Trade Liberalization and Labor Market in Brazil Rio de Janeiro, April 24, 2006 Jorge Arbache World Bank and University of Brasilia

1. How does trade liberalization affect the labor market? Basic theory Heckscher and Ohlin and Stolper and Samuelson theorems (HOS)  jobs, poverty and inequality Trade  Economic growth  jobs and poverty

2. Facts and figures: openness and labor market indicators Main changes in trade policy: Exchange rate appreciation: Change in exchange rate policy: Poor labor market performance More recently, some fall in poverty and inequality indicators

YearTrade to GDP ratioTrade balance (US$ million)FDI (net, US$ million) , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , Source: Ipeadata

Year Population under poverty line (%)Gini index Unemployment (SP metrop. area) Labour income - growth rate (main job) Informal labour as share of labour force (self-empl. + informal contract) 1980 NA NA NA NA NA NA NA NA NA 12.72NA 2004NA 11.76NA

3. Trade and labor market in Brazil: selected empirical results Did trade create jobs? Did openness reduce income inequality? Did openness reduce poverty?

3.1 Did trade create jobs? Poor job creation; skill-enhancing trade (Arbache, 2001; Maia and Arbache, 2003) Poor economic growth Little inter-sectoral reallocation of resources: segmentation (Arbache and Corseuil, 2004)

Sources of change in employment (%) – (Maia & Arbache)

Ln per capita output growth

3.2 Did openness reduce income inequality? No clear evidence – competing factors Trade favored college educated workers (Arbache et al, 2001; 2003; 2004) Exporting firms employ more, no less skilled workers (Arbache and De Negri, 2005) Trade reduced rent sharing (Arbache et al.) Trade hurt union bargaining power (Arbache, 2004) Trade reduced gender wage gap (Santos and Arbache, 2005) Externalities of trade sector wages on non-trade sector wages (Arbache et al)

3.3 Did openness reduce poverty? No clear evidence Different impacts depending on family and worker characteristics Very poor: isolated and hardly benefit from trade openness and globalization (Carneiro and Arbache, 2003, 2004)

4. Final remarks (I): issues No clear evidence that HOS works in Brazil – Why? Openness – mainly an anti-inflationary and external crisis instrument, not a growth strategy Lack of coherence among fiscal, exchange rate and monetary policies and trade policy Timing Very low per capita growth rates in recent decades  poor labor market outcomes

Final remarks (II): issues Successful openness has to be preceded or accompanied by investments in infrastructure, human capital and technology, institutional and governance reforms, macro stability and adequate exchange rate policy, and inclusive and targeting policies to protect the poor Openness not a panacea for employment, poverty and inequality

Final remarks (III): issues International competitiveness  technology and scale; value added and innovation More and better international integration  trade and service diversification Rising and declining sectors  labor and capital mobility  institutional and other factors Protectionism of developed countries China and India  competing effects