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Trade Reforms Would Reduce Poverty More Quickly In Some Countries Than Others, Says World Bank Study

Press Release No:2006/191/DEC

Contact:  In Washington, Christopher Neal (202) 473-7229

WASHINGTON, December 8, 2005
— An “ambitious” agreement in the WTO’s Doha Development Round of trade talks would reduce poverty, says a new World Bank research study, but some countries such as Brazil and China would make immediate gains, while others, such as Bangladesh, would need help to achieve the projected long-term poverty reduction a trade deal offers them.

“Poverty is reduced under an ambitious Doha Development Agreement, and this reduction is more pronounced in the longer run,”
said L. Alan Winters, Director of the World Bank’s Research Group, and co-editor, with Thomas Hertel, Professor of Economics at Purdue University of Poverty and the WTO – Impacts of the Doha Development Agenda. “To fully realize their potential to stimulate growth and thereby reduce poverty, trade reforms need to be far-reaching, addressing barriers to services trade and investment in addition to merchandise tariffs.”

Of 10 countries analyzed in the 17 commissioned chapters that make up this wide-ranging research study, those countries with agricultural export potential to the markets that liberalize the most—East Asia and Europe—are identified as obvious winners from trade reform, in both the short- and long-term. In Brazil, liberalization would drive rapid poverty reduction by prompting increased agricultural production and employment in regions with relatively higher poverty incidence, while in China, the poor would gain as exports would increase to agricultural markets in East Asia that are highly protected at present.

Doha reforms would have the greatest impact, authors Hertel and World Bank researcher Maros Ivanic conclude, on world market prices and trade volumes for farm and food products, followed by textiles and clothing—key industries in any strategy to reduce poverty. The strongest world price increases would be for farm products currently subsidized the most: rice and other grains, cotton, dairy products, and beef. The authors warn that there is no single “world price”, however, and that close attention should be paid to bilateral patterns of trade and country-specific price changes.

One chapter shows that Brazil’s near-term gains would be 0.4 percent reduction in poverty headcount under the proposed Doha framework; another shows its long-term gains to be 1.1 percent poverty reduction under Doha and 2.9 percent in the event of full goods trade liberalization. Similar short-term and long-term gains are shown for China—1.1 percent and 1.3 percent reduction under Doha, and two percent and 2.7 percent under full liberalization.

Contrary to widespread belief, the largest agriculture-related gains in Brazil would go to households in some of the country’s poorest areas that rely heavily on low-skilled labor, Joaquim Filho, of the University of Sao Paulo, and Mark Horridge, of Melbourne’s Monash University, conclude in their chapter on Brazil. Rather than benefiting larger-scale farmers alone, agricultural employment increases and Brazil’s income distribution improves with Doha reforms, they find.

In the short-term, some countries are vulnerable to shocks following agricultural trade reform, the study finds. Bangladesh, for example, a net importer of agricultural produce, would risk a short-term rise in poverty by 1.1 percent with full liberalization, but its long-run gains would be a poverty decline of over 4.6 percent. To capture the long-term gain, Hertel says, “the case for aid-for-trade is very clear: support vulnerable countries during the initial risk period so that they don’t miss the opportunity for sizeable gains in the future.”

Doha reforms would potentially have the greatest impact on poverty (both positive and negative), the study finds, by raising world market prices and trade volumes for farm and food products. But reforms could induce even greater poverty reduction if the Doha Round were to include deeper liberalizations by developing countries themselves.

Governments need to improve infrastructure and reform domestic marketing institutions, to ensure that higher world prices are transmitted to rural areas. They also need to educate rural populations better to enhance labor mobility between farm and non-farm jobs, and help farmers benefit from new export opportunities.

In a chapter on price transmission in Mexico, Alessandro Nicita of the World Bank shows that some rural households benefit from Doha reforms only when complementary domestic reforms, such as improved transport and market infrastructure, are undertaken. Without these reforms, rural producers may not have the resources to take advantage of improved market conditions.

A chapter by the Bank’s Jorge Balat and Guido Porto on Zambia finds that when subsistence households switch to cotton production in response to increased demand—and higher prices— for exports, their incomes increase by nearly 20 percent. This rise in income could go up to one-third when the switch to cotton production is combined with improved extension services and higher cotton prices—underlining the need to combine trade reform with complementary domestic reforms.

 “The combination of investment in education and trade reform has a much stronger impact on poverty reduction than trade reform alone,” Hertel concludes in a chapter on the role of labor market mobility and education reform, coauthored with Fan Zhai, of the Asian Development Bank. This chapter finds insufficient expenditure per pupil in rural areas in China as compared to urban areas—yet even one additional year of education could boost an individual’s chance of getting a non-farm job by as much as 14 percent.



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