Trade Integration Growth and Poverty Reduction Dr Yan

Trade Integration, Growth and Poverty Reduction Dr. Yan Wang, Senior Economist The World Bank Ywang 2@worldbank. org Prepared for a TOT Course on WTO Accession, NOSPA, Vientiane, Lao PDR, June 15 -17, 2005

Outline I. Main messages: Trade, Growth and poverty reduction: a framework II. The context of reforms: how trade reform affects the poor III. Analytical and data requirements IV. Strategy of the reforms and sequencing V. Complimentary policies and institutional capacity building VI. China: Openness, Growth and Poverty reduction 2

MAIN MESSAGES • Open trade regimes are growth enhancing and poverty alleviating in long run and on average • However, trade reform may imply distributional changes which can hurt some of the poor, who can ill afford it • Successful implementation of trade reforms that help the poor need to take into account many policy and institutional variables • Analyses of policy and institutional requirements should be undertaken in advance of reforms 3

A Framework of growth • A framework of balanced growth • A country needs at least 3 types of capital for income growth and welfare: physical, human and natural capital • Openness to trade and foreign investment raise the productivity of K, and H • Investment in H raised the productivity of FDI and other investment, but currently there is an under-investment in H • Investment in Natural capital (R) and protection of the environment contributed to growth as well as welfare, but currently there is an overexploitation of natural capital • Improvement of Governance would raise the productivity of all three K, H, and R, and promote growth and poverty reduction 4

A Framework H (Human capital) TFP • Opening to trade and investment • Improving investment climate • Providing sound macro policy • Correcting market failures hurting H and R • Good governance to ensure policy consistency K (Physical capital) Growth Welfare TFP R (Natural capital) Source: Thomas et al “The Quality of Growth, ” 2000. 5

THE CONTEXT OF REFORMS • • How the existing trade regime works and how it affects the poor • Tariffs and Non- tariff barriers (NTBs); antidumping and other contingent protection- and their impact on the poor • Export restraints can also hurt the poor Trade Institutions: Trade Ministries and Customs authorities The level of development and the poverty profile The setting for trade reform: is it unilateral (autonomous) or is it in the context of WTO negotiations? 6

ANALYTICAL AND DATA REQUIREMENTS • GENERAL POINTS • Benefits long term and widespread; costs are short term and more obvious • Analysis need to be done in advance of reforms: some of the needed institutional changes take time to implement • Focus on large groups: can not protect everybody • THREE MAIN ANALYTICAL TASKS TO IDENTIFY SHORT TERM DIRECT IMPACT ON THE POOR: • The nature of the reforms and trade sectors affected ( productsservices) • The production- employment effect • The consumption effect 7

THE STRATEGY OF REFORM • • BASIC PRINCIPLES • Government ownership • Credibility • Public information ‘Big Bang’ vs Gradualism: • Gradualism is better, if there adjustment costs; provided schedule preannounced and adhered to • Need to include ‘package’ that includes measures that help exporters 8

STRATEGY CON’D • Ø Ø SEQUENCING Liberalize trade and FDI before opening up capital account Eliminate NTBs early: they are likely to hurt the poor the most Try to adopt a simple tariff schedule- complexity leads to corruption, especially when institutions are weak Do not wait to do all the difficult things last: you may never do them because of opposition of entrenched political groups 9

COMPLEMENTARY POLICIES • • Complementary policies and institutional strengthening needed for trade reforms to benefit the poor Macro-economic stability essential for successful trade reform Successful trade reform requires competitive exchange rate; Markets need to work well for poor to benefit • Labor market problems hurt the poor • Transport costs an important constraint 10

STRENGTHENING INSTITUTIONS • • • TRADE INSTITUTIONS • The Ministry of Commerce • Customs OTHER TRADE RELATED INSTITUTIONS • Trade Finance • Marketing • Standards and other quality control institutions • Issues of access by the poor SAFETY NET ISSUES 11

Trade Reform in Lao PDR • Trade reform is part of the growth and poverty reduction strategy • Economic growth in Lao has been strong, with average 5. 8% for GDP growth in the last 4 years. Both import and exports are growing • There has been sustained poverty reduction • Fast growing neighboring countries • Reforms underway to modernize the country: member of ASEAN (AFTA), steps toward WTO membership 12

Linking trade, growth and poverty • Ambitious reform plans (NGPES) • To attain MDG by 2015, and exit from the group of LDCs by 2020 • Three-pronged strategy ØDevelop market economy—including trade and investment ØBuild up country’s infrastructure and ØImprove social welfare 13

Future Challenges for Lao • Projected high rate of growth of 6 to 7 % over 2006 -10 (IMF) • Projected growth of external trade by more than 10% annually • Three main challenges ØMaintaining macroeconomic stability ØImproving competitiveness ØAdvancing trade reform 14

Case study on China • China’s transition from plan to market economy • Country is firmly on the driver’s seat • Export performance: growth & composition • WTO accession a main driver of reforms • Some key issues – The trade-poverty relationship – Using the WTO to promote development 15

China’s Trade Reforms and Trade Volumes China 1978 - 2000 Trade/GDP (log) 2 Average tariff rate Average tariff 0. 5 (right axis) 1. 6 0. 4 Trade/GDP 1. 2 (left axis) 0. 8 0. 4 0 0. 3 1988 8, 000 trading companies 1986 Forex swap market 1984 800 trading companies 1979 Open SEZs to FDI, forex retention 1978 Trade monopolized by MOFERT 0. 2 0. 1 0 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 Source: Will Martin 2004 16

WTO Accession • Non-discrimination between suppliers – and between domestic and imported goods • Uniform administration and transparency • Liberalization of Trading rights • Protection substantially reduced – Abolition of all NTBs except state trading – Abolition of TRIMs – Abolition of MFA quotas on textiles 17

Other Key Features • Trade-Related Intellectual Property Rights • Retention of state trading for oil and key agricultural products • Tariff-rate-quota regime for some imports • Non-market economy treatment in antidumping for 15 years • Product-specific safeguards for 12 years • Special textile safeguards for 4 years 18

Cuts in Manufactures tariffs Source: Will Martin 2004 19

Household Impacts • Many reforms have benefited urban more than rural workers • Some poorer rural households may suffer significantly from WTO accession • Best solutions to this problem lie in policies with long-run benefits for the poor – eg improving labor mobility, better educational opportunities, improved agricultural technology, stronger social safety nets 20

Labor Markets Are Critical • Trade reform & China’s growth & development require massive movements of workers • Many barriers to mobility between agriculture & other sectors – Poor education, lack of experience, inability to sell land use rights, formal barriers (eg hukou) all limit mobility – Causes rural incomes to fall behind urban • Hukou system less restrictive than previously, but still an important barrier 21

Poverty decline has slowed since mid-1990 s Headcount index 60 50 2000 calorie poverty line 40 30 20 10 Official poverty line 0 1981 1982 1983 19841985 1986 1987 19881989 1990 1991 1992 19931994 1995 1996 19971998 1999 2000 2001 Source: Martin Ravallion and Shaohua Chen 2004 22

… while inequality has risen sharply Gini coefficient 45 40 National 35 30 Rural 25 20 Urban 15 10 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 Source: Martin Ravallion and Shaohua Chen 2004 23

Window of Opportunity: for regional integration • Regional integration through ASEAN+1, AFTA • Regional cooperation: through Great Mekong Subregional cooperation, facilitating regional trade and investment. • China’s economy has a complementarity with its neighboring countries • China is running a trade deficit with SE Asian economies, importing Agricultural products – crucial for these countries’ poverty reduction • China is encouraging firms to invest more in neighboring countries—South-South 24 investment

Summary • • Openness to trade and investment is key to capital accumulation and productivity, and hence to income growth Trade reform is poverty alleviating in the long term, but the short term impact may be uneven Trade reform and WTO accession is a part of Lao’s poverty reduction strategy: NGPES WTO accession provides opportunities as well as new challenges It is crucial to have complimentary policies in place, and to build institutional capacity for trade reforms Regional integration is gaining momentum A window of opportunity for further integration through South-South investment 25

References: • § § § § Bayraktar and Wang, Y, 2004. “Foreign Bank Entry, Performance of Domestic Banks and the Sequence of Financial Liberalization” Bhattasali, D. , Li, Shantong and Will Martin. 2004. eds. China and the WTO: Accession, Policy Reform and Poverty Reduction, Oxford University Press and the World Bank. Dollar et al. 2003. “Improving Investment Climate in China” The World Bank Matto, Aaditya, 2002. ”China’s Accession To The WTO: The Services Dimension, ” World Bank Ravallion and Chen, 2004. “China’s Uneven Progress against Poverty”. Wang and Husain. 1996. “China’s FDI and Economic Growth”, Revue d’Economie du Development. 1 -2. World Bank, 2003. Promoting Growth with Equity, Country Economic Memorandum. World Bank. 2000. The Quality of Growth. See http: //www. worldbank. org/trade/China-WTO. 26