Trade liberalization is not a development strategy. Since the consensus moves to a highly conditioned endorsement of free trade the discussion of the development agenda turns to be more important to combine trade, growth and poverty The gains of future trade liberalization through bilateral agreements are limited and will not come from the static benefits of trade but from the dynamic ones: economies of scale, technological change, foreign direct investment, and productivity gains coming from better trade structure (dynamic products, more value added, etc.) There may be excessive competition among developing countries in world markets for labour-intensive goods (fallacy composition).

Conclusions: Better initial conditions of infrastructure and education determined the possibilities of benefiting from the opportunities of trade. Public investment in infrastructure and human capital key factor to combat inequality and foster private capital formation, employment and growth Need to change the bias against public investment that is treated as expenditure together with designing the right mechanisms to benefit small public works specially in the rural areas Openness of the capital account and remittances contributed to high volatility and a tendency to currency appreciation Anti cyclical policies Strong and universal social protection systems (maybe independent of type od employment?) A macroeconomic policy that will target not only price and monetary stability but growth, employment and stability in the “real” sector

Conclusions: Those countries that made a smooth transition from import substitution, to export promotion to trade liberalization obtained better results even in the rural sectors. Need for a responsible public policy to address structural heterogeneity, weak linkages, low “density” of the productive apparatus, weak innovation and technology systems, high cost and uncertainty to penetrate markets. Special attention to rural areas and agriculture. There are loosers and winners, averages say little in LAC. Policies to offset the costs of the transition and help vulnerable groups to successfully face increased competition and develop human capital are indispensable We are not alone: William Cline has suggested that “the largest gains to the poor would come from differential trade liberalisation”, Domestic policies of the United States impact on the economic performance of the region. Trade policies and subsidies in the developed world International cooperation Regional integration with cohesion and structural funds to address asymmetries

And last… Institutions matter, without adequate institutions the benefits of trade will not be transfer to the poor and allow sustained growth: better governments and better markets. Regulation, good governance, transparency and accountability, fiscal resources Democracy (options to choose from). Room, for maneuver Protect Rightsw Useful to Recall some of Adam Smith´s thoughts on the keys to development: “Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice; all the rest being brought about by the natural course of things”

Indeed: the Smithian Pillars explained… A Peaceful environment: Lowers transactions costs, improves contract-enforcement, attracts investment Easy taxes: efficient and effective fiscal structure. Without a fiscal reform very little could be done in LAC´s development agenda Tolerable administration of justice: sets the basis for fair-play, builds trust

Comparación Internacional de la Carga Fiscal(*), (en porcentajes del PIB) Fuente: ILPES-CEPAL, Panorama de las Finanzas Públicas, (*)Las cifras de la OECD tienen cobertura de Gobierno General, al igual que Argentina, Brasil y Chile. El resto tiene cobertura de Gobierno Central