Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Joint publication by World Trade Organization the World Bank Group and the The Role of Trade 97607 in Ending Poverty Disclaimer The designations employed in this publication and the presentation of material therein do not imply the expression of any opinion whatsoever on the part of the World Bank, its Board of Executive Directors, or the governments they represent, or the World Trade Organization concerning the legal status of any country, area or territory or of its authorities, or concerning the delimitation of its frontiers. The responsibility for opinions expressed in this publication rests solely with their authors, and publication does not constitute an endorsement by the World Bank or the World Trade Organization of the opinions expressed. Reference to names of firms and commercial products and processes does not imply their endorsement by the World Bank or the World Trade Organization, and any failure to mention a particular firm, commercial product or process is not a sign of disapproval. This volume is a co-publication of the World Bank and the World Trade Organization. Attribution—please cite the work as follows: World Bank Group and World Trade Organization, 2015. The Role of Trade in Ending Poverty. World Trade Organization: Geneva. Copyright © 2015 World Trade Organization Cover image: Goma/Rubavu border crossing between Rwanda and the Democratic Republic of the Congo (Photo: Simone D. McCourtie/World Bank) Contents 3 Foreword 4 Acknowledgements 5 Abbreviations and Acronyms 7 Executive Summary 12 Chapter 1: Global growth, trade and 40 Chapter 3: Policies to maximize the poverty: the macro links gains of trade opportunities for the poor, 13 The global economy and minimize the risks 42 Integrating markets and improving 15 The poverty challenge the enabling environment 19 Trade and the poor: theory and evidence 43 Tariff and non-tariff measures 19 Growth and macroeconomic stability 45 Infrastructure and trade facilitation 21 Impacts on households and markets 46 Access to trade-related technology and trade finance 21 Impact on wages and employment 47 Enabling environment 24 Impact on government revenue 48 Refining integration and mitigating 25 Conclusion risks to maximize positive effects for the poor 48 Refining integration to maximize gains for the poor 26 Chapter 2: Constraints faced by the poor 53 Understanding and managing risks 27 Rural areas 54 Understanding the links between trade and poverty through better data and analysis 31 Fragile and conflict-affected areas 57 WTO and World Bank Group support 34 Informality for trade as a means of poverty reduction 35 Women, trade and poverty 59 Conclusion: implementing a 39 Conclusion strengthened trade policy agenda for the poor 62 Notes 67 References 1 The Role of Trade in Ending Poverty 2 Foreword This is a critical year in the world’s collaborative effort to end global poverty and boost the incomes of the poorest. We will endorse the Sustainable Development Goals, develop a plan for financing for development, and reach for a landmark agreement to mitigate and adapt to climate change. If we are to end extreme poverty by 2030, we must do all we can in this final push to raise the incomes of the extreme poor. The Role of Trade in Ending Poverty makes the case for how trade can contribute to this ambitious goal. Advances we make this year to reduce global trade barriers and strengthen the global trading system would add significant momentum to our efforts to end poverty. Our best opportunity to take these steps forward will be the WTO Ministerial Conference in Nairobi this December, where participants will make a renewed push to finalize multilateral trade negotiations in many areas. Though progress will be difficult, there is reason for optimism: The 2013 Ministerial Conference in Bali had a historic outcome, as parties signed the WTO’s Trade Facilitation Agreement and made important decisions, many of which will benefit Least-Developed Countries. To build on this momentum, we must address the trade costs that keep markets from being more fully integrated. Critical components will involve implementing the Trade Facilitation Agreement, advancing multilateral negotiations, achieving further policy reforms, and delivering Aid for Trade from the World Bank Group, the WTO and other partners. In addition, policies to increase the contribution of trade to growth will need to be matched with a new effort to maximize the extreme poor’s gains from trade. This entails tackling key challenges confronting the poorest, including rural poverty, gender inequality, fragility and conflict, and the nature of the informal economy. The Role of Trade in Ending Poverty sets out a framework for action on these issues. Closer coordination between the World Bank Group and the WTO, as well as partnerships with others in the international community, will be critical to our success. Although our two organizations have different mandates and memberships, they are united in a common purpose to contribute to economic development and improve people’s lives around the world. At this critical juncture in history, we need to ensure that trade helps all, especially the poorest, as we strive to reach the goal of ending extreme poverty in a generation. Roberto Azevêdo Jim Yong Kim Director-General President World Trade Organization World Bank Group 3 The Role of Trade in Ending Poverty Acknowledgements This publication has been prepared jointly by the staff of the World Bank Group (WBG) and World Trade Organization (WTO). Marcus Bartley Johns (WBG), Paul Brenton (WBG) and Roberta Piermartini (WTO) were the coordinators of the publication. The main authors of the various parts of the publication were Marcus Bartley Johns, Paul Brenton, Massimiliano Cali, Mombert Hoppe, and Roberta Piermartini. A number of other staff from the WBG and WTO made valuable contributions, including Joan Apecu, Marc Auboin, Marc Bacchetta, Cosimo Beverelli, Michael Ferrantino, Christian Henn, Alexander Keck, Shaun Mann, Juan Marchetti, José-Antonio Monteiro, Gaurav Nayyar, Coleman Nee, Mikiko Olsen, Robert Teh, and Thomas Verbeet. The coordinators wish to acknowledge the helpful comments received at various stages of preparing the publication, including from Dobromir Christow, Diwakar Dixit, Selina Jackson, Charles Kunaka, Nora Neufeld, Ana Revenga, Bob Rijkers, Michael Roberts, Michele Ruta, Sebastian Saez, Carmine Soprano, Melvin Spreij, Gretchen Stanton, David Tinline, Alina Truhina, Tara Vishwanath, Christian Wolff, and Tim Yeend. The advice and suggestions of the peer reviewers (Julian Clarke, Vasco Molini, and Raju Singh) are gratefully acknowledged. The preparation of the publication was carried out under the guidance of Robert Koopman at the WTO, and Bill Maloney and Anabel González at the WBG. The coordinators would like to thank Paulette Planchette and Aakriti Mathur for their assistance in the preparation of the publication. Dissemination and communications aspects of the publication were managed by Kristina Nwazota and Julia Oliver. The production of the publication was managed by Anthony Martin and Helen Swain at the WTO, and Mayya Revzina and others in the Office of the Publisher at the World Bank. Design and layout of the publication were undertaken by Steve Francis and his team. The publication was edited by Bill Shaw. 4 Abbreviations and Acronyms EIF Enhanced Integrated Framework FCS Fragile and Conflict-Affected States GATS General Agreement on Trade in Services GATT General Agreement on Tariffs and Trade GDP Gross Domestic Product GVC Global Value Chain HIV Human Immunodeficiency Virus ICT Information and Communication Technology LDC Least-developed Country OECD Organization for Economic Co-operation and Development R&D Research and Development SPS Sanitary and Phytosanitary Standards SME Small and Medium-sized Enterprises UN United Nations UNESCAP United Nations Economic and Social Commission for Asia and the Pacific WTO World Trade Organization 5 The Role of Trade in Ending Poverty This report offers five inter- related and complementary areas of policy for maximizing the gains 1 of trade opportunities for the poor. Lower trade costs for deeper integration of markets 2 3 improve the enabling environment intensify the poverty impact of integration policies Manage and 4 5 mitigate risks faced by the extreme poor Better data and analysis to improve policy 6 Executive Summary The expansion of international trade has been essential to development and poverty reduction. Today’s economy A key message of this report is is unquestionably global. Trade as a proportion of global GDP has approximately doubled since 1975. Markets for goods and the need to sustain efforts to services have become increasingly integrated through a fall in trade barriers, with technology helping drive trade costs lower. But keep global trade open and to trade is not an end in itself. People measure the value of trade by the extent to which it delivers better livelihoods, through higher do more to lower trade costs, incomes, greater choice, and a more sustainable future, among other benefits. For the extreme poor living on less than $1.25 a by further integrating markets. day, the central value of trade is its potential to help transform their lives and those of their families. In this way, there is no doubt that the integration of global markets through trade openness has made a critical contribution to poverty reduction. The number of people of a wider approach that recognizes the specific constraints living in extreme poverty around the world has fallen by around one facing the extreme poor — and for many, their disconnection billion since 1990. Without the growing participation of developing from markets — if they are to benefit from trade. This countries in international trade, and sustained efforts to lower includes challenges facing women, the rural poor, those barriers to the integration of markets, it is hard to see how this in the informal economy, and those in fragile and conflict- reduction could have been achieved. affected states. Thus, in order to have the greatest impact toward ending poverty, trade policy must be made and Trade can continue to play a key role in poverty reduction. implemented in conjunction with other areas of policy. This In 2011 (the most recent year for which comprehensive data entails deeper cooperation across sectoral lines, government are available), around one billion people remained in extreme agencies, and a wider range of stakeholders. poverty — just under 15 percent of the world’s population. The World Bank Group has adopted the goal of reducing this figure 3) The World Trade Organization and World Bank Group to less than 3 percent by 2030, and the concept is prominent in have made substantial contributions to trade and poverty discussions underway this year on the post-2015 Sustainable reduction. However, a great deal more remains to be done to Development Goals. This report, jointly written by the World Bank end poverty, and both institutions and other partners need to Group and the World Trade Organization, explores how sustained continually review their activities to support poverty reduction efforts to lower trade costs and integrate global markets can to ensure they remain relevant in an ever-changing world. maximize the gains for the extreme poor. It offers strategies on Trade can drive poverty reduction by boosting growth. how to support further integration of the poor into global trade Although the drivers of poverty are multi-dimensional, the basic by lowering trade costs in a way that maximizes the gains and requirement for sustained poverty reduction is economic growth. minimizes the risks, with a particular focus on the work of the World Opening up to trade increases a country’s GDP because it allows Trade Organization and the World Bank Group. each country to use its resources more efficiently by specializing This report has three key messages: in the production of the goods and services that it can produce more cheaply, while importing the others. Trade also affects long- 1) A sustained effort to deepen economic integration and term growth since it gives access to more advanced technological further lower trade costs is essential for ending poverty. inputs available in the global market and because it enhances Strong growth in developing countries will be needed to the incentives to innovate. Trade contributes directly to poverty achieve the end of poverty, and trade is a critical enabler of reduction by opening up new employment opportunities, for growth, opening up opportunities for new and better work example for agricultural producers, with the expansion of export for the poor. Although great progress has been made in sectors, and by bringing about structural changes in the economy reducing trade costs and integrating low-income countries that increase employment of low-skilled, poor workers in the into the global economy, more needs to be done. informal sector. Trade also provides better access to external markets for the goods that the poor produce. Understanding these 2) Lowering tariffs and non-tariff barriers between countries are channels helps us trace through the impact that trade can have on essential elements of this agenda, but this must form part the extreme poor. 7 The Role of Trade in Ending Poverty The increasingly integrated global economy has been is evidence to suggest that it will become even harder for overall a critical factor behind the poverty reduction achieved so growth to be translated into income gains for the poor. Extreme far. And integration will be just as — if not more — important poverty is becoming concentrated in countries and regions where on the path to 2030. A key message of this report is the need to poverty reduction seems to be less responsive to overall growth. sustain efforts to keep global trade open and to do more to lower trade costs, by further integrating markets. Reducing trade costs The extreme poor face numerous constraints that limit in countries where the poor live may not just oil the engine of their capacity to benefit from wider economic gains. In this economic growth, but also can increase the competitiveness of context, trade integration is important not only because of the boost the goods and services traded by the poor and lower the costs to growth it can provide, but also because there is room for it be of key inputs in production, such as fertilizers for poor farmers. executed in ways that more effectively overcome the constraints The inverse relationship between trade costs and income — the faced by the extreme poor. A novel feature of this report is the link poorer countries are, the higher the trade costs they face — drawn between these challenges facing people living in extreme underlines the need to do more on this front. Lowering trade costs poverty and their capacity to benefit from trade, as a key driver is particularly important for countries seeking to take advantage of growth. The report describes four leading characteristics of the of the fragmentation of production through global value chains, poor that have a particularly strong impact on their capacity to which offer new opportunities to generate growth and income gains extract the full potential benefits of trade: rural poverty; fragility and through trade. conflict; informality; and gender. Yet growth alone may not be enough to achieve the end of Each of these four characteristics shapes the environment poverty by 2030. Based on recent World Bank projections of likely in which the extreme poor live, and constrains them from global growth to 2030, growth is unlikely to be high enough across benefiting from trade opportunities. Poverty in many parts all developing countries to reduce poverty to the level sought by of the world — especially in Sub-Saharan Africa, where the 2030. Developing countries would have to grow at an average of 4 challenge of ending extreme poverty is greatest — is a strikingly percent each year — even higher than the growth rate of the 2000s rural phenomenon. For the rural poor, trade and internal market and much higher than that of the 1980s and 1990s. Even with barriers in agriculture present real challenges to benefiting from sustained growth, as poverty continues to decline globally, there trade opportunities. More than half of the extreme poor live in fragile and conflict-affected areas (often dominated by revenues from high value minerals and other natural resources) and are less likely to be able to benefit from trade opportunities, even though export diversification by providing alternative livelihoods can be an essential pathway out of conflict. Poverty and informality often go hand in hand. Informal sector workers and the micro-enterprises that dominate the informal economy face particular challenges, and are vulnerable to sudden economic shocks. Finally, women are often at the forefront of poverty reduction, and trade has brought particular benefits for women in terms of jobs and empowerment. However, women face specific constraints, both within and outside the household, which can make it difficult to participate in and gain from trade opportunities. The risks faced by the poor also affect their capacity to benefit from trade opportunities. Major risks faced by the poor across each of the four dimensions of poverty include economic shifts, labor market adjustments, and vulnerability to weather events and to climate change. At the same time, the poor often lack access to the instruments and support necessary to mitigate these risks — things people in advanced countries take for granted, such as insurance and social security. When poor people face risks, they may be unable to adopt strategies to make the most of trade 8 Executive Summary opportunities, even where these strategies would be beneficial. For on lowering tariffs and non-tariff barriers between countries are example, the risks faced by subsistence farmers are at least partly essential elements, but they must form part of a wider approach. responsible for their inability to invest in higher quality inputs like Only a holistic approach, which also incorporates a variety of seeds and fertilizers, which could help them take full advantage specific localized measures, can begin to deliver the gains required of trade opportunities. Similarly, a lack of access to finance to end global poverty. Although countries are the basic “building often limits the capacity of informal microenterprises to invest in blocks” of international trade policy, the challenges faced by the ways that would allow them to offset risks. Understanding and poor vary greatly within national borders, and across borders. addressing these risks is important to ensure that trade delivers For this reason approaches that focus on lowering trade costs maximum benefits to the poor. between countries will need to be complemented by efforts to tackle challenges faced by the poor within and across national borders. While the challenges and risks facing the extreme poor are This underlines the importance of the various programs that the considerable, the opportunities are great. Cross-border trade World Trade Organization and World Bank Group have in place to enhances the income of agricultural producers and traders in poor address these challenges, and of further efforts in this regard. countries. Trade has contributed to women moving out of agriculture into manufacturing and especially services, and this has brought This report offers five inter-related and complementary with it higher incomes and more formal employment. Trade can areas of policy that can be considered by countries and the also help to devise pathways out of conflict. Pursuing strategies for international community in implementing this approach: economic integration in ways that address the challenges faced by the extreme poor can help maximize the gains from trade. • Lowering trade costs for deeper integration of markets. Trade facilitation — including implementation of the WTO The greatest impact on poverty reduction will come through Trade Facilitation Agreement — as well as tackling other a coherent approach that lowers trade costs in ways that policy and infrastructure barriers to goods and services trade maximizes the gains for the extreme poor. Policies that focus are critical to growth and poverty reduction. 9 The Role of Trade in Ending Poverty 10 Executive Summary • Improving the enabling environment. Trade openness itself level, complementing unilateral opening and regional cooperation, and lowering trade costs is essential for delivering gains and helping developing and least developed countries to integrate for the poor. A range of complementary policies helps into the trading system remain as relevant today as ever. The maximize the gains of openness for the poor — including rules-based global trading system has been essential in reducing policies related to human and physical capital, access to the risks faced by the poor from opaque and unpredictable trade finance, governance and institutions and macroeconomic policies — both in terms of access to markets for the products they stability. Strengthening the enabling environment can be produce and by creating a stable trading environment to support done through innovative policy frameworks that improve job-creating investment, both domestic and foreign, in trade- consultation with the poor, and target their needs more related activities. Updating the World Trade Organization’s rules, carefully. To achieve this will require deeper cooperation market access commitments and flexibilities through a successful across sectors, better coordination across government conclusion of the current round of Doha negotiations will expand ministries and agencies and that a wider range of the opportunities for developing countries to benefit from inclusion stakeholders work effectively together. in the global trading system and foster development. • Intensifying the poverty impact of integration policies. The World Trade Organization also plays a key role in Bringing a greater focus on tackling remoteness from supporting trade facilitation. The need to support countries in markets at the sub-national level, and facilitating the making the most of trade opportunities is recognised in the Trade activities of poor and small traders, can help improve gains Facilitation Agreement, which states that assistance and support for the poor, especially in rural areas. This also entails must be granted to help developing countries achieve the capacity reforms to tackle costs generated by a lack of competition, necessary to implement its provisions. Various efforts are now and other sources of domestic costs. Promoting greater underway, including by the World Bank Group, to ensure that this inclusiveness of women, and targeting the challenges they commitment is delivered. Ratification and implementation of the face as distinct from men, is central to efforts to intensify the Trade Facilitation Agreement has the potential to deliver significant poverty impact of integration policies. reductions in trade costs, especially in the poorest countries. Recognising the particular constraints faced by the poor, including • Managing and mitigating risks faced by the poor. More focus small-scale traders, and focusing on connecting the extreme poor is needed on managing the existing risks that poor people to markets would maximize the impact of the Agreement on poverty face that limit them from benefiting from trade opportunities reduction. when they arise. Effective risk management can be a powerful instrument for development, through building poor The Aid for Trade Initiative, convened by the World Trade people’s resilience to the effects of adverse events and Organization, has helped mobilise significant additional also by allowing them to take advantage of opportunities for resources for trade-related assistance, and could more improvement. Addressing any potential risks to livelihoods closely monitor the impacts of trade integration on poverty for the poor through trade-related adjustments is also reduction. As the leading multilateral donor of Aid for Trade, the important. World Bank Group has a key role to play through its financing capacity, widespread country presence, capacity to undertake and • Improving data and analysis to inform policy. The gaps widely disseminate relevant research, knowledge and analytical in understanding of poverty, the nature of the informal expertise, and multi-sectoral capacity and reach. The Bank Group economy, the participation of women in trade, and of the is increasingly focusing on fragile and conflict states, and the trade-related constraints in general that many countries face importance of agricultural development in raising incomes in rural continue to be large. Better data is required for the design areas. Improving the tools to monitor the impact of Aid for Trade and implementation of effective policies to maximize the and integrating effective trade indicators into broader monitoring poverty reduction gains from trade. systems of poverty reduction and progress in fragile states is an important area of on-going and future work for the Bank Group. The World Trade Organization plays a critical role in Both institutions have a critical role to play in implementing the underpinning an open and inclusive global trading system. agenda set out in this report. The key goals of pursuing further openness at the multilateral 11 The Role of Trade in Ending Poverty 1 12 Chapter 1 Global growth, trade and poverty: the macro links The relationship between economic growth, poverty reduction, The global economy and trade is not a simple one. Although great progress has been Today’s economy is a global one — trade as a share of global made in reducing the number of people living in extreme poverty, GDP has grown massively, despite recent weakness, along due in large part to the rapidly growing participation of developing with FDI. Since 1950 the share of world GDP made up by trade countries in the global economy, nearly one billion people still live and the volume of world trade have increased dramatically: global on less than $1.25 per day. What will it take to end extreme poverty merchandise trade in 2014 was $18.9 trillion, up from $3.5 trillion in by 2030, which is the target date for the World Bank Group’s 1990.2 Flows of investment have increased by even greater levels. goal, as well as the end date for the next set of United Nations 1 Tariffs have fallen steadily since the end of the Second World development targets? What role will trade openness play in the War, along with progressive liberalization of capital controls, and next phase of poverty reduction? greater connectivity through new technology in transportation and Exploring these questions involves an understanding of communications. the nature of the global economy and the structure of global This globalization has created new opportunities for poverty today. In addition, it requires understanding the theory economic growth, development and poverty reduction. and evidence of the main links between trade, economic growth, The rapid growth of the global economy is a relatively recent and poverty reduction and how these are changing in an evolving phenomenon. Its expansion built up speed during the technological global economy. innovations since the Industrial Revolution, which allowed for This chapter shows that extreme poverty is becoming the more productive use of existing endowments of economic increasingly concentrated in Sub-Saharan Africa and South assets. The even faster growth of the last century is due largely to Asia, although pockets of extreme poverty persist in other technological innovations in communications and transportation, regions. The structure of the economies of countries in these regions, especially in Africa, suggests that current growth trends will not deliver the poverty reduction to eliminate extreme poverty by 2030. The chapter concludes, therefore, that we need to identify the key characteristics of the poor in these countries to develop ways in which trade-driven growth can be more inclusive. The key characteristics that we have identified as being of relevance to the impact of trade on poverty are: the extreme poor mainly live in rural areas, many earn their livelihoods in the informal sector, the majority lives in a fragile and conflict- affected state and women face particular challenges in alleviating poverty. These characteristics are all associated with the poor facing substantial constraints to trade and higher risks in their everyday lives that limit their capacity to adopt strategies that would allow them to raise incomes through trade. The report then asks what needs to be done to first identify and then reduce the barriers to new opportunities that trade can bring to the extreme poor and what can be done to address the high risks they face. 13 The Role of Trade in Ending Poverty as well as the progressive lowering of barriers to global trade to the WTO in 2001, China’s simple average tariff fell from about 40 and finance.3 This helps explain the strong correlation between percent in 1985 to under 10 percent today.5 The growing size and increased exports of goods and services as a share of global GDP, increased openness of large developing markets has provided new and the steady decline in the number of global poor (Figure 1.1). export opportunities for many other developing countries and has been an important factor driving growth. In this most recent period, developing countries have experienced high and sustained growth while participation in The emergence of global value chains has been an the global economy has increased rapidly. Developing country important driver of developing country participation in total trade as a share of GDP has doubled since 1985. Since 2000 the global economy. Countries no longer need to develop alone, the developing country share of world trade increased from competitiveness in whole industries to be able to trade. Declining 33 percent to 48 percent. China is now the world’s largest exporter, transportation and communications costs, along with improved with a number of other developing countries in the top twenty technology, have made it easier for firms in developing countries exporters, including Brazil, India, Indonesia, Malaysia, Mexico, to provide particular tasks or activities (services as well as goods) and Thailand. This has been accompanied by steady GDP growth. to value chains that extend across countries. More than half of Between 2000 and 2011, the largest, higher-income developing developing country exports in value-added terms involve global countries — those that are members of the G20 — experienced value chains (GVCs.) This is not being generated just through per capita GDP growth of 5.2 percent per year on average, up from — the share of trade trade from developing to developed countries ­ 3.9 percent in the preceding decade. This growth has not been in parts and components (a good approximation of GVC-related limited to the largest developing countries. Between 2000 and trade) between developing countries has quadrupled over the last 2011, least-developed country (LDC) per capita income grew at 3.7 25 years.6 percent per year on average, in stark contrast to negative growth of 0.7 percent in the preceding decade. The developing country share Economic growth is key to job generation and critical for of world output grew from 23 percent to 40 percent between 2000 poverty reduction, especially in countries with large numbers and 2012.4 of young people. Growth increases the demand for labor, which is the main and often the sole asset of the poor. In turn, increasing Important trade reforms undertaken in developing employment has been crucial in sustaining higher growth. It is the economies stand out as an important force behind these strong growth of the global economy over the past 10 years that has trends. Major liberalization episodes happened in Brazil, China enabled the majority of the world’s working-age population to and India over the last two decades. Following China’s accession Figure 1.1: GDP, trade, growth and the number of poor GDP per capita and world exports Billions of extreme poor and share of population U.S. Dollars Percent Billions Percent U.S. Dollars Percent Billions Percent 9,000 35 2.5 60 9,000 35 2.5 60 8,000 8,000 30 50 30 2.0 7,000 50 2.0 7,000 25 6,000 25 40 6,000 1.5 40 5,000 20 1.5 5,000 20 30 4,000 30 15 4,000 15 1.0 3,000 1.0 20 3,000 10 20 2,000 10 0.5 2,000 10 5 0.5 1,000 10 5 1,000 0 0 0.0 0 0 0 0.0 1981 1984 1987 1990 1993 1996 1999 2002 200502008 2010 2011 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2010 2011 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 GDP per capita (constant 2005 US$) Number of poor GDP per capita (constant 2005 US$) Number of poor Exports of goods and services (% of GDP) Poor as share of global population Exports of goods and services (% of GDP) Poor as share of global population Source: World Development Indicators, PovcalNet 14 Chapter 1 find employment. Real wages for low-skilled jobs have increased with GDP growth worldwide, which indicates that, globally, the poorest workers have benefited from the increase in global trade and growth.7 Globally, between 2000 and 2011 real monthly average wages grew by just under 25 percent, but in Asia they almost doubled, while in the developed world they increased by only about 5 percent.8 At the same time, in every region of the world and particularly in Africa, youth unemployment is a major issue. The poverty challenge Amid these shifts in the global economy, the world still faces a great challenge in ending extreme poverty and improving prospects for the poorest.9 Between 1990 and 2010, the proportion of people living in extreme poverty was halved, with East Asia and the Pacific (primarily China) having made the greatest contribution to this (see Table 1.1). Nevertheless, based on the most recent estimates available (2011 data), slightly more than one billion people globally — around 17 percent of the developing world’s population — continue to live on less than $1.25 per day. Table 1.1: Population shares and total numbers of people in extreme poverty Percentage of population below US$1.25 a day (2005 PPP) Projections Region 1990 2005 2008 2010 2011 2015 2020 2030 East Asia and Pacific 58.2 16.7 13.7 10.3 7.9 4.1 1.5 0.1 a Eastern Europe and Central Asia 1.5 1.3 0.4 0.6 0.5 0.3 0.2 0.1 b Latin America and the Caribbean 12.0 7.4 5.4 4.8 4.6 4.3 3.8 3.1 Middle East and North Africa 5.8 3.0 2.1 1.7 1.7 2.0 1.8 2.4 South Asia 53.2 39.3 34.1 29.0 24.5 18.1 13.8 2.1 Sub-Saharan Africa 56.6 52.8 49.7 48.2 46.8 40.9 34.2 23.6 Total (developing world) 43.5 24.8 21.8 19.1 17.0 13.4 10.5 5.7 Total 36.4 21.1 18.6 16.3 14.5 11.5 9.1 4.9 Millions of people below US$1.25 a day (2005 PPP) Projections Region 1990 2005 2008 2010 2011 2015 2020 2030 East Asia and Pacific 957.1 324.1 272.3 207.1 160.8 86.4 31.3 2.5 Eastern Europe and Central Asia 7.1 6.0 2.0 2.9 2.3 1.3 0.8 0.3 Latin America and the Caribbean 52.7 41.0 31.0 28.3 27.6 26.8 24.8 21.7 Middle East and North Africa 13.1 9.0 6.5 c 5.5 c 5.6 c 7.3 7.0 10.3 South Asia 603.2 589.0 532.7 465.3 399.0 310.6 249.6 42.5 Sub-Saharan Africa 287.1 399.1 406.8 416.4 415.4 403.2 382.9 334.6 Total 1920.2 1368.1 1251.4 1125.5 1010.7 835.5 696.4 411.8 Source: World Bank, Global Monitoring Report 2014/15. Poverty projections are based on per capita GDP growth rates set out in the World Bank 2014 Global Economic Prospects report, assuming unchanged income distribution within countries. a The statistic for 2030 is 0.11 for East Asia and Pacific. It has been rounded to 0.1 in the table. b The statistic for 2030 is 0.06 for Europe and Central Asia. It has been rounded to 0.1 in the table. c Refers to the numbers that are provisional because survey coverage is less than 50 percent of population in the region. 15 The Role of Trade in Ending Poverty Eighty percent of this one billion is concentrated in Sub-Saharan Almost three-fifths of the world’s extreme poor are Africa (415 million) and South Asia (399 million). While the share of concentrated in five large developing countries: Bangladesh, the population in extreme poverty in each region has fallen since China, the Democratic Republic of Congo, India, and Nigeria. 1990, with important variations across countries, the decline has Adding another five countries (Ethiopia, Indonesia, Madagascar, been faster in South Asia. Sub-Saharan Africa looks set to be the Pakistan, and Tanzania) would comprise just over 70 percent of only region that will not achieve the first Millennium Development the extreme poor (Figure 1.2). Of the countries where more than 4 Goal target of halving extreme poverty at a $1.25/day level by percent of the population are living in extreme poverty, all but two 2015.10 Of the remaining extreme poor, 161 million live in East are in Africa (Bangladesh and Haiti). Asia and the Pacific — with the largest number in Indonesia. Other regions together account for less than 50 million (just 3.5 percent) Although the rest of the extreme poor are spread across of the world’s extreme poor.11 many countries, the share of the extreme poor as a proportion of the total population in these countries is much higher than in many of the large countries listed above. In the Democratic Figure 1.2: Top 10 countries with the largest share of the extreme poor, 2011 Percentage of global extreme poor in each country 30% INDIA 10% NIGERIA 5% CONGO, DEM. REP. 3% ETHIOPIA 2% TANZANIA 2% MADAGASCAR 28% REST OF THE WORLD 4% INDONESIA 2% PAKISTAN 8% CHINA 6% BANGLADESH Source: World Bank, PovcalNet, from Global Monitoring Report 2014/15 16 Chapter 1 Republic of the Congo and Madagascar, for example, an estimated poverty to 3 percent globally. However, both scenarios assume 88 percent of the population is extremely poor — in Burundi, that the same relationship between per capita GDP growth and Liberia, Malawi and Zambia the share is between 70 percent and the decline in poverty is sustained — and there is evidence that 84 percent (see Figure 1.3). this is unlikely. After poverty reduction reaches the majority of poor people close to the middle of national income distributions, poverty Ending extreme poverty requires a growing global will fall more slowly for the remaining poor at the bottom of the economy and sustained growth in countries where poverty is income distribution. A range of constraints limits the capacity of concentrated — but growth alone will not be enough. Strong the poor to take advantage of overall economic growth and trade global growth in developing countries in particular created the opportunities. These challenges are the focus of the discussion in conditions for the reduction by half of the proportion of extreme the next chapter. poor between 1990 and 2010. In a recent study of long-run growth in 118 countries, the strongest driver of poverty reduction The challenge is even greater in boosting the among lowest-income earners was found to be increases in inclusiveness of growth in each country. The World Bank Group average GDP per capita, reinforcing the existing consensus on is working to increase real income for those in the bottom two this relationship.12 Projections from the World Bank of global per quintiles of the population. As with extreme poverty, constraints that capita GDP increasing by 1.7 percent per year (with developing affect the poorest 40 percent of the population can limit their ability countries growing at around 4 percent and developed countries to benefit from overall economic growth, and there is no automatic at about 0.6 percent) would result in a global poverty rate of “trickle-down” effect. The nature of these constraints varies widely about 4.9 percent by 2030, assuming income distribution remains across countries and income levels. For countries where the unchanged. Among other scenarios contemplated in the 2014/15 bottom 40 percent of the population is also below the extreme Global Monitoring Report, an optimistic scenario of global annual poverty line, the constraints of extreme poverty are the main focus. per capita consumption growth of 4 percent per year, combined But these will also be relevant for countries that may have large, with no changes in income distribution, was required to lower vulnerable populations at moderate levels of poverty (Box 1.1). Figure 1.3: Percentage of extremely poor people, countries where 40 percent or more of the population is extremely poor (in descending order) Percent of extremely poor people 100 80 60 40 20 0 9 11 1 06 0 10 8 1 01 11 10 08 2 05 12 0 0 05 11 09 0 4 8 0 2 07 01 00 01 01 00 00 01 01 01 00 00 01 00 20 20 20 20 20 20 20 20 20 20 20 20 20 ,2 ,2 ,2 ,2 ,2 ,2 ,2 ,2 r, 2 ,2 ,2 i, 2 ,2 o, e, di, h, iti, ia, er, c, a, a, p., a, nia so a, nin ipe ue au li da ros ola tho law ca g on bli Ma es ny ine eri Ha eri run mb Nig Re Fa To iq iss an za Be ínc as g mo pu so lad Le Ke Nig Lib Ma mb Gu An Bu Za n Rw a-B ina m. ag Le Re Pr Ta Co ng rra za De d rk nd ine Ba Ma an Sie Mo Bu éa o, Gu ic ng Afr m Co To al ntr o Sã Ce Source: World Bank, data from PovcalNet, http://iresearch.worldbank.org/PovcalNet/index.htm 17 The Role of Trade in Ending Poverty While focusing on extreme poverty, we need to avoid sanitation, or poor health. In the Middle East and North Africa, for any perception that an individual “graduating” from extreme example, although there are no extreme poor, many are below poverty entails a sudden shift to economic stability and $2.50 a day, living in vulnerable positions. There is a similar prosperity. Many above the extreme poverty line are highly situation in Latin American and the Caribbean (see Box 1.2). vulnerable and face challenges like inadequate water and Box 1.1: Trade and shared prosperity Box 1.2: Vulnerability on the margins of extreme poverty — regional experiences15 One of the Bank’s “twin goals” is to increase the income growth of the poorest 40 percent in each country, to Applying the $1.25 poverty line to Latin America and ensure that economic gains benefit the near-poor the Caribbean would show that extreme poverty was and lower-middle income groups. Of course, in many stable in the 1980s and 1990s at approximately 12 countries, and in particular in the poorest countries, 40 percent of the population but began to fall in 2002. By percent or more of the population live on incomes that 2011, extreme poverty had declined to about 5 percent, are below the extreme poverty line. In these cases, the putting the 3 percent goal within reach by 2017, based discussion in the rest of this report is directly applicable on growth and income distribution trends. However, the to both of the Bank’s goals. level of development in the region has led analysts to use poverty lines that are higher than the global $1.25 a To the extent that increased trade is associated day. For example, $2.50 a day is an average of national with economic growth, it is likely to be associated with extreme poverty lines in the region. However, those improvements in the standard of living for the bottom above this $2.50 per day poverty lines should still be 40 percent. While a rise in average income does not considered vulnerable, with recent World Bank analysis necessarily result in a rise in income in the bottom estimating that a $10 per day income reduces the deciles of the population, it is well-established that likelihood of returning to poverty significantly enough to economic growth often leads to poverty reduction.13 be considered “middle class.” Since the bottom 40 percent are in most countries more similar to people at the average income than to the In the Middle East and North Africa, the target of extreme poor, the link between economic growth and less than 3 percent of the population being below the outcomes of the bottom 40 percent is likely to be even $1.25 per day poverty line has been met. However, if stronger than the link between growth and reduced the poverty line is shifted to $2 per day (which may be poverty. more relevant given relatively higher incomes of many countries in the Middle East and North Africa), in 2012 The benefits of greater trade to the bottom 40 percent 12 percent of the population were below this line. At depend, in part, on the skill intensity of the products $4 per day, 53 percent of the population were below favoured by trade. If a country’s comparative advantage the poverty line. This suggests significant vulnerability lies in goods that are relatively intensive in less-skilled to falling below even the $1.25 poverty line in times of labor, increased trade is likely to benefit the bottom economic shock or conflict. 40 percent relatively more. If a country specializes in technology or high-skill intensive products, then trade The situation of these regions highlights the can in principle place downward pressure on the wages vulnerability of those who may be earning just above the of the bottom 40 percent. But this is more likely to be the $1.25 extreme poverty line. Does this mean the $1.25 case in high-income countries (although the downward line is irrelevant? It should not, because this level still pressure on less-skilled wages observed in high-income represents an extreme level of human hardship that is countries is at least as likely to result from skill-biased unacceptable. However, ending extreme poverty should technological change than from trade, if not more so).14 not involve ignoring the prospects of those that continue to live in poverty and the risk of falling back into poverty, albeit above the global extreme poverty line. 18 Chapter 1 Trade and the poor: theory and evidence increases the payoff from innovation, thereby increasing the incentive to invest in R&D.20 By facilitating open flows of ideas Trade openness is key to successful poverty reduction, but and technology, “late-comers” to development in the second half cannot be relied upon alone. The relationship between trade of the twentieth century did not need to “discover” the innovations openness and poverty reduction is a complex one. There are that had helped the advanced economies grow. Increasing flows a number of channels through which trade openness affects of goods, services, ideas and people meant they could access the poverty: economic growth and macroeconomic stability; impacts on best of the global economy. households and markets; changes in wages and employment; and impact on government revenues.16 In each of these, trade can be The impacts of knowledge transfers from trade in health a key driver of poverty reduction, although potential risks exist and and education products and services can be substantial. For need to be taken into account. example, large-scale immunization was facilitated by imports of medicines and medical equipment from advanced economies. Growth and macroeconomic stability Empirical evidence suggests that trade openness is associated Trade can benefit the poor by spurring economic growth. with faster mortality reductions in developing countries.21 Medical Opening up to trade increases a country’s GDP because it imports, originating from the ten countries responsible for the bulk improves the efficiency of its resource allocation. At the most of medical research and development worldwide, are found to be simple level, trade allows each country to specialize in the supply systematically related to lower mortality in developing countries.22 of the goods and services that it can produce more cheaply On the other hand, in the absence of strong health care and and import the others, thus exploiting comparative advantages, prevention systems, upgrades to trade corridors, leading to greater and fostering growth in the more competitive sectors and firms movement of people, can contribute to the spread of infectious in the economy. Integration into global markets also expands disease. For example, the increased mobility and migration the opportunities available to firms from the domestic to world facilitated by upgrading major trade corridors can create new economy, allowing for greater economies of scale. Opening up vectors for HIV infection: as a result, projects where this risk exists to trade affects the return to investment: closed economies face now include programs to increase awareness and limit the spread falling rates of return on investment. Countries that have pursued of HIV/AIDS.23 growth based upon the domestic market alone have typically been The case for trade openness leading to growth is a strong unable to sustain growth for long. The integration of developing one. In the long run the potential benefits from improved access countries into the global economy has also generated new sources to better technology and to a wider variety of intermediate goods of demand for other developing countries, with South-South trade and services, the benefits of greater scale and competition, between developing countries increasing from 8 percent of world and the reduction in the rent-seeking activities that accompany trade to around 25 percent today.17 Trade also supports growth by trade protection will often support sustained growth. However, it giving firms access to inputs that can help boost productivity, but is difficult to produce definitive evidence on this. Disentangling are not available domestically — from world-class logistics services causality can be very difficult since economies that are already to move goods to markets more efficiently, to seeds and fertilizers growing may be better placed to reduce trade barriers. Trade for farmers. policy reforms are often implemented together with other policies Trade also links firms and individuals with ideas and that may also stimulate growth, and many of these policies may technology, helping drive innovation, which supports also be critical in maximizing the contribution of trade openness productivity growth. Trade can facilitate the transfer of technology to growth, such as, clarity over property rights and effective through the knowledge embodied in products and services. The mechanisms for conflict resolution. In addition, significant public knowledge obtained from imported goods, both intermediate inputs investment in infrastructure, education and health has been and final goods, and services, also spills over to other firms and present in all countries that have sustained rapid growth. Although sectors, enhancing impacts on productivity and growth.18 The some have argued that openness to trade can push countries into imitation of advanced technologies, embodied in imported goods less dynamic sectors (such as extraction of minerals), harming and services, can subsequently foster research and development growth, there is also evidence that contradicts this.24 In the end, the (R&D) investments by domestic firms.19 Furthermore, by increasing evidence is strong that no country has been able to sustain growth the size of the market in which a firm operates, international trade without openness to trade.25 19 The Role of Trade in Ending Poverty The pattern of growth across sectors matters for poverty Box 1.3: The pattern of sectoral growth matters for poverty reduction26 reduction. Trade-driven growth may In spite of the rapid growth experienced in Africa over the past two decades, it not automatically benefit the poor. The appears that the conversion of this to declines in poverty has been slower than in links between trade-driven growth and the rest of the developing world,27 but there is considerable diversity of experiences poverty reduction can be complex, across countries. A 1 percent increase in GDP in Cameroon is associated with a but analysis of the poorest countries reduction in poverty more than twice that experienced in Zambia. In Burundi, the suggests that the pattern of growth poverty-reducing effect of growth is only half that of the regional average. This matters for poverty reduction because of reflects the reality that poverty reduction depends on inequality, both levels and differences in the pattern of work by the changes, and sectoral and geographic patterns of growth. poor across sectors (see Boxes 1.3 and Effective poverty reduction requires that growth be inclusive. However, poor 2.1). This in turn reflects where the poor people are often not located where growth takes place (being in rural and fragile live and work, a point that is stressed in regions) and typically face constraints in moving to areas where growth is Chapter 2. occurring. Further, political economy constraints within countries often hamper the implementation of policies of redistribution. This leads to the conclusion that growth The challenge for policy is also to is more likely to reduce poverty if it happens in the activities and areas where they combine growth-promoting policies, work or live so that the geographic and sectoral patterns of growth matter.28 such as trade opening, with policies Since poor people are concentrated in rural areas and are typically engaged in that allow the poor to participate agriculture, as will be discussed in more detail in Chapter 2, agricultural growth and fully in the opportunities that are rural economic growth will be particularly important for poverty reduction. However, created, and so contribute to that unequal distribution of land ownership may constrain the poverty-reducing effect of growth. Elements of a country’s policy agricultural growth.29 Similarly, since poor people usually have less skills, growth framework other than trade policy must which expands sectors which use unskilled labor relatively intensively will be more be taken into account to maximize the poverty reducing than growth which expands other sectors. Empirical evidence from gains for the poor through trade. For African countries supports the view that the structure of growth matters for poverty example, recent work has shown that reduction. Growth in agriculture and services is strongly associated with poverty the link between trade and poverty is reduction; however, growth in industry does not have a significant effect on lowering stronger in countries that have deeper poverty. A 1 percent increase in GDP per capita led by agricultural growth lowers financial sectors, better education poverty by 0.67 percent. An analogous increase in services reduces poverty by 0.96 levels and stronger governance.32 The percent.30 This contrasts to impacts across other developing countries where the beneficial effects of trade on growth impact of agriculture is not significant while industry and services growth has strong and the poor may not materialize in poverty-reducing impacts. Hence, as will be discussed further below, agricultural countries characterized by excessive trade policies, in both developed and developing countries, remain a key element or poor regulation.33 Trade policy must conditioning the impact of globalization on the poor in Africa and elsewhere. therefore be integrated or mainstreamed An important aspect of long-term poverty reduction is the movement out of into broader development policy rather agriculture and into other activities often located in cities. In Africa and South Asia than defined and applied in isolation, this process has been more one of poor people being “pushed” out of rural areas, and additional policies may be needed due largely to weak access to services, and less of cities acting as “growth poles” to to enhance the impact of trade on the attract the rural poor, with rural growth not sufficient to lower food prices and create poor. demand for urban goods and services. It would be a more positive process were it driven by improving economic opportunities in all areas, where cities gradually When trade drives economic pull rural residents in through relatively better performance and prospects, rather diversification and delivers greater than by declining conditions and periodic disasters in rural areas that push people macroeconomic stability this is out. This contributes to conflict and waves of migration that are difficult to absorb likely to increase the positive in the cities and typically just lead to expanded slums. A key element of a transition impacts for the poor. Many poor strategy, therefore, is to enhance living conditions in rural areas.31 countries have highly concentrated economies, with a few, often natural resource-based, industries accounting 20 Chapter 1 for much of economic activity. This leads to vulnerability to shocks By lowering the prices of imported inputs, trade can help and macroeconomic volatility, which is usually bad for the poor drive productivity gains in agriculture and in other sectors. because it can reduce economic growth34 and adversely affect Agricultural productivity in LDCs is already low compared to other the distribution of income. The poor have little access to finance 35 developing regions, and in future the gap could widen as a result to be able to smooth their consumption over time and therefore of global warming. Enhanced flows of technology are critical they are the most affected by macroeconomic volatility. If domestic for improving productivity and adapting to a changing climate. economic shocks are the major source of volatility, trade can help Technology embodied in imported inputs — for example, seeds reduce volatility thanks to export diversification. Trade allows or improved crop varieties, fertilizer, agricultural machinery, and domestic goods producers to respond to shocks to the domestic animal vaccines — would pave the way for the emergence of supply chain by shifting sourcing abroad. Geographical export more intensive production systems with increased productivity and diversification may also help reduce country-specific external greater sustainability.38 Other effects of trade on productivity are shocks. Export diversification appears to be associated with less 36 discussed below. output volatility in low-income countries.37 The additional competition that trade brings is likely to be However, greater trade openness also implies greater good for the poor as consumers. It is competition from trade that exposure to external shocks — especially in outward- reduces the price of products consumed by the poor and increases oriented industries. Trade can act as a mechanism to transmit the variety of products available. Trade will tend to be pro-poor if a country-specific shock from one country to others. Since many it undermines rents previously made by domestic monopolies and low-income countries’ exports are concentrated in a narrow range oligopolies. Similarly, lower costs and greater competition for the of commodities, shocks to trade often translate into significant exports of a country will tend to increase the returns to producers volatility in overall output. Such trade shocks can also cause of the products that the country can export efficiently. prolonged recessions by leading to a decline in investment associated with the traded sectors of the economy. Although there A lack of competition along the value chain can make it are long-term benefits for macroeconomic stability through trade, harder for the poor to benefit from trade opportunities.39 For as noted above, the vulnerability created by such shocks is an example, the decline in consumer prices from the removal of a trade important challenge for developing countries and emphasizes the barrier will be less if there is limited competition at some point along benefits to poor countries of diversifying their exports, in terms of the value chain. A lack of competition in, say, the transportation and both products and markets. distribution of staples might allow firms in this sector to capture the largest benefits of trade reform. This can then limit the extent to Impacts on households and markets which otherwise beneficial changes in prices are passed through to the poor. Clearly, world prices still matter, but the structure of Trade will have direct impacts on the poor if it changes the value chain and policy interventions along that chain affect the the prices and availability of the goods and services they way that changes in global commodity prices are translated into consume and the returns they receive from the goods and movements in consumer prices. services they produce. Trade reform can change relative prices in both product (final goods and services) and factor (labor, capital, Impact on wages and employment etc.) markets. Given the prevalence of poverty in rural areas and the importance of agriculture to poor farmers it is useful to view In helping allocate resources to the most productive activities these changes from the perspective of the farm household as both in each country, trade helps transform economies, with the consumers and sellers of goods and services. Poor farmers can potential to reduce poverty. The “typical” pattern of trade-driven gain if trade increases the price they receive for the food they sell growth experienced by many developing countries that have in the market and opens up new (maybe nearer) markets for their integrated into international markets involves the transition of produce. All farmers are part of a value chain — they require inputs people from relatively low productivity to higher productivity work. such as seeds and fertilizers and may use transport services to get This typically involves shifts in the concentration of employment their product to market. Trade can play a critical role in reducing in specific sectors. In East Asia, for example, as productivity and the price and increasing the variety of inputs available to farmers. incomes increased in the agricultural sector, demand for goods and As consumers, trade liberalization can be beneficial to the extent services in other sectors increased, even before manufacturing and that it reduces the prices for imported goods, as well as increasing service sector export-drive growth took off. the prices of exported goods. 21 The Role of Trade in Ending Poverty 22 Chapter 1 Increases in jobs and wages in sectors where the country can export competitively can benefit the poor. Box 1.4: Trade and the jobs challenge In low-income countries these sectors tend to employ large The jobs challenge facing the world is daunting. Of the roughly numbers of unskilled workers and so the impact on poverty 3 billion people worldwide that have jobs, some 1.65 billion may be significant. The poor will also benefit more if jobs are have regular wages or salaries, while another 1.4 billion work in created in the areas where they reside. A number of African farming, small household enterprises or as casual or seasonal countries have large endowments of mineral resources and day labor. The latter make up the majority of workers in the so increased trade openness will tend to stimulate these poorest countries, although there is little data on employment sectors rather than labor-intensive ones (see Box 1.3). in many of the poorest countries, complicating analysis of their There is little hard evidence on the poverty implications for situation. labor market outcomes through trade and trade policy. The Because of demographic changes, to keep the ratio of focus of most research to date has been on the effect on employment to working-age population worldwide constant, relative wages. The evidence is mixed, but existing studies in 2020 there should be around 600 million more jobs than in that focus on economies that are abundant in unskilled 2005, with around 12 million per year and per region needed labor find that absolute wages of low-skilled workers tend to in East Asia and the Pacific, and in South Asia, and around 9 increase.40 There are concerns that the globalization of trade million per year in Sub-Saharan Africa.43 The creation of jobs may have led to increased income volatility for workers but for those who want to work is critical, and as discussed in evidence to support this is limited.41 Ultimately, the impact this report trade can drive the economic growth that delivers on wages will depend on the nature of the labor market in jobs along with the reallocation of people to better jobs, and the specific country, influenced by factors like the level of improving aspects of the work people do. But in poor countries competition among employers for labor, and the bargaining where growth has been narrowly focused on capital intensive power of workers. In addition, there is no evidence that in the extractive industries, it has not generated the jobs required for long run openness to trade is associated with higher rates the growing numbers entering the workforce. This publication of unemployment.42 The links between trade and jobs are addresses many of the characteristics of this jobs challenge complex, but the importance of understanding the role of and how they link with trade: the creation of new jobs, informal trade in contributing to the challenge of providing more and work, and women and jobs, among others. For example, as better jobs is clear (Box 1.4). Chapter 2 discusses trade has played a significant role in creating jobs for women in many countries. The adjustment of the economy through trade Trade, like technological change, leads to simultaneous job openness toward more competitive parts of the creation, destruction and reallocation both across and within economy brings long-term gains, but entails short-term sectors. This entails costs for those who lose their current job in adjustment costs for the poor that need to be carefully the process. These costs tend to be minimized in countries with managed. Unemployment or lower wages in uncompetitive flexible labor markets and effective institutions for (re)training sectors that contract as a consequence of trade openness and supporting people in transition from one job to another. bring risks for poor people, if these short-term adjustment For poor countries the jobs challenge is inextricably linked costs are not addressed. In this way, trade reform for the with the challenge of structural transformation away from low poor may involve long-term benefits but with high short-term productivity farm-dominated economies to high productivity adjustment costs in some cases. Their lack of endowments economies in which all sectors — agriculture, manufacturing make it difficult for the poor to borrow to tide over temporary and services — contribute to job creation in the long term. The periods of joblessness or income loss while waiting for future growth of agribusiness sectors, for example, can generate opportunities to appear. Phased implementation may be one non-farm jobs in rural areas. Manufacturing and services strategy that can be employed, along with managing short- provide new opportunities for absorbing new entrants into the term adjustment costs and building capabilities to exploit jobs market. Trade plays a key role in structural transformation. opportunities generated through trade. For example, liberalizing trade in services can be catalytic if it provides job-creating firms with access to lower cost and higher quality inputs into production — electricity, finance, telecommunications, transport and so on. 23 The Role of Trade in Ending Poverty The fragmentation of production into global and regional value chains has generated new opportunities for the Box 1.5: How do GVCs affect the economy? poor. Production sharing across countries has made it easier for developing countries — and especially those with small Because the sharing of production across different locations domestic markets — to harness trade for their development. is a business strategy, it is the decisions taken by firms at In this way it can best be thought of as a new technology that the lead position in GVCs that determines their structure. enables the same transition from lower- to higher-productivity Policymakers seek to attract GVCs because they can lead to economic upgrading (in terms of higher value-added activities as trade in general. The flow of technology and production) and social upgrading (in terms of better welfare expertise from advanced to developing countries that took place for individuals, poverty reduction, and so on). Through what as economies like the Republic of Korea and Japan developed channels does GVC connectivity and upgrading contribute large manufacturing sectors can take place more easily now in to productivity gains, growth and poverty reduction? Four narrower activities, at a lower cost. In this way, GVCs can help broad effects (at least) can be identified. First, GVC lead facilitate the economic transformations to which trade contributes firms tend to require more or better inputs from local — in growth, productivity, jobs, and innovation — that we discuss suppliers, and can assist locals suppliers in becoming more in this chapter (see Box 1.5). productive by adopting better technology and management practices. Second, GVCs can also help foster greater The impact of GVCs on poverty is enhanced through competition in the domestic economy, through competition connections to the rest of the economy. Attracting between the GVC lead firm and local firms. Spillovers in foreign direct investment to establish a factory in an export knowledge and technology from GVC to domestic firms can processing zone (for example) will lead to a certain increase also boost overall firm competitiveness. Third, investments in employment and wage gains for those directly involved, but in infrastructure and backbone services (like logistics or the greatest impact on poverty arises when other firms and information and communication technologies) related to the workers in the local economy become involved as suppliers GVC lead firm are likely to have positive benefits for other to the investing firm. This requires competitiveness among parts of the economy, which would not have been achieved domestic firms supplying services or other inputs to the without GVC participation. Finally, increases in demand for GVC investor.44 Trade policy matters, but so does the overall skilled labor, training to local firms, and turnover in skilled business environment, the nature of the labor market, the workers from firms related to the GVC lead firm (e.g., level of competition in the domestic economy, infrastructure their suppliers) and the rest of the economy can increase connectivity, and so on. Of particular importance then is productivity.45 ensuring that the poor are able to take advantage of the While GVCs participation may have sizable benefits, opportunities created by GVCs. As we explore in subsequent there may be risks through GVCs. By generating competitive chapters, these issues are at a general level not that different pressure to initiate, maintain or upgrade participation within to the overall challenges in ensuring that the poor benefit from GVCs, risks can also be created. While labor, social and trade. Any risks that GVC participation entails also need to be environmental standards set by GVC lead firms can lead to considered. The nature of GVCs reinforces the message that the application of higher standards, the results of this have poverty reduction through policies to increase trade openness been mixed. There is some evidence that participation in needs to be complemented by measures that target the poor, GVCs increases exposure to global business cycles and as well as broader economic reforms. vulnerability to changes in location decisions by GVC lead firms, among other potential risks. Integrating into GVCs may Impact on government revenue be especially difficult in poor countries with large informal A key long-term challenge for most developing countries sectors because firms in the informal sector may not be is increasing revenue collection to support spending, able to satisfy the standards required by the lead firm and including on pro-poor programs: trade can have an impact may not have access to services, such as accountancy services, that are essential for effective engagement. Where on this. Although liberalization may appear to create risks informality dominates, countries may be more likely to be for the poor by lowering tariff revenue, strategies to increase positioned at the lower end of the value chain, and local revenue collection capacity, or raise new taxes, can be pursued firms and workers more vulnerable. to offset this. At first glance, trade liberalization will reduce tariff revenues, and this will certainly occur if all trade taxes are reduced to zero and no other changes take place. By lowering 24 Chapter 1 a government’s revenue through tariffs, there is less capacity to important that the impact on tax revenue through tariff reduction is fund services that may be important for improving the welfare of the taken into account, with strategies like raising new indirect tax (e.g., extreme poor. Tariff revenue is typically a more important share of value-added taxes), and customs modernization, to offset revenue overall government revenue for low- and middle-income countries losses implemented.47 than high-income countries. However, in practice trade openness does not necessarily Conclusion lead to lower revenues from trade, with many reforms leading Trade will make an essential contribution to delivering the to increased revenue collection through increased trade growth necessary to end extreme poverty. Trade contributes by volumes and improved capacity to collect revenue. Fostering opening up new opportunities for jobs; lowering prices for products trade may involve measures that do not affect tariff revenues consumed by the poor; improving access to external markets for (e.g., addressing non-tariff measures) and in reality, tariffs in most the goods that the poor produce; and bringing about structural economies are rarely reduced to zero anyway.46 Further, most changes in the economy as export sectors expand and increase countries apply non-discriminatory excise and consumption taxes, employment of low-skilled workers. such as value-added taxes, and revenues from these taxes will rise as trade increases. Reforms to improve revenue collection at the Harnessing the full potential of trade will require action border, while also facilitating trade, can help offset the tax revenue on two fronts: supporting an open global economy and impact of tariff liberalization. Tariff cuts may lead to increased facilitating the greater integration of developing countries; revenue by boosting trade and bringing it closer to an optimal and taking a more targeted approach to helping poor level. Furthermore, to the extent that quantitative restrictions on people overcome the constraints and the risks they face in imports are replaced by tariffs, new sources of tariff revenues will benefiting from trade opportunities. To do this requires a focus be generated. Even in the event that the initial tariff is already on the characteristics of the poor and an understanding of how below the revenue-maximizing level, customs collection can they interact (or do not interact) with international markets. The still be partially or wholly compensated for by greater collection challenge for policy is to combine growth-promoting policies, such of domestic taxes, even if tax rates do not change, since trade as those that increase openness to trade, with policies that allow opening stimulates economic activity and growth. Overall, it is the poor to participate fully in the opportunities that are created. 25 The Role of Trade in Ending Poverty 2 26 Chapter 2 Constraints faced by the poor Analysis of the role of trade in contributing to poverty their social protection is lower than for formal workers, and the reduction needs to go beyond its impact on economic growth. micro-enterprises that dominate the informal sector are constrained As discussed in the preceding chapter, economic growth will in the extent to which they can benefit from trade. Finally, the remain the key driver of poverty reduction globally, and trade will constraints faced by women make it more difficult for them to take continue to be a critical driver of growth. Nevertheless, in the advantage of trade-related opportunities than for men. areas in which extreme poverty is now concentrated — South Asia and Sub-Saharan Africa — with predicted growth more than 370 At the same time, the constraints faced by the poor can million people in these regions are likely to remain extremely poor expose them to risks through trade openness. Assisting in 2030, amounting to around 4.5 percent of the global population. poor people to mitigate these risks is important to allow them to Strikingly, 80 percent of these extreme poor will be in Sub-Saharan participate in, and benefit more from, trade. For each dimension of Africa.48 poverty related to trade, we need to understand what risks exist in order to consider how they can be addressed. To assess how trade could be more effective in driving poverty reduction, we need to understand the constraints the Rural areas poor face, based on who the poor are, where they are, and the economic activities they are involved in. The macro-level Extreme poverty in many countries is predominantly a rural framework for identifying the impact of trade on poverty, discussed phenomenon. An estimated 75 percent of the extreme poor in in Chapter 1, is useful for tracing through a number of key effects Africa live in rural areas.49 In Vietnam, 95 percent of the poor live of trade openness on the poor, including changes in relative in rural areas. The incidence of poverty is also much higher in prices, wages, and productivity. However, an in-depth analysis rural areas. In East Asia, just 4 percent of the urban population live of the characteristics of the poor is required to identify the main in extreme poverty, while over 20 percent of the rural population constraints that need to be addressed — and additional risks that live on less than $1.25 a day. In Sub-Saharan Africa, one third of will have to be mitigated — for trade to fulfil its maximum potential the urban population, but almost half the rural population, live in for poverty reduction. This chapter draws on the available theories extreme poverty. Hence, rural poverty-reducing policies are central and empirical evidence to examine four particularly relevant to achieving the objective of eliminating extreme poverty. dimensions of poverty — rural poverty, informality in the economy, In rural areas the poor continue to rely on agriculture for fragile and conflict situations, and women — to illustrate how and their livelihoods, and poverty is linked to low agricultural to what extent they affect the capacity of the poor to benefit from productivity. Boosting productivity on smallholder farms is a key trade. way of reducing rural poverty (see Box 2.1) and delivering food The picture that emerges is that these dimensions of security for farming and non-farming households. At the same time, poverty increase the challenges to participate in trade, but the growth of non-farm (although often agriculture-related) activities also increase the size of potential benefits if the constraints is an important aspect of poverty reduction in rural areas. Thus, faced by the poor are addressed. Being in a rural area reduces agricultural development is critical to reducing poverty, although the chances of being able to participate effectively in trading the exact relationship between poverty reduction and agricultural activities, as connections to markets are difficult and human and growth in any country depends on the agricultural and social physical capital are usually lower than in other areas. The poor in structure of a given location. Estimates suggest that a 1 percent conflict-affected areas face particular risks and challenges. Informal rise in agricultural GDP results in a 6 percent increase in income workers are also likely to be more vulnerable to trade shocks, as growth for the poorest 10 percent of the population.50 27 The Role of Trade in Ending Poverty Poor access to infrastructure and public services constrain the ability of the rural poor to benefit from trade opportunities.53 Box 2.1: Poverty reduction in rural areas has driven the overall fall in poverty51 Producers in rural areas often lack (reliable) access to critical services inputs, such as transportation, communication and financial In China, poverty fell from 53 percent of the population services, electricity and safe water, as well as facing high cost and in 1981 to 8 percent in 2001, with around 500 million limited variety of material inputs, such as seeds and fertilizers.54 people escaping from poverty.52 This was driven As a result, rural firms and farmers face greater challenges in by transformation in rural areas, with rural poverty reaching final destination markets and tend to be equipped with falling from 76 percent in 1980 to 12 percent in 2001, lower skills compared to those in urban areas. Agricultural products accounting for three-quarters of the total reduction face additional barriers in reaching destination markets, due to (see Box figure). The initial sharp decline in poverty the relatively high protection of agriculture and the perishability was spurred by agricultural reforms that led to substantial increases in agricultural production and of products. Farmers in rural areas experience high post-harvest productivity in part as a result of farmers using high- losses,55 and typically receive relatively lower producer prices for the yielding varieties of hybrid rice seed. Rural incomes staple foods they produce. rose by 15 percent a year between 1978 and 1984. In Farmers and firms in rural areas face particularly high subsequent years, the role of the rural non-farm sector transport costs and delays when shipping to international — became more important by providing employment and national — markets. Domestic transport costs are often a and income to millions of people, with the share of the rural non-farm sector in GDP increasing from close to multiple (on a per ton/km basis) of transport costs between marketing zero in 1952 to more than one third in 2004. Growth centres and larger cities, or international shipping. This is the result in agriculture did more to reduce poverty than either of bad roads, but also limited competition among transport service industry or services. providers.56 As a result, producing at small distances from a major marketing centre can increase overall transport costs significantly, and rural areas by definition are distant from larger marketing Rural and National Poverty Rates in China — centres. As transport costs to markets are generally absorbed by 1981 to 2002 producers who have limited market power, rural producers become less competitive,57 or can achieve only lower farm gate (or factory gate) prices in those cases where goods remain competitive and Poverty rate, % marketable. This affects the ability of rural firms and farmers to 70 compete, functions as a disincentive to expand production, and 60 negatively affects incomes, despite trade opening improving their 50 prospects through better prices in international markets. 40 High transport costs may also dilute the benefit of lower 30 consumer prices brought about by trade opening. Trade opening lowers consumer prices58 — but the extent to which border price 20 changes translate into domestic price changes for households is 10 determined by transport costs. High transportation costs associated 0 with connecting to rural markets in Mexico, for instance, dampened 1981 1984 1987 1990 1993 1996 1999 2002 the impact of border price reductions (when the country joined the Rural National Urban North American Free Trade Agreement) on the domestic price faced by rural consumers.59 A recent study suggests that the gains from Source: Ravallion and Chen (2007). trade in remote regions of Nigeria and Ethiopia tend to be captured by intermediaries, thus highlighting the importance of the distribution sector in influencing the extent to which the rural poor benefit from trade.60 High transport costs can therefore drive up the prices for consumption goods, which can be beneficial for local producers but can negatively affect the real income of consumers. 28 Chapter 2 Higher costs for intermediate goods and services further Production in rural areas is largely dominated by reduce competitiveness. International trade can increase the agriculture, and agricultural markets present particular availability of essential parts and components.61 But in rural challenges to trade integration. Trade opening can lead to areas, the prices of inputs that need to be procured from abroad increased sales for farmers in developing countries. However, or domestic centres of production (such as fertilizers, seeds, poor access to markets and the costs of compliance with public pesticides or packaging material) are higher than those in the and private standards set in high-income destination markets, better-connected urban areas. Longer lead times to obtain such especially for food items, make it difficult for agricultural producers inputs demand higher inventories, thereby raising financing costs, to reach such markets. While larger farmers are more frequently which are often particularly high in rural areas. While higher capable of meeting them, small holders face particular challenges, input costs directly raise production costs, poor connectivity can especially when located in remote areas. Poor access to safe also lead to the unavailability of critical goods and services that water, reliable electricity, knowledge, and reliable testing services can reduce productivity. In turn, this can contribute to both lower make meeting (and proving compliance with) such standards productivity and losses as a result of risks, such as pests and particularly challenging. Furthermore, most rural households are diseases. These factors reduce the overall competitiveness of involved in staples production, with staples outputs representing enterprises located in rural areas, and the ability to benefit from on average 62 percent of farm output in Sub-Saharan Africa. This trade. Access to credit is especially problematic in rural areas.62 reflects the fact that many rural households engage in subsistence farming to retain control over their food supply, as markets function Lower population densities in rural areas make the only imperfectly. This presents a barrier to diversifying production provision of infrastructure and services more costly. For into cash or industrial crops. example, in Africa over 20 percent of the population in rural areas lives in very dispersed settlements of less than 15 people per Remoteness contributes to low producer prices for small square kilometre, increasing the costs of providing infrastructure.63 farmers and reduces the incentive to produce for the market. Economies of scope (which would permit access to diversified Small farmers dispersed across rural areas are unable to benefit inputs) are frequently absent in rural areas, and because from consolidation and scale in selling their output, and often have companies are small they do not benefit from economies of scale, no choice but to sell to middlemen/intermediaries who are able to including when accessing information, organizing transport, exploit this situation. As a result, small farmers tend to receive a importing, or exporting, because related costs are largely fixed per relatively low price compared to the final price. African smallholder transaction. This means that small producers pay higher prices farmers who sell surplus harvest typically receive less than 20 per unit of output, further affecting their capacity to compete when percent of the consumer price of their products, with the rest eaten trade opportunities arise. away by high transaction costs and post-harvest losses.67 Beyond direct connectivity issues, structural factors Weak institutions and lack of functioning markets limit further penalize the rural poor and make it more difficult for access of rural farmers to instruments to mitigate the severe them to benefit from trade integration. While primary school risks they face. Farmers face considerable risks from weather- completion rates were similar for rural and urban areas in a sample related events and price volatility. In rural areas in poor countries, of 46 countries, enrolment rates in rural areas are frequently small farmers are typically unable to access instruments, such lower.64 In addition, the quality of education is generally lower as weather-indexed insurance and warehouse receipt systems, in rural areas, as results from the 2010 Southern and Eastern to help address these risks. This reflects the lack of appropriate Africa Consortium for Monitoring Educational Quality show. Health institutions, but also barriers, especially at the regional level, that outcomes, such as infant mortality and morbidity rates, also tend impede trade and the development of market mechanisms that to be significantly worse in rural areas. These factors contribute mitigate risk (see Box 2.2). Institutions that have developed to to making mobility out of poverty more difficult. As a result, 65 address risks in agricultural markets cannot address, and indeed the ability of people living in a rural area to benefit from trade is will be constrained by, policy-related risks. In addition, efficient impaired through two channels: directly through poor connectivity, institutions are more likely to develop at the larger scale that would and indirectly because their location negatively affects household be enabled by open regional trade. Weather-indexed insurance, for characteristics that affect labor productivity. For the rural poor example, becomes more viable if the financial institution is able to these factors are aggravated, as they often belong to socially offer cover to farmers over a wide region, as many weather-related marginalized groups or those with least access to land and water.66 shocks affect only a limited area. 29 The Role of Trade in Ending Poverty Box 2.2: Mitigating risks for small farmers in rural areas68 Warehouse receipt systems Weather-indexed insurance These allow farmers to deposit a stated quantity of a specified Weather-indexed insurance can mitigate the impact of climatic quality of a commodity into a private warehouse, where it can shocks on farmers. This, in turn, can enable farmers to invest be pooled with other commodities of similar quality. A receipt in more productive seeds and fertilizers that would otherwise is issued to the owner as evidence of location and ownership. be too risky in the face of crop failures. Without insurance, Warehouse receipt systems facilitate risk management in households adopt strategies that reduce risks but also limit three ways. First, they provide farmers with improved access income potential. Hence, effective insurance against such to formal credit, since the receipts can be conveyed to a weather-related risks can allow households to move into farm financial institution as verifiable collateral for loans. Second, activities that yield higher incomes. the warehouse receipt system protects farmers against low Weather-indexed insurance is a financial derivative written sale prices for their commodities, by providing them with against deviations in average rainfall or temperature indices safe storage of commodities until market prices become constructed from data measured at weather stations. For attractive, at which time the stock can be sold and any credit example, if observed rainfall is below a set threshold, leading is reimbursed. This allows for diversification of sales across to low yields, an insured farmer would receive payment to time, which helps reduce seasonal price volatility. Third, compensate for reduced food staple production. the system helps large-scale accumulation because the warehouse physically groups a set of consignments of known Weather-indexed insurance is common in developed quality so that a large-scale buyer (e.g., government, miller, countries, but is rare in developing countries. While the aid agency) can target these collectively. potential for weather-indexed insurance is substantial, progress needs to be made with regard to data and However, such systems remain limited in poor countries. information on weather and the effects of severe weather First, the development of these market-based systems conditions for insurance providers to develop new products.70 requires predictable and consistent government policies Improvements in legal and regulatory environments are to allow companies to make investments in buildings and also necessary for buyers and sellers to have confidence management capacity.69 For example, export bans that that contracts can be enforced. In many African countries, reduce domestic prices can reduce the value of the collateral for example, appropriate laws and regulations for the to a level less than that of the receipts, making the cereals development and use of weather insurance products are risky assets. Thus, trade barriers can undermine warehouse not in place. Policy predictability is also crucial. Insurers will receipts systems, and also increase the risk of storage by be reluctant to sell policies if there is a possibility that the making it difficult to predict future prices. government could alter the terms of the insurance contract after the insurance is sold. Poor people working in agriculture face particular Poor smallholders are less likely than larger farms to adopt new challenges in benefiting from the transfer of technology technologies that are perceived as “high-risk, high-return”.72 facilitated by international trade. In addition to policy barriers Barriers to information and education for farmers about that limit the use of imported seed varieties, perceptions that new technologies that increase productivity can also have a new seed varieties present risks for farmers, which they are disproportionate impact on the poor. Gender, social status, or unable to manage, may impede their adoption. With formal exclusion from kinship networks can further exclude the poor from insurance markets generally inaccessible for poor farmers, this flows of information.73 presents a barrier to the adoption of trade-enabled technology. 71 30 Chapter 2 Distortions to international agricultural trade harm poor rural producers by eroding their competitiveness and affecting Figure 2.1: A rising share of food processing in total agriculture value-added is associated with rising incomes international prices. Subsidies provided to farmers by some economies — particularly large economies — have a significant negative effect on others. The overall environment has improved since the conclusion of the WTO Agreement on Agriculture in Food processing value added/ agriculture value added 1995, which introduced greater discipline on agricultural subsidies. 0.6 Nevertheless, economic evidence suggests that production-related HUN subsidies have negative effects on the welfare of poor farmers by depressing prices and hindering entry into major export markets by ARG 0.4 ROM BRA MEX rural producers not receiving such subsidization. Recent estimates indicate that the removal of agricultural trade distortions could ZWE ECU MYS reduce the number of extreme poor (using a $1/day poverty line) IRN ZAF BOL PER 0.2 SVK by 2.7 percent. 74 SEN PHI MAR TUR MWI THA IDN Diversification into non-farm economic activities EGY NPL BGD IND is key to transformation and poverty reduction in rural 0 UGA 0 2,000 4,000 6,000 8,000 areas. Agricultural commodities in their raw form are generally associated with relatively low value added. The development of GDP per capita, constant 2,000 US$ an internationally competitive rural non-farm sector, including Source: Byerlee et al. (2013) agri-business, is necessary for creating job opportunities and rising Note: The list of 3-letter codes and the countries they represent can be found in World Bank (2007), page xviii. incomes (Figure 2.1). In Sub-Saharan Africa, the agri-business sector is about half the size of the farming sector. In Latin America and Asia, agri-business is between 2 and 3 times larger than the farming sector, while in Organization for Economic Co-operation and Development (OECD) countries, the ratio of the size of agri- Figure 2.2: Most of the poor live in fragile countries business to farming can be as high as 10. 75 Fragile and conflict-affected areas Number of poor people, millions (<$1.25/day 2005 ppp) In the past 30 years, the world has become less poor 2,000 everywhere except in fragile and conflict-affected states (FCS). 1,800 This year, most of the world’s poor are expected to live in fragile 1,600 countries where civil conflict is common, and security and the 1,400 rule of law are very weak (Figure 2.2).76 This trend is expected to 1,200 continue, and in 2030 more than 90 percent of the world’s extreme 1,000 poor are projected to live in fragile and conflict-affected states. 800 600 Fragile countries also have a significantly higher poverty 400 incidence than other developing countries. The difference is 200 large when considering either the OECD or the World Bank list of 0 81 84 87 90 93 96 99 02 05 08 10 15 20 25 30 11 fragile countries (Figure 2.3). Using the OECD definition, the mean 20 19 19 19 19 19 19 19 20 20 20 20 20 20 20 20 Non-fragile Fragile Total value of the extreme poverty rate (measured against the $1.25 per day line) in fragile countries is almost 5 times that in the other Source: Historic (1981-2011) data is from PovcalNet (accessed Oct. 10, 2014). developing countries. And this difference is highly significant. The Projections based on 10-year historic growth scenario from Lakner, Negre and Prydz (2014) as reported in Calì (2015). difference is only slightly smaller when considering the World Bank Note: Estimates from countries on the OECD Fragile States list from 2014. Poverty estimates only from countries where at least one household survey list.77 and PPP conversion factors available. For 18 countries of the 51 on the list, we do not have such data. These missing countries comprise about 10 percent of the total population in fragile states. 31 The Role of Trade in Ending Poverty Countries emerging out of conflict and with weak state Figure 2.3: Fragile countries have a higher incidence of extreme institutions are also more exposed to relapsing into conflict, poverty than other developing countries which makes their fight against poverty more difficult. A 2011 study by the World Bank finds that nearly 90 percent of the conflicts between 2000 and 2010 occurred in countries that had already experienced a recent conflict; and almost half of the post-conflict Percent 90 countries relapse into conflict within 10 years. A vicious circle can 80 ensue, as high rates of poverty and unemployment can increase 70 the risk of conflict because they decrease individuals’ opportunity 60 cost of engaging in conflict.84 The high poverty rates typical of 50 fragile contexts make it more difficult to break the conflict-poverty- conflict cycle. 40 30 Individuals, households and firms in fragile and conflict- 20 affected areas are likely to be less able to reap the gains 10 from trade. On one hand they are typically less exposed to trade. 0 Conflict and violence stifle trade and thus undermine the pre- Non fragile Fragile Non fragile Fragile (OECD) (OECD) (WB) (WB) conditions for benefiting from it. On the other hand, even when trade opportunities do arise, various dimensions of fragility, such as Mean High exposure to conflict and the uncertain economic environment, pose constraints to reaping those benefits. Source: Authors’ elaboration on PovcalNet data. Note: The lines represent 95% confidence intervals. Poverty rate for a category of countries indicates the average share of country’s population Conflict and violence often directly hinder the ability to below the extreme poverty line ($1.25 per day in PPP terms). Poverty figures are for the years 2010-14. Fragile countries are defined according to the trade across (and within) borders, which can raise the prices World Bank or OECD list for 2014. of basic goods and services and exacerbate poverty. Conflict often leads to a collapse in imports, which can directly affect consumption through increased prices and less variety of goods Many fragile countries, as well as regions within countries, and services in the market. The violence that led to the closure are affected by civil conflict or are emerging from conflict. of the border between Sudan and South Sudan raised the prices Civil conflicts take a huge toll on human life, but they also cause of basic commodities, especially in the northern states of South protracted, severe disruption of economic activities, assets, Sudan, which were reliant on imports from Sudan for much of their infrastructure and human capital. These effects of conflict can basic consumption.85 This led to an estimated increase in poverty have a direct impact on individual earnings, as demand for and of as much as 10 percent. Similarly Uganda’s trade boom of the production of goods and services are often disrupted78 and the 1990s occurred only through the borders with Kenya and Tanzania, mobility of goods and labor restricted.79 Conflict can also negatively but not through those with Sudan and Democratic Republic of affect lifetime earnings by reducing individual schooling and health Congo, in large part due to the civil unrest in the Ugandan districts outcomes.80 Not surprisingly, conflict can dramatically increase bordering these countries. During the trade boom, districts closer poverty. In Rwanda, 20 percent of the population fell into poverty to the external border experienced a smaller reduction in prices of following the genocide.81 common consumption items than the other districts.86 Fragility can also indirectly contribute to higher poverty Conflict and violence reduce the ability to trade by through the weakness of state institutions.82 Where institutions lowering the production capacity of firms and households. are weak, they cannot effectively provide much needed public Conflict can reduce the access of local firms to imported inputs, goods or support the efficient allocation of resources. This can which can stifle their productivity and in turn lead to lower wages, result in lower overall earnings and affect a large share of the sales and employment.87 Evidence from Sierra Leone suggests population. In addition, state institutions in weak institutional that the civil conflict in the 2000s reduced firms’ output through settings can be captured by interest groups. As a result, these two further channels: an increase in unit cost as disruption to captured institutions then allocate public resources towards areas production compelled reversion to less sophisticated and less dominated by those groups,83 rather than to the poorer areas or capital-intensive means of production that would have been those most in need. 32 Chapter 2 competitive in “normal” times, and a drop in demand due to the relied more on subsistence activities to protect food consumption reduction in household income.88 Similarly, the civil unrest in Côte and their income.94 Households also adapt investment decisions d’Ivoire following the 1999 coup d’état led to an average 16–23 to cope with the conflict in ways that reduce the surplus production percent drop in firms’ productivity, with a larger drop for foreign that they can trade. For example, in Colombia farmers in conflict- firms, which were specific targets of the violence.89 affected areas reduced the amount of land allocated to perennial crops in favour of less profitable seasonal crops and pasture, which Conflict can also affect the ability of individuals to provide require lower investments.95 labor, thus indirectly reducing production, trade and earnings. The post-electoral violence in Kenya in 2008 dramatically raised The effects of civil conflict spill over to neighbouring the costs workers faced to reach the workplace. This led to a countries. Bilateral trade between neighbouring countries declines large welfare loss for workers (equivalent to more than three times if one of the countries has a domestic conflict, by 12 percent on average weekly earnings) and reduced firms’ outputs and exports average.96 The drop is particularly large for those firms exporting of cut flowers, one of the country’s leading agricultural export to the neighbour in conflict. For example, following the outbreak sectors (Figure 2.4).90 Colombian households in areas affected by of the Syrian civil war, Lebanese exporters to Syria experienced civil conflict substituted on-farm with off-farm labor, as agricultural an average reduction in exports of 25 percent, while exports work in the field became more difficult during the hostilities.91 by Jordanian firms fell by 75 percent.97 Civil conflict may also Similarly the Maoist conflict in Nepal induced more women to enter affect neighbouring countries indirectly, through the disruption of the labor market to compensate for the negative impact of the war transit for goods and increased insecurity and uncertainty in the on households’ earnings. These coping strategies, however, are 92 neighbourhood. These penalties are even higher for landlocked not always available, especially in more isolated rural communities, countries that rely on countries in conflict for access to global which lack alternative occupations to subsistence agriculture. markets.98 In conflict-affected situations, households often adopt The adverse effects of conflict on trade can extend well sub-optimal production and investment decisions to reduce beyond the end of hostilities. Investment and production the risks they face. These strategies typically reduce households’ decisions made during conflict are often difficult to reverse, so productivity and earnings, constraining their ability to exploit the that households may remain stuck with sub-optimal production gains from trade. In Rwanda during conflict, small agricultural patterns even after the conflict ends. Areas emerging out of a producers sold their cattle to be able to smooth household conflict usually experience a high degree of uncertainty, which can consumption.93 And farmers in conflict-affected areas in Uganda stifle investment decisions beyond the short-run effect of conflict.99 Thus, households and firms may choose to continue with what are now sub-optimal strategies after the end of conflict, due to uncertainty over whether peace will last. For example, households Figure 2.4: Conflict and Kenyan cut flower exports in Mozambique were still practising many of their wartime coping strategies three years after the 1992 ceasefire.100 Finally, the impact of loss of education and worse health outcomes due to Log of de-seasonalized export volume conflict affect the ability of households to benefit from economic opportunities well beyond the conflict period.101 These factors 2 reduce households’ ability to reap the net gains from trade even in the post-conflict environment, thus calling for special efforts to 0 rapidly integrate post-conflict areas with the rest of the economy -2 and provide households and firms with mechanisms to deal with the risks and uncertainties that they face. -4 In countries with poor governance and weak institutions, -6 competition between different groups within society over -10 -5 0 5 10 returns from trade in products such as lucrative minerals can Weeks from beginning of conflict contribute to conflict. Fragility is typically associated with weak Conflict No conflict Difference state institutions that impair the provision of the public goods that are necessary for the poor to participate in and benefit from trade. Source: Ksoll et al. (2014) 33 The Role of Trade in Ending Poverty These include security, transport, energy and telecommunications work in family farms or family firms, and wage employment in infrastructure, agricultural extension services and training. Weak unregistered firms that lack social security coverage (see Box 2.3). institutional capacity affects the ability of governments to manage This type of informal worker typically earns low wages and has tension over the control of natural resources. 102 For example, tenuous direct links with trade. But many informal workers are conflicts in the Great Lakes region of Africa have been fuelled employed by formal firms and may benefit from similar working by the exploitation of high-value tradable commodities, notably conditions as formal or declared employees, but without coverage including minerals such as diamonds, gold and the “Three Ts” by social security, and in many cases without a written contract. (tantalum, tin and tungsten), but also timber. Control over the extraction and trade of these resources has been highly contested, fomenting conflict both within and between countries. For the most part, these resources are mined and traded through informal, and Box 2.3: Picturing the informal sector104 often illicit, channels. The benefits have accrued to those that The informal sector consists of economic activity that control critical parts of the value chain in transit countries and is unregistered, involving self-employment or work for in destination countries. Transparent management of extractive a very small, unregistered firm. Although these firms resources is an essential element for preserving peace in these are often described as SMEs, this is not particularly circumstances. The international community can help through accurate. Rather than larger SMEs, it is microenterprises effective and pragmatic measures to address the traceability employing less than 10 workers — but often only one of conflict-related products, for example through the Kimberley worker — that make up the bulk of employment in most Process Certification Scheme for Rough Diamonds, and other developing countries. For example, informal sector microenterprises are often dominant employers in the schemes related to the traceability of precious metals. In weak manufacturing and services sectors, accounting for states affected by conflict, large and sudden declines in real close to 100 percent of employment in Ethiopia, around incomes, for example driven by increases in the international prices 60 percent of manufacturing and 80 percent of services of essential consumption goods such as food, may also exacerbate in India, and between 50 percent and 60 percent in tensions.103 Ghana. The kind of work done by those in the informal While ensuring that valuable resources are traded sector varies. Agricultural production on family farms is the dominant informal sector activity. Non-farm activities through formal channels is critical to stability, providing include small-scale service delivery, transporting people alternative employment opportunities for artisanal miners or goods; simple construction work; scavenging for and diversifying trade are also important to resolving such waste that can be reused; personal services like hair- conflicts. Recent international efforts to tackle the trade in conflict dressing or house-cleaning; repairing clothes, shoes minerals have focused on due diligence — requiring companies or mechanical objects; and so on. Workers in micro- to implement checks on their supply chains to make sure they are enterprises in the informal sector lack access to social not supporting abusive armed groups. The OECD has developed safety nets or other formal employment protections. comprehensive due diligence guidance for companies using tin, tantalum, tungsten and gold. The UN Security Council has similar guidelines. To maximize their effectiveness, policies to address trade in conflict minerals must take place within the context of a comprehensive program for peace and security, including actions Research provides evidence of a strong correlation to support economic development. Providing alternative livelihoods between poverty and informality. For example, one study of five for artisanal miners in conflict zones is critical to the success developing countries105 indicates that the share of working poor106 of such programs, and trade can play a key role in supporting is higher among workers in informal employment than among those agricultural development and diversification into agro-processing, formally employed. Data for 44 countries from the International basic manufacturing and services. Income Distribution Database also indicates that informality is consistently higher among the bottom 40 percent of the income distribution than in the top 60 percent.107 This finding holds for Informality different measures of informality, including the type of employment The informal sector covers a wide variety of activities. Informal contract, access to health insurance, and access to social security. work often involves subsistence farming, self-employment in petty The 2013 World Development Report on jobs found that informal trade or low-transformation household-based production, unpaid workers face a higher probability of being poor, and generally lack 34 Chapter 2 social insurance coverage and job protection, making them more productivity and the ability to appropriate the gains from increased vulnerable than formal sector workers along multiple dimensions.108 trade. Informal self-employed workers and micro-enterprises also Within countries, informality declines with the level of education, tend to have limited access to market information, and to external suggesting that those with little education are both poor and more markets and the latest technologies used therein, which limits likely to find a job in the informal sector. Informal self-employment learning, innovation and technology adoption/adaptation. Informal declines with development, suggesting that as the opportunity cost sector workers also tend to use sub-par business processes, of being informal rises, fewer people enter.109 Overall, a blanket reducing cost effectiveness. conclusion that informal sector workers are less well off than formal sector workers is probably not merited. Nevertheless, the informal There is little available evidence, especially at the micro sector deserves special attention because informal sector workers level, that increased openness to trade is associated with are disproportionately poor, less covered by social protections, a larger informal sector.111 An often-expressed concern is that and less linked to sources of productivity improvement than formal trade reforms that increase competition in the domestic market sector workers. will lead to a rise in informality. It is argued that in the face of greater competition, formal sector firms will seek to reduce labor Those working in the informal sector face greater risks costs by cutting wages and benefits, replacing permanent workers than those in formal activities. Workers in informal firms with part-time workers, subcontracting with establishments in the typically do not have the same employment rights as those in informal sector, and laying off workers who subsequently seek formal employment. Informal sector firms and households have employment in the informal sector. Economic theory does not limited access to finance to smooth over short-term economic provide a clear answer, and it is possible to specify models in fluctuations, like a sudden rise in food prices or a sudden which trade has the opposite effect. What matters is how the labor contraction in economic growth. In addition, informal sector market works and how wages in the formal and informal sectors workers are not covered by social benefits such as health, pension are determined. There are very few empirical studies that have or unemployment insurance, so tend to be less covered against looked at how specific trade reform episodes have affected the risk than formal sector workers. In general, workers in the informal size of the informal sector. Those studies that exist have not found sector, both wage earners and self-employed, appear to face more compelling evidence of a relationship between trade liberalization earnings risk than do comparable workers in the formal sector. and the share of the informal sector in total economic activity. On the other hand, informal sector workers pay less in taxes, may It is the nature of the labor market that seems to be of greatest value the flexibility the micro-enterprise sector offers, and often find importance.112 social protections systems costly and poorly designed. 110 Many small entrepreneurs in the informal sector regularly Women, trade and poverty cross borders to provide goods and services, but their growth Poverty disproportionately affects women, and gender is limited by the constraints posed by informality. Informal discrimination and marginalization impede women’s efforts to workers tend to be low skilled, and therefore typically benefit escape poverty. Women have been at the centre of global efforts from trade liberalization through new job opportunities and higher to reduce poverty, in particular since the Fourth UN Conference on wages. Policies that facilitate the transition of workers from the Women in 1995 identified eradicating the "persistent and increasing informal to the formal sector are likely to increase the benefit from burden of poverty on women" as a critical area for action. However, trade opportunities, while mitigating the risks. the continuing dearth of appropriate gender-disaggregated data make it difficult to determine how many women are poorer than A common characteristic of the poor in the informal sector men, how much poorer they are, and whether gender differences is low productivity, which reduces their earnings potential and in income have widened or narrowed in recent decades. resilience to trade shocks. A trade-related shock that leads to a Nevertheless, a range of indicators of food security, education, decline in informal employment can cause an immediate loss of health and vulnerability point to women suffering disproportionately income, requiring poor households to curb expenditures on food from poverty.113 Constraints faced by women can be direct: for and other essentials. Informal workers are also more likely to be example when women farmers are excluded from the production unbanked and to lack access to finance, whether for smoothing of cash crops, or indirect, for example when girls and women have consumption or for investing in human or physical capital. Informal limited access to education, finance, ownership of assets such as workers’ low levels of human capital thus tend to be accompanied land, and information. Statutory and customary laws limit women’s by low levels of physical capital investment, further undermining access to land and other types of property in most countries in 35 The Role of Trade in Ending Poverty Africa and in about half the countries in Asia.113 Also of importance Box 2.4: Gender inequality in access to ICTs120 is the extremely limited sharing of household tasks, which means that women lack sufficient time to pursue actions that reduce the Information and communication technologies (ICTs) — poverty and vulnerability of their households. notably access to the Internet and to mobile phones — have been an important means of generating additional There has been some progress. For example, women have income for many poor households in recent years. gained parity in primary education in a majority of countries, maternal Mobile phones make it easier to access price mortality has fallen by 47 percent since 1990 and the gender information, increase flexibility in how women can gap in labor force participation has narrowed slightly in the same manage time, and can ease access to important services period. But women are still paid less than men for equal work, are like banking, health, and education. Because of the over-represented in vulnerable, informal employment, are under- tendency for women to face more restrictions than men represented in positions of power and political decision-making, and over their mobility and time due to the combination of undertake a disproportionate share of unpaid domestic work.115 family and income-generating commitments, access to ICTs can have a disproportionately positive impact Women in the poorest countries face the greatest on poverty alleviation for women. However, gender challenges and the biggest constraints. According the UN inequalities in access to ICTs limit women’s opportunities Development Programme’s Gender Inequality Index,116 South Asia to escape poverty. Although gender-disaggregated data and Sub-Saharan Africa, the two regions with the highest levels on ICT access in developing countries are sparse, the of poverty in the world, also have the highest degree of gender evidence available suggests clear gender gaps. In a inequality. The poorest countries have achieved minimal progress number of African countries, for example, women are half as likely as men to own or use a cell phone. In many since 1994 in improving women’s status, reducing maternal death, developing countries, women are less likely to be able eliminating child marriage or increasing women’s life expectancy. to access the Internet, although the picture is mixed. Lack of access to health services and the extreme physical Addressing these gender gaps in access to ICTs is burdens of food production, water supply and unpaid labor create critical to poverty reduction. disproportionate threats to poor women.117 Women in developing countries face more risks than men. Women’s risks related to earnings and employment are Increased employment for women through trade has led higher due to their higher participation in the informal sector, their to positive changes in household dynamics. Women employed need for flexibility in working hours to meet household and family in export-oriented industries may be better able to bargain within commitments, and their greater tendency to move in and out of the the household and affect the allocation of resources, leading to labor market. Women farmers face greater risks due to their lack of better nutrition and higher education for household members. a legal right to own land in many developing countries, and more For example, girls in Indian villages where business process limited access to instruments, such as credit, to offset weather and outsourcing increased employment among young women were employment-related shocks. more likely to be in school than girls in villages where there were Trade has played a key role in empowering women and no such links through trade. By contrast, such trade links did not assisting them in dealing with poverty. Increased trade affect the probability of boys being in school.121 In Latin America, openness over the past three decades has brought new job the increase in female labor force participation rates is largely opportunities, has often increased returns for women working in explained by changes in education and family formation (marriage export-oriented sectors, and has increased incentives to remove and children), gender wage gaps are partly explained by the gender biases and discrimination. Across developing countries, presence of children in the household, and the gap in terms of exporting firms generally employ a significantly higher share of poverty between female-headed and male-headed households women than non-exporters. 118 Declines in trade barriers, together has closed.122 Enormous benefits can arise if the empowerment with new information and communication technologies (see of women through trade-generated jobs leads to a reduction in Box 2.4), have reduced transaction costs and increased the access physical violence against women within households. to markets for many women, and in some cases have increased Trade has created new opportunities for women in women’s wages relative to men’s.119 manufacturing and services. The growth of female employment 36 Chapter 2 has been faster in manufacturing and tradable services than is “I am happy to have my own business and do not receive orders in other sectors, and female employment in these sectors has from any boss; neither do I need to depend on any man for my increased faster in developing than in developed countries. livelihood.” Trade opportunities have played an important role in Increases in female employment levels between 1995 and 2005 creating jobs for women in Lesotho and Cambodia (Box 2.5). were correlated with increases in international trade.123 The associated shift from agriculture to other sectors has brought with it higher incomes and more formal employment for women. But within agriculture, a shift in some countries towards non-traditional Box 2.5: Positive trade impacts for women: the garment sector in Lesotho and Cambodia128 and higher value added products, such as horticulture, has also brought benefits to women and reduced gender inequalities in rural A study of the impact on women of the growth of the areas. Women appear to benefit more from large-scale, export- export-oriented apparel sector in Lesotho suggests oriented estate production and agro-industrial processing than from that trade and trade policy, in the form of preferential smallholder contract farming.124 However, these trends towards access to the US Market under the African Growth and the manufacturing and services sectors and high-value agriculture Opportunity Act, can play a key role in creating jobs for women, including relatively unskilled women who appear less prevalent in the poorest countries, where traditional otherwise would have little chance of being formally agriculture still dominates. employed. The benefits extended beyond formal In poor countries, women participate in trade in many employment and the resulting income, to access to ways. Women play a key role as small-scale, cross-border traders; innovative workplace health programs that provided women participate in the production of traded goods and services, free HIV care and treatment. These services were ranging from rural cotton farmers, to textile workers, to professional provided by the Apparel Lesotho Alliance to Fight AIDS (ALAFA) — a public–private partnership involving the activities such as legal and accountancy services; and women Government of Lesotho, local industry (Lesotho-based can also be entrepreneurs with dominant ownership of exporting manufacturers and trade unions), international brands, companies. While women face common problems, such as limited retailers and donors. Of particular importance was that access to finance, across all areas of traded activity, there are also workers could access the ALAFA clinics while on the specific barriers that vary according to the type of activity. factory premises and so did not miss a working day Cross-border trade enhances the income of agricultural (the public clinics reportedly had an average waiting time of eight hours). Workers thereby avoided having to producers and traders in poor countries, many of whom make difficult choices between wages and attention to are women. Cross-border exchange provides the main source health. Another important aspect of the program was that of income for a large number of small-scale traders who are workers who had been dismissed still had access to the predominantly poor women carrying agricultural products.125 The ALAFA clinics for the subsequent six months. households of cross-border traders are just as well off in the quality of the dwelling, access to electricity, type of cooking fuel used, and The export-oriented garment sector is one of the ownership of durable goods, as the average urban household that main providers of wage employment in Cambodia, with is used as a comparator.126 Hence, trading activities are critical in significantly higher participation by women than others enabling households in border areas to attain the levels of welfare sectors: 85 percent of total garment industry workers enjoyed by the typical households elsewhere in the country. In are women. Women in the garment sector receive a positive premium on wages compared with other sectors, Cameroon, women are heavily involved in the harvesting and contributing to their economic empowerment, despite an trade of eru, a vegetable found in the forest and in high demand overall gender wage gap across all sectors of 30 percent. in neighbouring Nigeria. A recent study of harvesters and traders Preferential market access on garments coupled with of eru found that the income from eru trade allows women to assistance to upgrade labor standards in the garment contribute financially to their household, especially to their industry made an important contribution. The Better children’s education.127 The study confirmed that eru harvesting Factories Program — a partnership managed by the and trade enables women to diversify their source of household International Labor Organization and supported by the income, thus reducing their vulnerability. Taking part in eru trade is government, by the Garment Manufactures Association also seen as a source of empowerment for women. A typical view of Cambodia, and by the unions, has helped implement favourable conditions for female employment. 37 The Role of Trade in Ending Poverty However, gender gaps have limited the ability of (iv) Women can be excluded from traditional, male-dominated many women to benefit from trade opportunities. Since distribution networks. Successful exporting or importing the challenges facing women are often highest in the poorest usually requires interaction with distribution networks. countries, it is typically poor women in Africa and South Asia who However, women often have limited access to contacts have been excluded from the benefits of more open trade. Some of in the market and to role models, and as a result, their the key issues are: contact with the “business culture,” which serves as the main training ground for trade, is often limited. Analysis of (i) With lower education levels and less training, women male- and female-owned firms suggests that male-owned producers and traders face more constraints in accessing firms are more likely to find customers through traditional overseas markets than do men. This is particularly networks of contacts, while women-owned firms have to find constraining in agriculture, as it limits the ability of women other means.130 The Internet is playing an important role in farmers to raise their yields through use of improved seeds allowing women exporters to overcome these constraints, and fertilizers. Limited education and illiteracy make it underlining the importance of ICT connectivity for women, difficult to comply with complicated border procedures especially in rural areas (although Internet penetration and make women traders more vulnerable to predatory remains low in the poorer communities). behaviour and extortion by officials, and those pretending to be officials, at borders with weak governance. (v) Women have limited access to finance and face restrictions on ownership of land. There is a clear gender gap with (ii) Women face greater risks when trading across borders. regard to access to finance. Women in developing Bad governance and non-transparent rules and regulations economies are found to be more excluded from the financial at borders mean that women traders are often subject to sector than men, even after controlling for income and extortion and physical harassment, including rape, when education. Of those living below US$2 per day across the crossing borders.129 While there has been considerable globe, women are 28 percent less likely than men to have attention to facilitating trade in terms of the processing of a bank account.131 The difference is even greater in the trucks and containers, with substantial support from the poorest regions. Lack of access to finance significantly donor community, there has been little attempt to improve constrains women’s participation in trade-related activities, the conditions faced by small-scale traders, the majority of because these generally require capital. This applies to a whom tend to be women, despite the significant potential wide range of cases — from women traders who want to benefits of such improvements for poor households in border expand their business, to farmers who want to increase areas. their yields by investing in modern seeds and fertilizers, to owners of exporting companies. Often lack of collateral, (iii) Women face substantial time constraints, a result of the and especially restrictions on land ownership, limit women’s uneven distribution of responsibilities in the household. The access finance. In many countries, a woman may still need amount of time women can spend on trade-related activities the signature of her husband to be granted a bank loan, but is limited by social biases towards work in the home and not vice versa. bearing and caring for children. The eru traders in Cameroon lamented that they often have to cancel planned trips to the Discrimination, for example in the labor market and in the market because of lack of time. Time delays in crossing the household, may limit the opportunities for women to benefit border can be particularly burdensome for women. Women from trade. Existing patterns of gender segmentation may become who challenge these constraints within the household more entrenched, especially in the poorest countries, if women can suffer domestic violence. Measures to simplify trade remain confined to slow-growing (or contracting) non-tradable procedures for women, to provide nursing facilities at border sectors while men continue to predominate in the tradable and posts and border markets, to provide storage to allow for expanding sectors.132 Studies find that women farmers in Africa are better planning and organization of time, and to provide less productive than their male counterparts, but this gap training and support to traders and producers in a way that is disappears when controlling for factors such as the quality and compatible with household obligations can all have important tenure of land and access to inputs in the market. Addressing benefits for women. 38 Chapter 2 constraints that limit women’s access to inputs, for example, is Trade policies and their implementation can have critical for maximizing the gains of trade for women. Even when important effects on women. Increasing recognition of the trade opportunities have delivered new jobs for women, gender different effects of trade on women compared to men, and biases have sometimes resulted in greater risks, less protection improving the extent to which women are consulted on trade and more unfavourable working conditions for women compared to policies and their implementation, can help increase the poverty men (Box 2.6 discusses one example). Jobs for women in export impact of trade. For example, efforts to improve facilities at borders sectors may be less sustainable if women are denied the could do more to address the specific needs of women. As another opportunities for training and skill enhancement. example, export bans on staple foods, such as maize, reduce the price received by poor farmers, and may have a particularly deleterious impact on the welfare of the many female farmers and their households. Box 2.6: Risky business: poor women cross-border traders in the Great Lakes Region133 A recent survey identified the following key features Conclusion of cross-border trade in the Great Lakes Region: The extreme poor face a range of constraints that condition the majority of traders are women (85 percent of the the way they benefit from trade opportunities. Addressing respondents); most of the officials who regulate the these constraints involves understanding how the nature of border are men (82 percent); for almost two-thirds of poverty across the four dimensions of rural poverty; fragility and the respondents, income from cross-border trade is the conflict; informality; and gender affects the relationship between main source of income; and most (77 percent) report poor people and trade. The constraints faced by the poor tend to that household income is heavily dependent on their cut across multiple dimensions of poverty — many of the women trading activity. These survey results paint a dark picture facing challenges in benefiting from trade opportunities are those in of the conditions experienced by poor, female cross- rural areas, working in the informal sector, for example. The extent border traders. Cross-border traders regularly have to to which each of these dimensions applies within each country — pay bribes and suffer harassment. An important feature and across borders for neighbouring countries — varies, but the of many border crossings is the large number and range of officials at the border, increasing the opportunities for four dimensions identified in this chapter provide a lens through abuse, particularly in an environment of generally weak which the constraints faced by the extreme poor in benefiting from governance. A lack of transparency and awareness by trade can be better understood. The risks that the extreme poor both traders and officials of the rules and regulations that face further compound the difficulties for them in maximizing the govern cross-border movements of goods and people gains from trade opportunities. At the same time, the strength of compounds this situation. A large number of traders these constraints and risks means the opportunities for poverty report having to pay bribes and being subject to acts reduction are great if they can be addressed. of violence, threats, and sexual harassment. Traders are exposed to beatings, verbal insults, stripping, sexual harassment, and even rape. Much of this abuse is unreported. This lack of economic and physical security and safety undermines the livelihoods of these traders and compounds their lack of access to finance, information, and business knowledge. 39 The Role of Trade in Ending Poverty 3 40 Chapter 3 Policies to maximize the gains of trade opportunities for the poor, and minimize the risks Policies to support open markets and integrate economies The most effective prioritization and sequencing of are indispensable in the effort to end poverty. As Chapter 1 policies will vary by country, depending on the nature of the showed, an integrated global economy has allowed a flow of challenges faced by the poor. The issues presented in this goods, services, investment and ideas that has helped lift more chapter are intended to respond to the characteristics shared by than one billion people out of poverty since 1990. Even though the poor globally — set out in Chapter 2 — but the specifics vary trade integration may not automatically contribute to poverty from country to country. In many cases, regional approaches will reduction in the short term, without it economies struggle to grow in be important to complement multilateral efforts to address these the long term and thereby to boost incomes for the poorest. Even challenges. outside the countries where the poorest are concentrated, trade makes an important contribution to growth and poverty reduction. Economic growth in large developing countries has not only helped lift people in those economies out of poverty; by boosting global demand their growth has created new opportunities for the extreme poor elsewhere. Growth in advanced economies also helps add to global demand. Thus, on-going efforts to integrate markets in goods and services through unilateral reform, regional cooperation, and multilateral processes are critical to poverty reduction. At the same time, ending poverty will require a targeted approach to maximize the gains and minimize the risks of economic integration for the extreme poor. Chapter 2 showed that extreme poverty is entrenched in rural areas, in fragile states, among women, and among informal sector workers and firms. Broad-based growth policies must be complemented by approaches targeted at the poor to achieve continued progress in poverty reduction, particularly as the responsiveness of poverty reduction to aggregate growth will decline as global poverty continues to fall.134 This chapter sets out a framework (Figure 3.1) for analysing the most important trade-related policy issues for tackling extreme poverty. This framework combines policies to lower trade costs, focused on reforms to reduce tariff and non-tariff barriers and facilitate trade between countries, with measures to deepen the poverty impact of these policies, as well as complementary policies to tackle sub-national and internal constraints faced by the poor that limit their capacity to benefit fully from the opportunities generated through trade. 41 The Role of Trade in Ending Poverty Figure 3.1: Framework of issues Implementation of reforms across each of the five main areas in this framework should be considered, with the overall goal of boosting growth and raising incomes for the extreme poor LOWER TRADE COSTS INTENSIFY POVERTY IMPACT FOR DEEPER INTEGRATION OF INTEGRATION POLICIES OF MARKETS • Addressing domestic market • Reduce tariff and non-tariff inefficiencies and behind-the-border BETTER barriers constraints OBJECTIVE: DATA AND Economic growth • Trade facilitation • Institutions and policy frameworks and increased ANALYSIS targeted at the needs of the poor incomes for the TO INFORM • Infrastructure upgrading extreme poor • Gender sensitivity in trade policy POLICY • Technology • Connecting rural areas and addressing • Trade finance constraints on agricultural productivity • Recognising informality and scale challenges IMPROVE THE ENABLING ENVIRONMENT MANAGE AND MITIGATE RISKS FACED BY THE POOR A key message is that lowering tariff and non-tariff in which this process of integration can be refined to maximize the barriers, and other national-level approaches — although gains for the poor, other policies to be considered in overcoming critical — may not be enough to deliver the poverty gains the key constraints the poor face, and the risks which further limit required to end global poverty by 2030. While countries are the their capacity to benefit from trade opportunities. The final section basic “building blocks” of international trade policy, the challenges considers implications for the World Bank Group and WTO. faced by the poor vary greatly within national borders, and across borders. This means that a focus on lowering trade costs between Integrating markets and improving the countries will need to be complemented with efforts to tackle enabling environment challenges faced by the poor within and across national borders. Further efforts to integrate markets are critical to unlocking This chapter looks at the policies necessary to address the economic growth needed for poverty reduction and these constraints and the role of the World Trade Organization creating new trade opportunities for the poor. Reducing trade (WTO) and World Bank Group in addressing them. The costs can directly benefit the poor by making the goods and chapter is structured in four sections. The first considers the services that they provide more competitive and lowering the costs need to improve data and analysis of the links between poverty of inputs in production. This section discusses four key areas of and trade. Despite some steps forward, significant data gaps action, including tariff and non-tariff measures; infrastructure and continue, making it hard to design effective policies based on trade facilitation; access to trade-related technology and trade the characteristics of poverty in individual countries. The second finance; and the enabling environment. The section does not section considers policies to lower trade costs and improve the include an exhaustive list of policies, but rather focuses on critical enabling environment, which are necessary to stimulate growth and steps to harness trade for poverty reduction that cut across each of contribute to poverty reduction. The third section focuses on ways the poverty dimensions examined in Chapter 2. 42 Chapter 3 Tariff and non-tariff measures Despite steady progress in economic integration, various Box 3.1: WTO decision on Duty-Free Quota-Free tariff and non-tariff measures continue to generate significant (DFQF) market access trade costs, including in areas of importance for the poor. At the 2005 Ministerial Conference in Hong Kong, WTO A key contribution of the multilateral trading system to the global members agreed to enhance market access for least- economy has been the long-run reduction in trade barriers developed countries through non-reciprocal preference facilitated by the WTO and the General Agreement on Tariffs schemes, and decided that “developed countries and and Trade (GATT) before it. Average tariffs levied by importers developing country members declaring themselves on products from least-developed countries (LDCs) have been in the position to do so would provide duty-free and decreasing over time, in line with global declines in most- quota-free market access on a lasting basis […] for all favored nation (MFN) tariffs, preference schemes, and the WTO products originating from all LDCs […] no later than Decision on Duty-Free Quota-Free market access (see Box 3.1). the start of the implementation period in a manner However, despite these overall declines, tariffs and tariff rate that ensures stability, security and predictability”. The quotas on agricultural products remain, on average, higher than decision required that DFQF market access should be those applied to non-agricultural products, and relatively high provided for at least 97 percent of products. Further, at duties persist on a number of products of importance for low- the Ministerial Conference in Bali in December 2013, income producers, especially in agriculture and clothing. This WTO members decided that developed countries that do is especially true for MFN and bound duties (Table 3.1). Most not yet provide DFQF access on at least 97 percent of importantly, significant distortions remain in agriculture, especially products originated in LDC “shall seek to improve” their due to the use of subsidy measures. This lack of discipline on DFQF coverage prior to the next Ministerial Conference. Today, most developed and some developing countries trade policies on agricultural products contributes to an uncertain offer significant duty-free market access to products from trading environment that has a particularly adverse impact on poor LDCs. farmers, given the very high risks they already face (as discussed above). Table 3.1: MFN applied and bound rates, and binding coverage (in percent), based on World Tariff Profiles (2014) Most-favored nation (MFN) in percent Bound rate in percent Binding coverageb Average Ind.a Agr.a Average Ind.a Agr.a Average Developed 4.7 2.4 18.6 10.4 5.8 40.1 99.0 Developing 8.3 7.5 13.3 31.7 26.6 48.8 87.5 LDCs 11.5 11.0 14.8 59.2 42.2 72.8 60.5 Source: WTO Integrated Database and World Tariff Profiles 2014 including AVEs. a The standard WTO definition of agricultural products (Agr.) and non-agricultural products (Ind.) has been used. b The average binding coverage across all products. Agricultural products close to 100% bound. 43 The Role of Trade in Ending Poverty Further progress in the Doha negotiations, and in particular achieving a substantive outcome on agriculture, is Box 3.2: The Standards and Trade Development necessary to increase the effectiveness of trade in reducing Facility poverty. The agriculture sector, which employs most of the poor, Recognizing the growing potential of standards to will continue to play a key role in lifting people out of poverty. Its reduce the benefits of agricultural trade for the poor, five role could be strengthened if more was done to remove remaining international organizations — the Food and Agriculture obstacles to agricultural exports. Tariffs and subsidies are Organization of the United Nations (FAO), the World particularly high in the agricultural sector, as discussed in Chapter Organization for Animal Health (OIE), the World Bank, 2, and anti-competitive behaviour in some segments of the supply the World Health Organization (WHO) and the WTO — chain can make it particularly hard for the poor to benefit from established the Standards and Trade Development trade participation. The increasing importance of supply chains in Facility (STDF) in 2002. The STDF helps developing production has highlighted the linkages between the agriculture countries gain access to markets by improving their sector on one side and the services and manufacturing sectors on capacity to meet international sanitary and phytosanitary the other, showing that progress in removing obstacles to trade (SPS) standards, guidelines and recommendations. ideally should occur simultaneously across all sectors. In the long The STDF has strengthened collaboration on SPS- run, the capacity to leverage agriculture for reducing poverty will related technical cooperation, improving the capacity depend on achieving continuous improvements in productivity, of beneficiaries to identify and prioritize SPS needs reducing the costs to trade in agricultural goods, reducing tariffs on and formulate project proposals that are able to imports and key intermediates such as fertilizers and agricultural secure funding, and improving the performance of the machinery, and improving access to a range of services that are beneficiaries of STDF-funded projects. key inputs in the production chain. The capacity to comply with product standards has become an important factor in determining access to Trade and regulatory policies in many countries with large markets,135 particularly for poor producers of agricultural poor and rural populations also affect the productivity of poor products. Standards are often set to achieve important and farmers. In Africa in particular, these policies affect the potential legitimate public policy objectives of the importing country. for greater regional trade. Only 5 percent of Africa’s demand for Well-designed standards can facilitate trade by providing food staples is met through supply from other African countries.137 necessary information to producers seeking to enter new markets. Barriers to imports of seeds and fertilizers can severely limit There is evidence that the standards introduced by multinationals productivity increases in agriculture. Improved access to seeds investing in developing countries may contribute to increased trade and fertilizers could help produce a version of the Asian “Green for these countries, and have a significant impact on poverty Revolution” of the second half of the 20th century in West Africa, reduction.136 However, compliance with standards may also result where 20 percent of the region’s food requirements are met in higher production costs, and new inspection and certification through imports. With proper seed and fertilizer inputs, West requirements that undermine competitiveness. There is also a risk African countries could double or triple their output of most major of setting standards too high for smallholder farmers to meet, or at crops. Although governments in the region are gradually becoming a level that consumers do not really require or cannot afford. In more active in supporting imports, including through regional trade addition standards may be manipulated to act as trade barriers. of these inputs, more needs to be done to analyse and address the The Standards and Trade Development Facility is an example of a trade-related barriers limiting farmers’ access to inputs and their program assisting developing countries to meet international ability to sell their produce.138 standards (Box 3.2). 44 Chapter 3 Well-designed and implemented standards incorporate investment in the countries where the poor are concentrated is assessments of effects on the poor. While standards are often significant. For example, recent World Bank estimates suggest an important part of the process of production upgrading for the that South Asia alone requires transport infrastructure investments poor, poorly designed standards may impair the ability of the poor of between $411 and $691 billion (2010 prices) through 2020.142 to trade. For example, proposed standards in the East African Rural road upgrading and maintenance is of great importance for Community on discoloured maize could exclude all smallholder- connecting the poor in remote areas. Improving port efficiency can produced maize, if the requirements are too stringent and have a large impact on reducing shipping costs. Research shows alternatives for lower grades are not provided.139 Simply importing that bad ports can be equivalent to being 60 percent further away standards from developed countries will often not be appropriate, from foreign markets for the average country.143 particularly for products not destined for export to developed countries. Even where food safety is concerned, governments However, approaches that focus on weak physical should evaluate whether there are equivalent, less burdensome infrastructure alone as a barrier to connecting the poor to ways of ensuring that food is safe. For example, international markets are unlikely to achieve their full potential. Addressing standards for the consumption of fresh cold pasteurized milk “soft infrastructure” constraints — including logistics services require very specific procedures, processes, and equipment to and border management — is required to maximize the gains limit the growth of bacteria that could cause harm to humans — from infrastructure investments. This entails policy measures and requiring investments that are beyond most poor producers in regulatory reforms that often involve complex political economy East Africa. However, in many developing countries the majority dynamics. Freight costs in developing countries are on average 70 of people consume raw milk but boil it before consumption, percent higher than in developed countries, with Africa being the which — if properly done — kills the bacteria. While requiring that region with highest cost, at twice the world average.144 Lowering all producers in East Africa satisfy the international standards freight costs requires a mix of increased competition, simplified would indeed raise the quality of milk in the domestic markets, it regulations, and other reforms to address the structure of the could compromise the supply of milk from a vast number of small transport sector. A recent study shows that that the gains from producers. 140 This highlights the importance of supporting poor trade in remote regions of Nigeria and Ethiopia tend to be captured producers to upgrade their capacities in meeting international by intermediaries, highlighting the role of high distribution costs in standards. limiting the gains from trade enjoyed by the poor in remote areas.145 Lowering trade costs through improvements to policy and Infrastructure and trade facilitation procedures affecting border management is critical. The costs Physical infrastructure improvements are important to generated by inefficient border management can be addressed lowering trade costs to support the participation of the poor through trade facilitation reform programs. The measures in trade. Traders and producers in lower income countries often contained in the WTO Trade Facilitation Agreement (see Box 3.3) do not have effective modes of transportation infrastructure — should form the “baseline” for any trade facilitation program to including quality roads, railway, ports and air transportation — to connect the poor to the opportunities presented by international allow their goods and services to reach markets in a secure and trade. These measures also would complement existing national timely manner. Improved trade-related infrastructure can reduce and regional trade facilitation initiatives, as well as other reforms, the costs involved in connecting to markets. Poor infrastructure including those targeted at small-scale traders like Simplified Trade accounts for more than 40 percent (up to 60 percent for landlocked Regimes or the Charter for Cross-Border Traders (see Box 3.6). countries) of transportation costs.141 The need for infrastructure 45 The Role of Trade in Ending Poverty Access to trade-related technology and trade finance Box 3.3: The Benefits of the Trade Facilitation Agreement Improvements in access to information and The Trade Facilitation Agreement (TFA) signed at the Ninth communications technologies (ICTs) can increase WTO Ministerial Conference foresees a number of measures for the gains from trade for the poor. The quality of ICT streamlining border processes, such as pre-arrival processing infrastructure in developing countries lags significantly behind of shipments, electronic documentation and payment, and the high-income countries. At the global level the application release of goods prior to the final determination of customs of ICTs has significantly changed the transport sector. The duties. The aim is to reduce the time required for, and improve freight industry, traditionally very fragmented, has become the predictability of, trade. Poor trade facilitation is an important more integrated, and a multimodal transport system source of high trade costs across countries where the poor organized by logistics companies has developed. Sharing are concentrated. Delays at the borders, administrative costs and cumbersome procedures are particularly burdensome in information among terminal operators, shippers and customs developing countries, and most of all in LDCs. Delays in getting brokers can help manufacturers and logistics contractors to goods from the factory gate onto the ship hinder exports more manage the supply chain and facilitate “just-in-time” delivery than foreign tariffs do,146 particularly in lower-income countries. and material requirements planning.151 Inability to deliver on For instance, importers in Sub-Saharan Africa face an average time significantly reduces access to new trade opportunities applied tariff of 11.2 percent, whereas the estimated ad valorem arising from supply chain production. In addition, cross- tariff equivalent of the delays importers incur (expressed in border trade in services (GATS Mode 1) largely depends monetary costs) may be as much as 25.6 percent. on telecommunications as the channel for transactions. For example, the use of ICT in the tourism sector renders the A common finding of the economic literature is that trade facilitation can improve export performance, and that the use of online reservation systems possible, thus providing potential gains are larger for developing than developed local people working in the sector the possibility to bypass countries. Estimates indicate that the implementation of the international agents in the tourism value chain. Technology TFA would reduce trading times by 2 days on average, with has also enabled the rapid growth of business process significant positive effects on trade.147 For example, using a outsourcing in developing countries like the Philippines and sample of Uruguayan firms, one study148 shows that an increase India, creating new and better-paying jobs for people. Online by two days in the duration of export inspections reduces freelancing also provides workers access to larger and more exports by 16.4 percent. Overall estimates suggest that the TFA global employment marketplaces. Workers can bid for tasks may reduce developing countries’ trade costs by 14 percent on platforms, such as Elance-oDesk and Freelancer.com, on average.149 Trade facilitation can also promote export and deliver services digitally to their employer.152 diversification. For Sub-Saharan African countries, one set of simulations suggests that improved trade facilitation can lead to ICTs also can help to reduce information costs, an increase in the number of products exported by destination foster trade, improve market efficiency and increase of up to 16 percent.150 traders’ income. For example, the introduction of mobile phone services to coordinate sales between fishermen at Trade facilitation may be particularly beneficial to the poor. sea and wholesale and retail traders in Kerala — a state Time at the border is costly, particularly for the poor, and most especially for women who are most time-constrained due to in India with a large fishing industry — has reduced price obligations in the home. Lack of governance and corruption dispersion across markets through increased opportunities impinge most heavily on small traders with very fine profit for arbitrage.153 Fishermen’s profits increased by 8 percent, margins. Reforms to make border crossing procedures more consumer prices fell by 4 percent, and fish waste was transparent and predictable are of particular importance to reduced. The Internet is improving access to information on small traders, and especially women, who are typically more markets and also on countries’ trade rules and regulations. vulnerable given the asymmetry in power between the official Additionally, the opportunities for lowering trade costs by and trader, and the lack of a functioning mechanism for connecting to buyers directly and using efficient distribution addressing complaints and resolving disputes. Trade facilitation services established by large, specialized e-commerce firms is likely to be of particular importance for perishable agricultural can help create new export opportunities that can generate products, which are often the products produced and traded by benefits for the poor. Export survival rates appear to be the poor. significantly higher for firms participating in e-commerce, and 46 Chapter 3 e-commerce appears to be facilitating the participation of a greater to credit, helping businesses grow, and making it easier for number of small firms in international trade.154 households to manage risks and economic fluctuations. Strong governance allows contracts to be enforced and increases Lack of access to trade finance is a serious impediment to predictability, while education is important in skill upgrading. An participating in trade, with small firms in low-income countries analysis of 30 African countries over 1981–2010 found that trade most affected. As much as 80 percent of global trade is supported openness tends to reduce poverty in countries with deep financial by some form of financing, for example credits that bridge the time sectors, high education levels, and strong governance. These gap between the exporter’s shipment and the importer’s receipt, or factors are very important in ensuring an economy’s capacity to loans for working capital to provide exporters advance payments transform through trade openness by reallocating resources from to meet urgent financial needs. A recent survey shows that lack of less productive sectors to more productive ones.158 By reducing access to trade finance is a major obstacle to trade for 66 percent distortions in resource allocation, changes in the overall enabling of exporters in Africa.155 These difficulties have been exacerbated environment help maximize the positive impact of trade openness since the financial crisis, as global banks have reduced their on growth. Deepening integration into global markets through lower banking network and costs by cutting finance for trade in the trade costs involves work to address “behind the border barriers”, poorest countries.156 A December 2014 survey of 900 banks by the internal costs, regulatory issues, and many of the other trade- African Development Bank shows that obtaining confirmation of related policies surveyed in the preceding sections. Lowering trade letters of credit has become more difficult for African banks. When costs is critical for poor countries, since the lower average incomes finance is available, interest rates and collateral requirements are are, the higher trade costs tend to be.159 very high for traders (over 25 percent and more above inflation). A similar survey by the Asian Development Bank estimates the Despite shocks, the generally more stable macro-economic amount of finance rejected in developing Asia at close to $1 trillion, situation of many developing countries in recent decades with a rejection rate of 50 percent for trade financing submitted has helped create the conditions for sustained growth and by SMEs. Although there have been some successes in efforts to poverty reduction. In Africa, the boom-bust cycles that preceded raise awareness of the impact of trade finance constraints, and the 1990s were replaced in many countries by greater stability, address these through targeted programs and wider reforms to the assisted by stronger macroeconomic policy management and debt financial sector, limited access to trade finance continues to be a relief. These stronger macroeconomic frameworks even proved constraint on trade. resilient to the impact of the 2008–09 crisis.160 In a climate of macroeconomic instability, with exchange rate volatility and high Enabling environment inflation directly affecting trade and business decisions, it is unlikely A sound enabling environment is critical for trade to that growth or trade can be sustained. contribute to growth. At the country level, successive research Cross-cutting investments in human capital — notably has confirmed that key ingredients of policy strategies for sustained good nutrition, education and health — are important long-run and inclusive growth include:157 determinants of labor productivity.161 Addressing job-relevant • Sustained investment in education, health and infrastructure; skills deficits among the poor can be an important aspect of fostering their participating in trade through employment in export- • Functioning capital markets; related firms. The availability of skilled workers can also be a key • Labor market reform, fostering competition and innovation determinant of global value chain-driven investment, as well as in the domestic economy, and facilitating shifts from less to the potential for countries to benefit from positive spillover effects more competitive economic activities; of GVCs through greater employment of workers in the domestic economy. Job training programs must be carefully designed, with a • Ensuring macroeconomic stability; focus on providing poor individuals with skills demanded by trade- • Effective governance, rule of law, and secure property rights. oriented firms.162 These enabling factors help create the conditions for the Constraints in the overall business environment that poor to benefit from trade. Financial sector depth, governance create an incentive for informal, rather than formal, economic and property rights, and education are particularly important in activity need to be addressed. Such constraints include high maximizing the contribution trade makes to poverty reduction. rates of taxation and social security contributions, regulatory A healthy financial sector helps overcome limitations on access burdens, limited access to finance, barriers to competition, and 47 The Role of Trade in Ending Poverty corruption. Efforts to address these constraints, coupled with deepen integration could incorporate measures to support small targeted support for small firms, can help foster an environment traders and strengthen consultations with the poor, as well as where small firms are more able to participate in trade. At the same negotiations to reduce barriers to goods and services trade. time, the sheer size of the informal sector and the number of micro and small enterprises involved means it is important to remain Refining integration and mitigating risks realistic about the impact of programs that only provide direct to maximize positive effects for the poor support to such firms: they need to be complemented by reform to address economy-wide constraints.163 At the same time, the likely This section outlines a number of ways in which the wider process timeframe for implementing the economy-wide reforms needed to of economic integration outlined in the preceding section can be support a transition to formality also confirms the importance of built upon with more targeted policies to maximize the benefits of policies intended to support informal firms’ participation in trade, for trade for the poor. It also considers the risks faced by the poor, and example as small traders. the extent to which these can be mitigated. Well-functioning trade institutions are critical in Refining integration to maximize gains for the poor transmitting the positive effects of trade to the poor. The The wider processes of economic integration must be institutions that support trade continue to be weak in many complemented by more targeted approaches to maximize countries with significant numbers of poor people. The experience gains for the poor. An evaluation of the characteristics of poverty of LDCs supported through the Enhanced Integrated Framework at the country level can generate pro-poor recommendations (EIF) — a mechanism to assist LDC integration into the global for strengthening sub-national connectivity, addressing internal economy — is informative. Through the EIF, almost all LDCs barriers to competition, facilitating small-scale trade, and improving have received technical reports (Diagnostic Trade Integration institutions, among others. Studies) analysing trade competitiveness and potential. However, some have found it challenging to translate this analysis into The returns from addressing sub-national trade facilitation, comprehensive and sustained policy reform. logistics and other internal market issues are likely to be substantial. While trade facilitation reforms at key international The quality of trade-related institutions has helped the gateways – including those discussed in the preceding section more successful low-income countries to maximize the gains – are likely to have positive outcomes for the poor, they are not from trade-driven growth. Lao PDR, for example, has built an enough to maximize the gains for the poor. Even if the efficiency of effective, centralized institutional structure for trade policy, and trade at major gateways improves, the extent to which the benefits for coordinating donor-funded trade projects, which enabled a pass through to those in remote areas depends largely on internal, demand-driven process with strong ownership by the government. behind-the-border constraints, including sub-national connectivity Ministries of trade or commerce need the capacity to develop and and logistics, and barriers to competition. implement trade policies effectively, and coordinate with the wide range of agencies involved in managing the many dimensions of A concerted effort to improve sub-national logistics could competitiveness in international markets. For example, effective generate significant benefits for poor agricultural producers, efforts to lower trade costs at the border involve not only the who typically experience high transport costs in accessing agency responsible for customs and ministries of commerce, but remote international gateways. The trade-related barriers also ministries of public security, health, agriculture, and others. along the agricultural supply chain from producer to consumer are complicated, especially at the first stages of the supply chain. Improvements to the enabling environment should be Substantial costs are incurred in the earliest steps taken to undertaken in tandem with the targeted approaches outlined consolidate small volumes of agricultural products from smallholder in the following section. Small-scale business and poor farmers, farmers. The gains from reducing these transport costs could unlike large and politically well-connected firms, often cannot find be significant. For example, a 50 percent reduction in transport viable ways around the constraints imposed by a weak enabling costs could increase real agricultural GDP by seven percent in environment. Policies to improve the enabling environment and Mozambique and three percent in Malawi. Reforms to increase targeted reforms are not mutually exclusive; one need not precede competition among logistics providers could reduce the cost of the other, and they can be closely linked. For example, policies to transporting staples in West Africa by 50 percent within 10 years.164 48 Chapter 3 Greater impact could be achieved through coordination government interventions in the maize market could reduce maize between trade, transport and agricultural support policies; prices by 20 percent on average, and that would reduce poverty by for example, road projects in rural areas to connect farmers 1.8 percent.167 to markets may have limited effect without coordinated investment in storage facilities. An absence of well-planned Improving competition among the processors and traders storage facilities (whether financed by government, private sector, of crops could significantly increase farm gate prices for or a combination) can significantly raise transport costs. Increased informal smallholder farmers. Case studies of export crops in understanding of the alignment of interests between producers, Africa — such as cotton in Zambia, Malawi, and Burkina Faso, buyers and governments is likely to have a positive impact. coffee in Uganda, Rwanda, and Côte d’Ivoire, tobacco in Malawi This could involve, for example, taking advantage of the greater and Zambia, and cocoa in Côte d’Ivoire and Ghana,168 demonstrate capacity of larger firms to address sources of logistics costs, and the substantial impact of the structure of export value chains the willingness of large domestic and multinational firms to invest on poverty and welfare in rural areas. For example, splitting the directly in supply chain improvements if the policy framework is largest cotton processing firm in Zambia could increase the income stable and supportive. It would also involve an understanding of of the average cotton producer by more than 2 percent. Similarly, how the needs of small producers are different from those of large concentration in the distribution sector acts as an import barrier producers, and what role intermediaries play in shaping profits by increasing trading costs,169 thus reducing the market access earned by poor farmers. benefits for the poor from tariff reductions. Lowering domestic transport costs is particularly Measures to facilitate formal trade and overcome the important for poor producers of food staples. Given the low constraints faced by small-scale traders are important. ratio of value-to-weight of many agricultural products, transport Programs that improve the overall transparency of trade costs represent a significant share of the final price. For example, a regulations can be especially beneficial for small-scale traders, who 2007 study of the value chain for fresh cassava in Cameroon found often lack the capacity of firms to locate and understand what rules that domestic handling and transport costs made up 21–35 percent apply. Transparency can also be implemented in ways that are of total shipment value, over the relatively short delivery distance particularly targeted at small-scale traders that may have limited of 130 kilometres. This compared with less than 12 percent for capacity to understand or access regulations, either physically or cotton lint delivered over more than 1,200 kilometres from northern on the Internet. Trade facilitation reforms that streamline border Cameroon to the port of Douala. 165 Food staples are strongly linked clearance procedures should have a particularly positive impact to poverty reduction, particularly given their importance for food on small traders, complementing simplified trade regimes or other security. similar schemes. For example, the Common Market for Eastern and Southern Africa (COMESA) implements a Simplified Trade Promoting competition can help ensure a level playing Regime which provides for simple customs procedures and field for firms, reduce the barriers to entry facing small firms, declarations for shipments of less than US$1,000, although low and lower input costs for potential exporters as well as prices awareness of the scheme, mutual mistrust between border officials for poor consumers. Anti-competitive behaviour in transport and and traders, and poor information have limited its impact to date. distribution networks, for example, is often identified as one of the The Charter for Cross-Border Traders (see Box 3.6) is another reasons behind intra-national transport costs being higher than example of an approach that addresses the constraints imposed by international transport costs in many countries — although the size, while still supporting the gradual formalization of trade. One of small scale of domestic shipments, weak infrastructure, and other the key aims of the Charter is to improve trust between traders and factors are also important.166 A recent analysis of sugar and maize officials by establishing mutual responsibilities. Another example is in Kenya found that market distortions, have increased market provided by the World Bank Group’s Great Lakes Trade Facilitation prices and thus reduced the real incomes of poor households. Project (Box 3.4) which targets support to small-scale traders in a Relaxing trade barriers to allow sugar prices to fall by 20 percent fragile and conflict-affected region. was estimated to reduce poverty by 1.5 percent. Similarly, adjusting 49 The Role of Trade in Ending Poverty achieve better and more stable prices for their agricultural produce. However, such information must be location-specific, timely and Box 3.4: The Great Lakes Trade Facilitation Project accurate, dynamic, locally available, and in a language understood The project’s objective is to facilitate cross-border trade by the rural population. Few government-run market information by increasing the capacity for commerce and reducing systems have adequately met these requirements. the costs faced by traders, especially small-scale and women traders, at targeted borderland locations in the Great Lakes Region. The project will support interventions in six countries (DRC, Burundi, Rwanda, Box 3.5: Country examples from India and Cambodia Tanzania, Uganda, and Zambia) that have a common on increasing connectivity171 desire to promote cross-border trade and are facing The impact of reforms in India a decade ago to increase similar constraints. The development indicators being private sector participation in agriculture provides an used to measure success include: (i) average time example of how increased efficiency in the supply to cross borders (ii) incidence of harassment of small chain can lower costs and deliver benefits to producers. scale traders, especially women; and iii) perception of Since these reforms, a large Indian agricultural firm traders regarding quality of services provided by border has progressively rolled out the “e-Choupal” system, agencies. comprising simple computer kiosks serviced by trained The project will prioritize agriculture and trade in food staff in rural villages. The system has now spread to products (the primary goods traded in border areas cover at least 4.3 million farmers through a network by small-scale traders), by targeting border crossing of more than 6,400 kiosks. The e-Choupals provide points which form major bottlenecks in the link between information to farmers on prices available for their farmers and regional markets. These efforts should produce, helping them sell at times when they can improve food security, increase incomes for many poor maximize profits. They are provided with a tentative households, and raise employment in the agriculture, quote, based on criteria made available to the farmer food processing and logistics sectors. The first phase for transparency, for the price of their produce along of the project, involving the DRC, Rwanda and Uganda, with information on the nearest procurement hub where has been prepared; it is expected that implementation the farmer can sell the produce. These improvements will commence in October 2015. in logistics and information services have significantly lowered costs and increased profits. The e-Choupals also demonstrate how efficient supply chains involve the flow of not just goods from producers, but two-way flows More targeted systems for gathering and disseminating of information between buyers and producers, as well as information can reduce information costs for the poor. Poor more efficient logistics services. Although the e-Choupals farmers and small firms often have little or no information on have had a positive impact, the continued high level of market conditions, prices and the quality of goods. Surveys of rural poverty in India indicates that more is needed to urban and rural households in Nepal and India suggest that the connect the rural poor to market opportunities. poor gather information mainly through informal networks of The experience of Cambodia underlines the potential trusted family, friends and local individuals, and that the internet, benefits of a comprehensive effort to lower the trade fax and computers are accessible by only 2 percent of the low- costs that rural producers face. The most recent World income households.170 This limits the ability of the poor to organize Bank Poverty Assessment of Cambodia found that from collectively to help offset the market power of the generally larger 2004 to 2011 the poverty rate fell from 52.2 to 20.4 and stronger market intermediaries to whom they sell their produce percent. Ninety percent of Cambodia’s poor lived in and from whom they buy inputs and consumer products. Better rural areas, and increased rice prices and production access to market and price information — including through have been the key drivers of poverty reduction. Higher ICTs, as discussed above — can assist producers with marketing rice production was achieved through infrastructure decisions, and help them to organize and develop strategies to improvements and other reductions in export costs for poor farmers, in the context of a relatively open trade policy and minimal distortions through subsidies or price controls in the agricultural sector. 50 Chapter 3 Efforts are required to strengthen consultation with the The principle of developing policies that recognise the poor and improve the impact of institutions on poor people. poor more effectively can be applied widely. For example, Increasingly, mechanisms are being used to improve the voice poverty analysis could be more explicitly incorporated into of the poor, for example by ensuring that public-private dialogue Diagnostic Trade Integration Studies undertaken in LDCs. These includes smaller firms operating in the informal sector, women studies could also more systematically include consultation traders, and those in rural areas without access to institutional with poor stakeholders (e.g., women traders, small traders, and networks for influencing policy. Nevertheless, consultations with farmers), building on recent examples in countries like Zambia.173 the poor and the dissemination of trade information need to be Such approaches are gaining attention at the global level with more effective. A severe lack of transparency on what regulations multinational enterprises, as well as national governments. For apply, when they are often determined in an apparently arbitrary example, the World Economic Forum’s New Vision for Agriculture manner, exacerbates this situation.172 Where institutions are is based on national processes for increasing agricultural ineffective, consultation non-existent, and transparency very productivity (focused at the smallholder level), bringing together limited, the capacity for poor farmers to address regulations that producer associations, business, and government. A national impair their capacity to earn income is severely constrained. committee was established in Tanzania to implement the New Progress in improving this situation is closely linked to the data Vision approach, co-led by the Minister of Agriculture and a vice- and analytical agenda. Mechanisms for stakeholder engagement president of Unilever, and engaging global and local companies, that include the poor can be established, or existing national donor agencies, civil society and farmer leaders. This committee structures for consultation of policies can be adapted. For example, has developed a blueprint for generating US$1.2 billion in farming recognising that the majority of cross-border traders in Africa live revenue and 420,000 new jobs in the Southern Agricultural Growth in extreme poverty and face a range of policy constraints that limit Corridor, largely for smallholders.174 Another approach is to set up their capacity to benefit from trade, innovative approaches are agricultural commodity exchanges that explicitly target the needs of being taken to include small traders in the institutional structures poor farmers (Box 3.7). governing trade (see Box 3.6). Box 3.6: The Traders Charter The Charter for Cross-Border Traders, which has been developed and tested by the World Bank at a number of border posts in Sub-Saharan Africa, enshrines a basic set of rights and obligations that apply to both traders and officials. The obligations in the Charter are displayed clearly, with the goal of increasing transparency and awareness of the rules, hopefully improving behaviour at borders and promoting the gradual formalization of small-scale, cross-border trade. For example, the Charter requires that whenever a physical check of a trader is requested, the relevant official must provide the reason; and that female traders have the right to be inspected in private by female officials. Another example is that traders must pay appropriate duties and present the required documentation when crossing the border. Following consultation with small traders at key border crossings, the Charter is being piloted at the border between Malawi and Zambia, with World Bank assistance, and could be rolled out to other countries. The Charter is an example of an innovative approach to reflecting the needs of the poor more clearly in the implementation of trade policy. 51 The Role of Trade in Ending Poverty Knowledge platforms are one option for enhancing inclusive trade policy development and implementation. Box 3.7: Agricultural commodity exchanges These are mechanisms for gathering information, consulting with Agricultural commodity exchanges aim to link farmers relevant stakeholders, improving transparency, and implementing to upstream buyers, to improve farmers’ understanding policy, generally targeted at a specific policy challenge. Knowledge of market conditions and enable them to receive platforms allow for an alternative approach to tackling trade- better prices on their crops. The Ethiopian Commodity related problems, beginning with the identification of a particular Exchange (ECX), a spot trading mechanism set up problem rather than the specific constraints imposed by in 2008, includes a warehouse receipt system that government institutions. For example, the World Bank has helped assesses the quality of the commodities on delivery develop a knowledge platform to increase the competitiveness of and issues electronic warehouse receipts, which can professional services in the East African Community. The platform be traded on the exchange (or pledged against bank has brought together policymakers, business, academics, and loans). All coffee and sesame products from Ethiopia other stakeholders to identify barriers and remove them. A similar not directly exported by farmers are traded at the ECX approach could be beneficial for a number of trade-related issues by law. The ECX reaches 2.4 million small farmers of great relevance for the poor. For example, a national or regional through farmer cooperative unions, which are members of the ECX.175 By effectively using mobile technology, knowledge platform focused on agriculture trade-related issues agricultural commodities exchanges can become a could help identify export and import barriers preventing the poor platform where farmers can receive up-to-date market from benefiting more from agriculture. This platform could bring information, which helps farmers optimize decisions together experts and policymakers from trade, agriculture, health related to the sale of their produce. Kenya’s Agricultural and safety, and other government agencies, along with farmers and Commodities Exchange (KACE), which deals with other stakeholders, and be implemented on national and regional non-traditional export commodities such as maize and levels. beans,176 conveys daily information on the prices of some 20 commodities collected from market vendors around Producer associations, cooperatives, and similar the country to farmers and market intermediaries such institutions to align interests among different participants in as traders, through SMS text messages and daily radio pro-poor value chains have an important role. Cooperatives, bulletins.177 Similarly, the ECX provides market data in for example, are a common feature of the agriculture sector in various ways, including to rural ticker boards. In 2011, its developed economies. However, only 10 percent of farmers in SMS service had 156,000 subscribers, and it received developing countries are aggregated into producer organizations.180 61,000 calls a day inquiring about price information.178 Such organizations can make it easier for farmers to overcome The use of this system can lead to significantly increased constraints imposed by small size. Even where formal aggregation income through better access to information and into producer organizations is not pursued (noting that decisions services — 75 percent of farmers reported higher income on the organization of firms should be made by the private as a result of the KACE.179 sector, not government), policy measures that facilitate greater cooperation and coordination among different stages of the value chain can help. The e-Choupal example in India (see Box 3.5) There is a clear need to engage women more in trade is one example. In Morocco, the Company of Commercialisation policy, coupled with wider efforts to achieve gender equality. and Export supports the aggregation of small-scale agriculture As we saw in Chapter 2, women are disproportionately represented producers, providing information on export opportunities, transport in small-scale, cross-border trade, and stand to gain greatly and logistics, and other aspects of exports that individual producers through trade. A well-designed trade policy should take into could not afford to collect. At the global level, producer associations account the potentially different effects on men and women, and are an important part of the World Bank Group’s Agriculture the way in which male and female participation in trade varies. Strategy, as in the World Economic Forum’s NVA initiative For example, women are more vulnerable to abuse at border discussed above. More systematic work needs to be undertaken crossings, especially when the overwhelming majority of border to analyse the impact of producer organizations and similar officials are male. And without wider efforts to address barriers to institutions, to help small producers overcome constraints due to gender equality, women entrepreneurs who might otherwise be their small size, and to identify effective policy interventions. able to export may be unable to participate in male-dominated business networks. 52 Chapter 3 Government- or private sector-led export promotion and Initiative (see Box 3.9), trade-related adjustment has consistently investment facilitation agencies can help the poor overcome received the least assistance since the Aid for Trade Initiative was the challenges of small scale and connect them to trade established in 2005. In the 2013 Aid for Trade Global Review, for opportunities. These institutions are likely to be particularly example, $63 million in trade-related adjustment assistance was effective when producer organizations, cooperatives, or other reported, approximately 0.15 percent of the total $41.5 billion in associations help lower the costs at early stages of the export Aid for Trade commitments.182 The reasons for this warrant further process, which export agencies do not address. Government investigation, with particular focus on how trade adjustments relate support needs to be sensitive to poverty dimensions. For example, to characteristics of the extreme poor discussed in this report. attention should be paid to representation of women in businesses supported by such agencies, as well as gender-related issues that More attention needs to be devoted to mitigating risks might prevent women traders from accessing the benefits provided. that prevent the poor from adopting strategies to benefit from trade opportunities. The top-down analytical model primarily used Tourism is an important services sector that can contribute in trade and poverty analysis, which traces changes in relative to poverty reduction in remote areas and where the informal prices as a result of trade opening through to effects on the poor, economy dominates. A recent study finds that between 10 and does not identify risks that confront the poor and limit their ability 25 percent of tourism expenditures reach the poor.181 The sector to interact with markets. For example, subsistence farmers’ low is, however, underperforming in many countries in which the capacity to manage the economic, climactic, and other risks they extreme poor are concentrated. Opportunities from tourism can be face exacerbates the constraints of low income and savings to readily accessible to the poor, who can provide goods and services prevent them from investing in new technologies, such as seeds to tourists that travel to regions where they live. The influence and fertilizers, that are made more available and at cheaper prices of global value chains (cruise ship companies and large tour through trade. Similarly, firms in the informal sector may not be operators) can be important. Increasing participation of the poor able to obtain capital to invest in risk mitigation strategies that in tourism value chains could contribute to poverty reduction, and would allow them to integrate into formal markets and benefit more. more attention needs to be paid to how governments interact with those lead players in terms of policy, as well as the character and A more coordinated approach between labor market structure of infrastructure investments. policies and trade policies may help mitigate temporary, adverse consequences of import competition. Often, a poor Understanding and managing risks individual’s capacity to supply his or her labor presents the most significant pathway out of poverty — and trade can fundamentally The risks the poor face prevent them from responding reshape the demand for labor, creating more formal wage to economic opportunities brought about through trade. employment at higher incomes. The International Collaborative Chapter 2 showed how weak institutions and a lack of functioning Initiative on Trade and Employment surveyed a wide range of markets limits the capacity of rural farmers to mitigate risks, and priorities in this area. Labor market policies to complement trade how weak institutions in fragile states limit the capacity to manage openness that are of most relevance for developing countries the impact of trade-related price shocks. As opening to trade include social protection schemes to compensate for losses shifts economic activity from less to more productive areas of the imposed by trade-related shocks, efforts to support compliance economy, the impact on people — especially the vulnerable — can with labor standards, and measures to improve the formalization be considerable. More attention needs to be given to mechanisms of employment.183 Social protection schemes supported by to help manage these adjustments and minimize any negative development partners that aim to protect the real income of the impact on the poor, who are the least able to support themselves poor when it is threatened by external shocks can form part of after experiencing an adverse shock. For example, in World Bank the response to managing the risk of conflict in fragile states.184 Group projects, expertise on labor market and social safety net At the same time, a greater understanding is required of the links development is being more systemically integrated into trade between poverty, informal employment, and trade. Much existing projects, in line with the World Bank Group Trade Strategy. research has focused on the ways in which trade openness affects Aid for Trade can be used to address trade-related the character of employment, rather than the different (albeit adjustment needs, although the use of this assistance related) question of how the informal nature of work for the majority has so far been low. Among five themes of the Aid for Trade of the world’s poor affects their capacity to benefit from trade, and how this can be addressed. 53 The Role of Trade in Ending Poverty Export diversification to reduce the vulnerability of the key in minimizing supply volatility. It is estimated that climate poor to trade shocks on specific products is another priority. change will induce heterogeneous shocks across countries and In Cambodia, for example, almost all of the country’s success in regions. For example, in East Africa, future climate predictions poverty reduction has been due to exports of rice, putting farmers suggest that some countries will experience severe dry conditions at risk from price shocks in rice markets. Export diversification that may reduce agricultural production in years when others is clearly relevant in such situations (and is already occurring in are only mildly affected. This underlines the importance of better Cambodia, including through growth in recent years of the export- matching of supply and demand between countries, which can be oriented garments sector and services trade). Export diversification undermined by trade restrictions such as export bans.188 is also relevant for the challenges faced by fragile and conflict- affected states. Diversification of exports away from a narrow set of Understanding the links between trade commodities, especially into labor-intensive sectors, can generate and poverty through better data and income that mitigates the risk of a return to violence in post-conflict analysis states.185 A new data and analytical agenda that is better connected Volatile food prices are of particular importance for the to other policy areas (e.g. labor markets, agriculture, and poor, as both producers and consumers of food. Government gender issues) would provide a stronger basis for designing policies can increase volatility and reduce the capacity of smaller, the policies needed to maximize the benefits of trade for poorer countries to manage the adverse impact of shocks. the poor. Better data provides a foundation for identifying key Although the interplay of different effects on consumers and constraints facing the poor and defining effective interventions. For producers through food price shocks is complex, recent World a start, comprehensive data on the pattern of existing trade by the Bank research indicates that food price rises have a net positive extreme poor (volumes, types of goods and services, and mode of impact for the poor over two to three years after a price shock, transportation) does not exist. More analysis is required of barriers although urban consumers of food can remain worse off for longer. that impinge heavily on the poor, both to ensure effective advocacy However, the border policies that governments pursue in an effort for responses to deal with these issues and to inform the design of to insulate the poor from the effects of price shocks are collectively policy interventions. ineffective and may have negative consequences for the poor. International cooperation to remove distortions in agricultural trade Improving understanding of the nature of poverty in each provides a way to address these effects. Domestically, policies to economy is the starting point for strengthening the poverty improve social protection and assistance for affected consumers impact of trade-related policies. The availability of household and producers can have a more positive effect on real incomes surveys has increased from the 22 countries covered in the 1990 than trade interventions. 186 Mechanisms to manage risk more World Development Report, which was based on one of the first effectively — including weather-indexed insurance and warehouse comprehensive cross-country databases on poverty, to more than receipt insurance, mentioned above — also have an important role 1,000 today.189 These surveys have vastly improved our ability to to play. measure poverty, design policies, and assess progress in poverty reduction, but significant gaps remain. National census data, up-to- Trade can also play an important role in addressing the date poverty surveys, and other economic information are needed vulnerability of the poor to climate change. Increased extreme to gain a more complete understanding of the patterns of poverty weather events and drought create additional risks for already at the national level. Consistent data across borders is needed to vulnerable poor people in many countries. This is compounded by go beyond national analysis, for example to look at neighbouring the dependence of many producers in poor countries on rain-fed border regions where poverty is concentrated. There is a particular agriculture systems. In rural areas, climate change could result in need for more gender-disaggregated data to understand the even lower food production. Trade-related policies will be important participation of women in the economy and the links between in facilitating trade from food surplus to deficit countries, thus gender and poverty. The challenges of collecting relevant data on playing a critical role in food security, but also in providing access trade and poverty are especially great in fragile countries. to inputs (for example, drought-resistant crop varieties) to help address the impact of climate change on food production.187 Indicators of the transaction costs involved in international trade are necessary to measure the impact of trade integration The diverse impact of climate change will generate policies on the poor. There has been a steady improvement in opportunities in agriculture as well as risks, and trade will be indicators for measuring trade costs — for example, through the 54 Chapter 3 World Bank/UNESCAP trade costs database (which measures most trade diagnostic studies look only at the formal economy bilateral trade costs in agriculture and manufacturing), the Logistics at the national level, focus on individual countries and so fail to Performance Index, and the Doing Business indicators. However, identify key cross-border spillovers, and are rarely integrated into these national indicators of transactions costs are not sufficient deeper analysis that considers issues relating to poverty, fragile to understand the varied levels of trade costs faced by the poor, states and gender.192 and must be complemented by indicators that capture the trade costs faced by the poor in each country or region. For example, Better data are required on the informal sector, given its the cost of shipping a container through the main port, while importance in countries with large numbers of poor people. important to a country’s integration in international markets, may Existing research has focused on the impact of trade liberalization not provide adequate information on the trade costs faced by the on the formal sector, while a greater understanding of the poor in rural areas or in the informal sector. The costs of getting constraints that informality imposes on participation in trade is produce to market and across nearby border crossings may be necessary to address the challenges presented by informality. One the most important determinant of the costs faced by poor, small- pressing need is for more comprehensive labor market surveys, scale traders. Hence, a broad range of data are required to design as many of the assumptions regarding the impact of trade on jobs effective policies to achieve a reduction in trade costs. only reflect the experience of the small (in many economies) share of workers engaged in wage employment — not the majority of Indicators of trade costs also need to capture the costs those in the informal sector engaged in subsistence activities or of trade in services. Trade in services can play a critical role in self-employment.193 poverty reduction, a role that is often overlooked. Services are critical, job-creating inputs into almost all other activities. Examples A greater availability of data on the participation of women include the role that transport services play in connecting the in trade could improve the design of trade-related policies. poor to markets, the importance of trade in health and education Many policymakers and other stakeholders adopt approaches that services in overcoming weaknesses in the enabling environment, assume the opportunities and effects of trade are the same for and how innovative approaches to trade in financial services (e.g. men and women, or that trade policy has no place in addressing the use of cell phones) can improve access to finance for poor gender inequality. Chapter 2 examined the important role of women people. Moreover, a small number of studies indicate that cross- in trade and the specific challenges women face in benefiting from border trade in services can be important for both consumers and trade opportunities. Increased recognition of these challenges is providers of services. 190 Interestingly, poor service providers are the first step in addressing them more effectively. crossing borders to provide services that are traditionally thought Investing in new instruments and sources of data can of as “non-tradable”, such as hairdressing. Indicators that may be provide the information necessary to better guide policy relevant for the involvement of the poor in trade in services include analysis. Survey data and other shorter-term and (relatively) the cost of trade finance, the cost of crop insurance, fees charged lower-cost approaches are important. For example, a World by services providers for standardised services, and the time Bank survey of more than six hundred traders at a number of and cost to obtain a work permit in neighbouring markets, among land border crossings in Africa in 2011 and 2012 helped develop others. a clearer picture of the trade policy challenges faced by these More data is necessary on localized, trade constraints (overwhelmingly poor) traders, the majority of whom are women.194 in areas where the poor are concentrated. For example, the This has provided the basis for a World Bank trade facilitation World Bank’s Logistics Performance Index, which provides a project which focuses on improving conditions for small traders, the detailed picture of logistics at the national level, is increasingly first of its kind. complemented with sub-national analyses of logistics performance. New technologies are now available to collect data more A combination of geographical information systems, network directly from the poor, without the cost and administrative analysis, and supply chain analysis can be used to assess challenges of large-scale surveys. Rapid consumption surveys connectivity at the sub-national level in “lagging regions”.191 This have been shown to be effective in providing essential information is an emerging field, and further work to assess connectivity at in fragile and conflict states.195 New techniques, such as crowd- the sub-national level is a priority to develop a clearer picture of sourcing and “mystery shopping”, can provide specific information the trade-related constraints facing the poor. In general, trade on the barriers and the risks that the poor face with regard to diagnostic work would benefit from a greater focus on localized trade.196 Crowd-sourcing, the process of soliciting contributions and other constraints faced by the poor. Reflecting the limited data, from a large group of people (often an online community or a 55 The Role of Trade in Ending Poverty group of mobile device users), appears to be effective in obtaining information from remote, Box 3.8: Pilot studies of crowd-sourced data poor communities. The rapid expansion of mobile penetration throughout poor regions In 2014, the World Bank conducted three pilot studies on intra-regional trade in in Africa and South Asia is increasing the Africa using SMS-based crowd-sourcing surveys. The first pilot focused on the number of potential contributors to crowd- prices and quality of maize, seeds and fertilizers, and targeted farmers from sourcing surveys. There is a range of Burkina Faso, Cameroon, Ghana, Kenya, Malawi, Mali, Tanzania, Uganda and Zambia. An SMS survey was administered to about 150 respondents in each possible uses of crowd-sourcing surveys of the target countries, based on an existing phone directory. to monitor the impact of trade (Box 3.8). Contributors could be asked to provide In the SMS survey, farmers were asked the price they paid for the fertilizers information on particular barriers to trade they they use. The results suggest that prices for homogeneous products can differ face, or to report on product and services substantially between neighbouring countries. For example, the price of urea prices, which could then provide insights on was found to be more than 16 percent higher in Kenya than in Tanzania. the extent to which markets are integrated In addition to collecting data on specific prices and quantities of goods and across borders. These surveys should services, the survey gauged consumer and producer perceptions on a range be undertaken in conjunction with other of qualitative indicators, and measured farmer satisfaction with the seeds they interactions with the contributors, to improve are using, generating interesting results: for example, farmers in Cameroon incentives for participation. have a much lower level of satisfaction with their seeds than farmers in other countries. Better data can help tackle the political The second pilot study gathered quantitative information on trade in economy challenges countries face in health and education services in Cameroon, Ghana, Kenya, Malawi, Nigeria, maximizing the gains for the poor. For Rwanda, Tanzania, Uganda and Zambia, including: (i) data on health and example, entrenched, politically influential education professionals, as well as students and patients involved in trade in stakeholders may resist reforms that health and education services; (ii) information on differences in the cost and reduce their economic rents but generate the quality of education degrees and medical treatments across countries; and widespread welfare gains. Improving the (iii) information on the recognition of foreign academic degrees and medical evidence base for policy debate, formulation, qualifications. The results from the SMS-based survey highlight the extent and and implementation can help those who want importance of regional trade in health and education services, and suggest to reform rules and regulations governing that the availability and the quality of services are more important determinants trade that are politically difficult to implement. of trade flows than the cost of services. The crowd-sourcing surveys also Politicians and officials can be held more generated information on selected barriers to services trade, such as the time accountable for commitments they have it takes to recognize foreign degrees of professionals, or the cost of courses made and gain credit for positive outcomes required for the recognition of the degrees obtained abroad. that result from politically-difficult decisions, The third study involved a cell-phone based survey of small cross-border Stakeholders also need to be able to see traders in Kenya, Malawi, Tanzania and Zambia. The traders were asked about progress being made and to reap the benefits their most recent experience of crossing the border, in terms of the time taken, of opening up to trade to allow politicians to whether they paid unofficial fees, if they were subject to insults or physical garner support for further steps to deepen abuse, and which goods they were carrying. The data was disaggregated by integration. gender. The three pilot studies confirm the potential of crowd-sourcing techniques to generate new indicators of trade integration. Issues concerning the representativeness of the sample and the necessary sample size to obtain meaningful results need to be carefully addressed. While keeping these challenges in mind, the cost advantage and the capacity to deliver new and timelier data relative to traditional face-to-face surveys indicates that crowd- sourcing holds substantial promise for expanding the data on trade integration and filling important information gaps on the impact of trade on poor people. 56 Chapter 3 WTO and World Bank Group support for improvements, connecting to and upgrading in global value chains, trade as a means of poverty reduction and fostering innovation and entrepreneurship. Both the WTO and World Bank Group contribute to economic Trade will play a key role in implementing the World Bank development and the improvement of poor people’s lives Group’s action plan for ending poverty and hunger. As earlier through trade. The focus of collaboration between the two chapters of this report have discussed, trade can help disseminate institutions to date has been in support of efforts to lower tariff and knowledge on new techniques and technologies, make new non-tariff barriers between countries, and other sources of trade technologies, such as drought-resistant seeds, available to the costs — this Report underlines the scope to deepen cooperation poor, and link poor farmers to markets and value chains, and on maximizing the impact of trade policies for the poor. hence to better opportunities for improved incomes. Specific issues where the Bank Group is developing its support include: Leveraging the full potential of the global economy for poverty reduction is an important priority for the World Bank • Facilitating trade in farm inputs through mutual recognition, Group. One of the key objectives of the Bank Group’s reform and, where appropriate, harmonization (at the regional level), agenda has been to deliver more effective results for its clients, by of seed and fertilizer standards and certificates. allowing for more effective collaboration across different sectoral lines, bringing the best experience and knowledge to bear for • Improving the transparency and predictability of trade addressing development challenges. This change has put the Bank policies and safety nets, including greater discipline on the Group in a better position to address one of the key messages of use of ad hoc trade policies such as export bans, better this report — the need for trade policy implementation to be better quality and improved availability of market information, and “joined-up” with areas of policy that are often seen as distinct, better-aligned safety nets that protect the purchasing power including labor markets, agriculture, gender equality, or fragility and of the poorest and most vulnerable. conflict. • Investing in infrastructure and policy reforms that reduce The World Bank Group 2011–2021 Trade Strategy, the costs of connecting to markets and ensure that the implementation of which is being led by the Trade and incentive structure for agricultural production and marketing Competitiveness Global Practice, responds to multiple is consistent with raising the incomes of poor farmers. dimensions of the policy challenge of maximizing the benefits The World Bank Group has intensified efforts in recent of trade integration for the poor. Support for trade-related work years to support efforts to improve services trade. This has has grown from $3.3 billion in fiscal year 2004 to $13.2 billion involved identifying barriers to services trade, assessing the full in fiscal year 2014. The Strategy sets out four themes for the range of constraints on the competitiveness of developing country Bank Group’s trade work in response to this growing demand: services sectors, and supporting countries in implementing the trade competitiveness and diversification; trade facilitation, necessary reforms. A recently-released Services Competitiveness transport logistics, and trade finance; support for market access Toolkit, for instance, provides a framework for analysing and international trade cooperation; and managing shocks and competitiveness issues and identifying export potential. The promoting greater inclusion. Approximately half of the World Bank’s Regulatory Assessment on Services Trade and Investment toolkit trade-related commitments (as of Fiscal Year 2014) were for trade complements this by providing guidance on how to assess and facilitation, reflecting high demand from developing countries as reform the regulatory environment for services. It has already well as growing awareness of the importance of trade facilitation been used in a number of countries — including least-developed reforms. There are clear synergies between these priorities and countries like Cambodia, Lao PDR, and Liberia — as a basis for the challenges set out in this Report. For example, the strategy reform. prioritizes efforts to promote greater inclusion across the Bank Group’s trade work, including by increasing work on small traders, Multilateral efforts to reduce barriers to trade, first under promoting internal trade to connect lagging and more remote the GATT and then the WTO, have had an important impact on regions within and between countries, and doing more to address growth, and therefore poverty reduction. Though unilateral and the gender dimensions of trade projects. The wider work of the regional integration help to explain the growth of trade, multilateral Trade and Competitiveness Global Practice supports countries integration has had a major role (e.g. researchers197 estimated in a range of areas where complementary action is necessary that the reduction of China’s weighted average tariff protection for maximizing the gains of trade, including investment climate on imports from 21.4 percent to 7.9 percent was exclusively due 57 The Role of Trade in Ending Poverty to its WTO accession), and the two processes are often found to “Green Box”). While the Green Box applies to both developed reinforce each other.198 and developing countries, developing countries are given special treatment in respect to stockholding policies for food security WTO commitments enhance good governance and the purposes, the provision of subsidized food to needy consumers, predictability of market access conditions, and this has an and various kinds of subsidies. Finally, some WTO provisions economic value in itself beyond reforms in applied trade allow exceptions for food security objectives, for example allowing policies. Research estimates that economic growth increases by members to maintain temporary export restrictions (with due 2.5 percent, on average, for at least five years after a country’s consideration for importing countries’ food security). In general, GATT/WTO accession, leading to a permanently higher output of taking advantage of necessary exceptions to WTO rules must be about 20 percent.199 The increase of growth is sharpest in those weighed against the benefits of making commitments that promote countries that initially have lower quality of institutions, indicating stability and predictability. that WTO commitments can promote economic development by contributing to good governance. Another study200 estimates that The WTO also involves a range of institutional the increased certainty of trading conditions following China’s mechanisms that are specifically devoted to the concerns 2001 WTO accession explains 22 percent of its export growth to of developing countries. The Committee on Trade and the United States. The WTO rule-based system and its monitoring Development, among other functions, oversees the implementation activities helped restrain protectionist responses to the global of the WTO’s trade-related technical assistance. The WTO leads economic crisis of 2008–09. the Aid for Trade Initiative (see Box 3.9) and has partnered with a range of other organizations on various trade capacity- The flexible nature of the WTO gives broad space for building initiatives in developing countries, such as in the developing countries to tailor their commitments to their Standards and Trade Development Facility and the Enhanced own policy priorities, including poverty reduction, although Integrated Framework. In July 2014, the WTO launched its Trade this needs to be weighed up against the benefits of making Facilitation Agreement Facility, to ensure all countries are able commitments that promote stability and predictability. to access support for implementation of the TFA. The WTO also WTO rules provide flexibility to help developing countries cope provides information on the implementation of commitments by with the costs and risks involved in trade liberalization. Special trading partners, including WTO schedules of commitments, provisions for developing countries (referred to as special and notifications (e.g. of subsidies, technical barriers to trade, and differential treatment) include less-than-full reciprocity in market SPS measures) that many developing countries would find it access negotiations and non-reciprocal preferences provided by difficult and exceedingly costly to obtain on their own.202 The Trade more advanced economies, special flexibility to restrict imports Policy Review Mechanism provides regular reviews of each WTO and promote exports (including through subsidies under certain member’s actual practices in implementing their commitments, conditions), as well as provisions addressing resource constraints, which helps each member learn about others’ policies and evaluate including via technical assistance and the possibility to implement its own trade policies, including formulating specific technical commitments more slowly.2041 The Trade Facilitation Agreement assistance needs. Finally, the WTO Dispute Settlement Mechanism includes a novel approach to flexibility that links technical contains a range of provisions that give special consideration to assistance with self-determined implementation timelines on the developing country concerns and allow for special flexibility in part of developing countries. In the WTO Agreement on Agriculture, dispute settlement procedures in light of the possible resource policies to develop rural infrastructure, to enhance investment in constraints faced by these countries, including when it comes to agricultural research, to provide training and extension services implementing dispute settlement rulings. Developing countries may to farmers, and to offer relief to farmers from natural disasters are also obtain legal assistance in dispute settlement proceedings via all exempted from the monetary ceilings (they fall in the so-called the WTO Secretariat or at the Advisory Centre on WTO Law. 58 Chapter 3 Conclusion: implementing a strengthened Box 3.9: Aid for Trade trade policy agenda for the poor The WTO-led Aid for Trade Initiative — of which the The issues presented in this chapter should be seen as World Bank Group is a key partner — has helped providing a framework for analysing some of the key trade- generate substantial increases in trade-related related policies that can maximize the potential contribution assistance, along with a greater focus on results, since of trade to ending poverty. Integrating markets can transform its establishment in 2005. The Aid for Trade Initiative countries’ economies, lifting growth, driving productivity gains, aims to increase the awareness of governments and boosting incomes. These changes were instrumental in the regarding the importance of trade for development and to poverty reduction of the last two decades. Keeping markets open mobilize resources to address the trade-related supply- and further lowering trade costs, along with policies to address the side constraints of developing countries. It covers four key constraints the poor face in each country in profiting from the broad support categories: trade policy and regulations; opportunities created by trade, will be essential for ending poverty. economic infrastructure, i.e. transport, energy and telecommunications; productive capacity-building, i.e. Potential gains from reducing trade distortions and sectoral support; and trade-related adjustment. Aid for trade costs are great. For example, the agricultural sector will Trade commitments amounted to US$56.7 billion in continue to play a critical role in lifting people out of poverty, but 2013, accounting for almost 40 percent of total ODA. tariffs in destination markets and distortive subsidies continue Several studies find that Aid for Trade, in general, is to be high, and exporters continue to pay the high costs of poor positively correlated with export performance and the trade facilitation. A successful conclusion of the Doha Round, reduction of trade costs.203 The challenge of ending regional trade cooperation, and unilateral reforms, as well as the poverty underlines the on-going need for Aid for Trade, implementation of policies that can effectively reduce trade costs, and also considerable room to strengthen the link such as an improved business environment, improved trade between Aid for Trade, poverty reduction, and increased facilitation and trade-related infrastructure, are key to creating inclusion. For example, there has been little focused new economic opportunities. In the countries where the poorest discussion in the Aid for Trade Initiative of how to are concentrated, implementation of the reforms set out in this maximize the poverty impact of Aid for Trade, with work chapter could deepen integration with the global trading system normally focused on boosting growth and exports. and contribute to stronger connectivity of the extreme poor to international markets, while managing the risks the poor face. In implementing the framework for policy analysis and The World Bank Group and the WTO cooperate with each action outlined in this chapter, policymakers should recognise other, as well as other multilateral institutions, to promote that many poor people in different economic sectors face trade as a means of poverty reduction. The Bank Group is a common challenges. For example, the challenges and constraints central partner in the Aid for Trade Initiative. Other key examples presented by the employment of most poor people in the informal of cooperation include the Bank Group’s support for negotiation economy apply across the services, agriculture and manufacturing and implementation of the WTO Trade Facilitation Agreement; sectors. Policy responses that apply across sectors are likely to both institutions’ roles in the Enhanced Integrated Framework; and have more impact than narrower ones. Institutional frameworks their advocacy to ensure that the Basel Committee on Banking or economy-wide constraints — for example those that prevent Supervision’s new financial sector regulations following the global women from achieving full economic participation — need to be financial crisis did not impose unintended, negative consequences addressed if policies targeted at particular sectors are to achieve on the availability of trade finance.204 their intended goals. At the same time, analyses of the drivers of competitiveness in specific sectors and value chains of importance to the poor remain relevant. 59 The Role of Trade in Ending Poverty Realising the potential created by international production- which the benefits of trade can reach the extreme poor, even if sharing for poverty reduction requires an understanding of trade can help create economic opportunities for women. This linkages between sectors and policy dimensions. By allowing underlines the need flagged at the opening of this chapter for countries to participate more easily in segments of a particular more integrated approaches to tackling extreme poverty, based value chain, GVCs offer the possibility of a more fragmented and on an understanding of the fundamental drivers of poverty in each eclectic development pathway — with opportunities being created country, and the way in which economic integration can work in for the poor in more ways — than a traditional model based on concert with other areas of policy to improve livelihoods for the “progressing” from one sector to another (see Box 1.5). In the extreme poor. same way that GVCs require policymakers to better understand the linkages between trade, investment, skills, infrastructure, The World Bank Group and the WTO both have a and other policies, the linkages between sectors are important in strong role in promoting coherence to support multilateral determining GVC participation. The capacity to access quality and governance of the trading system, and the implementation affordable services (e.g., logistics) can be a key determinant of of trade policies in a way that delivers the greatest possible GVC-driven investment choices. By understanding the potential for benefits for the poor. The multilateral trading system has a GVC participation and upgrading, policymakers can focus on the significant positive effect on the global enabling environment. This different points where benefits for the poor can be increased and supports trade’s contribution to growth and poverty reduction, as address specific barriers that may limit participation of the poor at well as contributing to countries’ economic performance. An open, particular stages of a value chain. predictable, non-discriminatory, rules-based multilateral trading system will continue to be a necessary tool for development A fundamental message that emerges is that in order to and poverty reduction in the future. Success in moving forward have the greatest impact toward ending poverty, trade policy effectively on the Doha agenda will create new economic must be made and implemented in conjunction with other opportunities, boost business confidence and revive the support areas of policy. The framework set out in this chapter points to for multilateral cooperation aimed at reinforcing the stability of the clear relationships between poverty dimensions. Addressing the world economy. As well as supporting multilateral, regional and challenges facing small traders, for example, will benefit many unilateral trade reforms, the World Bank Group is increasingly women among the extreme poor, and mitigating the trade-related taking the challenges faced by the poor in benefiting from trade risks facing fragile and conflict states is likely to help the many into account. Its Trade Strategy and the formation of the Trade and rural poor in these countries. At a broader level, while economic Competitiveness Global Practice provide the tools for doing so, integration can be pursued in ways that helps maximize the along with intensified efforts to address the challenges of fragility, gains and minimize the risks generated through poverty, trade agriculture, and others. The two institutions cooperate closely outcomes for the extreme poor are also shaped by the nature of together on a wide-ranging agenda. Aid for Trade and other forms poverty. So, for example, while trade-related policy improvements of multilateral cooperation are important in reducing persistently can play an important role in limiting conflict in fragile states, the high trade costs in developing countries, and reducing poverty. ultimate impact on poverty reduction will be limited unless the This report stresses the importance of expanding the focus of this root causes of conflict are addressed. Or, in countries where agenda to maximize the positive effects of trade for the poor. deep gender bias persists, there will be limits to the extent to 60 Chapter 3 61 The Role of Trade in Ending Poverty Notes 1. Specifically, to essentially end extreme poverty by reducing 21. See Jamison et al. (2001), Owen and Wu (forthcoming), the share of people living on less than $1.25 a day to less Papageorgiou et al. (forthcoming). than 3 percent of the global population by 2030. See 22. See Papageorgiou et al. (forthcoming). http://www.worldbank.org/en/publication/global-monitoring- report/report-card/twin-goals 23. Asian Development Bank (2010). 2. WTO press release 14 April 2015 and World Bank (2011e). 24. See, for example, Rodriguez and Rodrik (2001). The key assumption in these models is the existence of learning- 3. Commission on Growth and Development (2008). by-doing only in the manufacturing sector and that the 4. WTO (2014). knowledge developed in the North cannot transfer to the 5. WTO (2014). South. In contrast, it is now well established that knowledge spillovers exist (Keller, 2010), although it is not yet known 6. WTO (2014). how important they are. A general result of the economic 7. Kingdom et al. (2006). literature is that even when negative effects of trade on growth exist, provided that there are large knowledge 8. ILO (2013). spillovers, the ultimate effect of trade on growth is positive 9. Poverty data in this section from World Bank (2015a). (Baldwin and Robert-Nicoud, 2008). For a review, see WTO 10. World Bank (2015a). Africa faces a particular challenge in (2008). ending extreme poverty not just because of the number of 25. Commission on Growth and Development (2008). the poor but also because many of the poor are a long way 26. This box is derived from World Bank (2014c). from the poverty line. There are far fewer immediate poor in Sub-Saharan Africa than were recorded in China and India, 27. Christiaensen et al. (2013). which would facilitate sharper reductions in poverty. Chandy 28. Loayza and Raddatz (2006) find evidence from a cross- et al. (2013) show that poverty is less responsive to growth country analysis that not only the size of economic growth and distribution changes in Sub-Saharan Africa than in India but also its composition matters for poverty alleviation, with or China at any given poverty rate. the largest contributions coming from labor-intensive sectors 11. Careful analysis of trends in poverty in aggregate and across (such as agriculture, construction, and manufacturing). countries is made difficult by the significant weaknesses in 29. Christiaensen et al. (2011). data. See Chapter 3, as well as World Bank (forthcoming a). 30. See Table 2 from World Bank (2014c). 12. Dollar et al. (2013). 31. Linking Africa to Build Africa; World Bank (forthcoming b). 13. Dollar et al. (2013). 32. See Le Goff and Singh (2014). 14. Feenstra and Hanson (1999), Baldwin and Cain (2000). 33. Bolaky and Freund (2008). 15. Latin America and Caribbean information from World Bank (2013a); Middle East and North Africa from Ianchovichina 34. Ramey and Ramey (1995); Aghion and Banerjee (2005); (2014). Hnatkovska and Loayza (2005); Martin and Rogers (2000). 16. Winters (2002) and Winters et al. (2004). 35. Breen and Garcia-Penalosa (2008); Inter-American Development Bank (1995); Laursen and Mahajan (2005). 17. WTO (2014). 36. Jansen et al. (2015). 18. Coe et al. (1997), Gera et al. (1999), Xu and Wang (1999), Acharya and Keller (2009), Van Meijl and van Tongeren 37. IMF (2014). (1998). 38. World Bank (2015d). 19. See Helpman (1993). 39. McCorriston (2011). 20. Recent empirical evidence from Argentina shows that firms 40. A number of studies analyse this issue. Some look at the in sectors with the largest market access gains were more effect of openness on the gap between high- and low-skilled likely to increase technology spending than firms operating workers and find a reduction of this gap (thus inferring in sectors where trade opening was less ambitious. See that low-skilled workers have gained relatively more than Bustos (2011). high-skilled workers). Other studies find an increase in the wage gap, but find that this is associated with higher wages for both high- and low-skilled workers. Other studies find 62 a positive impact on the level of employment of low-skilled basis) between farms and market centers remain 10 to workers. See Verhoogen (2008), Pellandra (2013), Frías et 20 times higher than transport costs from such centers to al. (2009), Amiti and Cameron (2011), Kumar and Mishra ports in neighbouring Mozambique. As a result, the cost (2008), and Mishra and Das (2013), Burstein et al. (2013). of transporting goods 40 km from the village to the market 41. Fajnzylber and Maloney (2005). center in Malawi is nearly half the cost of transporting these goods nearly 1,200 km from the market center in Malawi 42. Bottini and Gasiorek (2009) find that a 10 percentage point to the port of Beira. The limited competition among (rural) increase in the export share (as a measure of openness) of transport service providers allows them to exploit information a sector led to 3.5 percent more jobs on average in Morocco asymmetries and can depress prices for farmers, while during the period from 1994-2002. This study also finds keeping prices high in intermediate markets (Kunaka, 2010; that there was no significant correlation between imports Hoppe and Newfarmer, 2014). and job destruction, despite considerable trade opening by Morocco during that time period. This may reflect that certain 57. Milner et al. (2001) show that high transport margins taxed employment policies facilitated short-term adjustment for exports from rural areas in Uganda. workers. Feenstra and Hong (2010) calculate that, for China, 58. In Bangladesh, trade liberalization helped to mitigate the a $1,000 increase in exports generated between 0.16 and post-flood food crisis in 1998, with imports of rice stabilizing 0.20 person-years of employment. Edmunds and Pavcnik market prices. See del Ninno et al. (2001). (2006) find that the liberalization of Vietnam’s rice market 59. Nicita (2004). increased wage hours. In other research the evidence is more mixed. Casacuberta et al. (2004) find a positive 60. Atkin and Donaldson (2014). Interesting new research also relationship between measures of trade openness and job shows the distributional impact of retail store entry: see Atkin creation for Uruguay, but the impacts are rather small (less et al. (2015). than 0.1 per cent). In South Africa, Dunne and Edwards 61. Litchfield et al. (2003) show that foreign trade opening (2007) find a zero net effect of trade liberalization on increased the availability of farm inputs such as fertilizers employment. Gains in export sectors are matched by losses and pesticides in Vietnam. Gisselquist and Grether (2000) in import competing sectors. Also see OECD (2012). find similar evidence for farmers in Bangladesh. 43. The preceding paragraphs are drawn from World Bank 62. Lopez et al. (1995) show that the supply response to price (2013c). incentives is much lower for poor farmers with more limited 44. Taglioni and Winkler (2014). access to capital in Mexico. 45. This draws extensively on Taglioni and Winkler (2014). 63. Foster and Briceño-Garmendia (2008). 46. Indeed, application of tariffs rather than quotas has been 64. See World Bank (2013b). the direction chosen under the multilateral trade rules 65. See IFAD (2011). starting from GATT and more firmly under the Agreement on 66. FAD (2004). Agriculture, especially for agricultural products. 67. CTA (2010). 47. IMF (2011). 68. Drawn from World Bank (2012a). 48. World Bank (2015a). 69. UNCTAD (2009). 49. Livingston et al. (2011). Also Ravillion et al. (2007) estimate that in 2002, over 70 percent of the poor in both Sub- 70. Skees and Collier (2008). Saharan Africa and South Asia lived in rural areas, although 71. See Foster and Rosenzweig (2010). there has been some increase in the share of the urban poor 72. See Murdoch (1990). over the previous decade. 73. See Peterman et al. (2011) (the empirical evidence, however, 50. Ravallion et al. (2007) and Ligon and Sadoulet (2007). is not conclusive) and Foster and Rosenzweig (2010). 51. This paragraph is derived from World Bank (2007), page 46. 74. Anderson et al. (2013). 52. Ravallion and Chen (2007). 75. World Bank (2015). 53. Using household survey data before and after trade policy 76. The definition of fragile countries is from the OECD list, reforms in India, Topalova (2007) finds that the poor in rural which is composed of countries that are fragile according areas gained less from trade liberalization than other income to the World Bank and other regional development banks groups or the urban poor. (World Bank list henceforth) plus countries which have a 54. Banerjee et al. (2008). high score of the Fund For Peace’s Failed States Index (i.e., 55. World Bank (2011d). above 90). 56. Foster and Briceño-Garmendia (2008) report that in Africa, 77. Details of the WBG and OECD lists are available at rural roads are generally in poor condition, and the backlog http://www.worldbank.org/en/topic/fragilityconflictviolence/ for rehabilitation is higher than for other roads. Poor roads overview. Seventeen of the 33 countries in the World Bank and limited competition for domestic transport services 2015 list are in Africa. increase transport costs, especially along rural roads. 78. Collier and Duponchel (2013) and Klapper et al. (2013). For example, in Malawi transport prices (on a per ton/km 63 The Role of Trade in Ending Poverty 79. Calì and Miaari (2013) and Ksoll et al. (2014). 108. World Bank (2013c). 80. Bundervoet et al. (2009) and Shemyakina (2011). 109. Loayza and Rigolini (2006). 81. Justino and Verwimp (2006). 110. Maloney (2004). 82. This is the other main criterion commonly used in the 111. Winters and Martuscelli (2014). classification of countries as fragile. The World Bank list 112. The most thorough test of the hypothesis of a relationship considers fragile any country with an average Country between trade liberalization and informality was undertaken Policy and Institutional Assessment (CPIA) score (that by Goldberg and Pavcnik (2003) who, exploiting industry is an average between the World Bank and the regional variation in protection across time, find no relationship with development banks’ CPIA ratings) below 3.2. the share of informality in Brazil, and a modest relationship 83. Hodler and Raschky (2014). in Colombia. They conclude that, compared to labor 84. Blattman and Miguel (2010). market rigidities, trade policy is of secondary importance in determining the magnitude of informal employment. 85. Calì and Varela (2013). More recently, Menezes-Filho and Muendler (2011) find a 86. Calì (2014a). significant effect of trade liberalization on the labor market, but no statistically significant relation between informal work 87. See Amodio and Di Maio (2014) for an example. and trade in Brazil. Bosch et al. (2012) argue that the vast 88. Collier and Duponchel (2013). majority of the 10 percentage point rise in informality in Brazil 89. Klapper et al. (2013). in the 1990s was due to the increased firing costs and a negligible fraction to the far-reaching trade reform. 90. Ksoll et al. (2014) estimate that weekly export volumes fell by 38%, driven by a worker absence rate of 50% during the 113. UNDP (2014a). peak of the violence. 114. UN (2010). 91. Fernandez et al. (2011). 115. UN (2014). 92. Menon and van der Meulen Rodgers (2015). 116. UNDP (2014b). 93. Verpoorten (2009). 117. UN (2014). 94. Deininger (2003). 118. See Calì (2014b) for cross-country data and Hallward- 95. Arias et al. (2014). Dreiemeier et al. (2011) for specific examples. 96. Qureshi (2013). 119. See Chapter 6, World Bank (2012b). 97. Calì et al. (2015). 120. Box based on Chapter 6, World Bank (2012b) . 98. Moore (2015). 121. See Box 6.1 in World Bank (2012b). 99. Arias et al. (2014). 122. Chioda (2015). 100. Bozzoli and Brück (2009). 123. World Bank (2012b). 101. Akresh et al. (2012) and Bundervoet et al. (2009). 124. See Miet Maertens and Johann Swinnen (2012). 102. The micro evidence in support of this link is growing (Dube 125. It is estimated by officials that between 20,000 and 30,000 and Vargas, 2013; Maystadt et al., 2014; Berman et al., people cross through the Goma-Rubavu border post 2014; Abidoye and Calì, 2015), while it is more disputed between the DRC and Rwanda each day. Most of these are across countries (e.g., Bazzi and Blattman, 2014; Cotet and women. In Southern Africa it is estimated that small-scale Tsui, 2013; Calì and Mulabdic, 2014 and Lei and Michaels, cross-border trade contributes around 30 to 40 percent of 2014). intra-regional trade, with a value of US$17.6 billion per year, and that 70 percent of this trade is undertaken by women 103. Abidoye and Calì (2014). (SARDC, 2008). 104. Blades et al. (2011) and World Bank (2013c). 126. Garcia et al. (2013). 105. The study by Heintz (2008) covers Brazil, El Salvador, India, 127. See Ndumbe (2013) Kenya, and South Africa. 128. UNCTAD (2012). 106. The report compares the number of individuals who are poor (i.e., who live in poor households) expressed as a 129. See also the film ‘Les Petites Barrières’ at http:// percentage of the total number of individuals (poor and non- go.worldbank.org/MKK5U1Y2D0 poor) within a particular category of employment. 130. Bussuroy et al (2012). 107. Observations fall between 1998 and 2012. The only 131. Asli Demirgüç-Kunt (2013). exception to this pattern can be observed for Iraq in 2006, 132. World Bank (2012a). defining informality as lacking access to health insurance or social security. World Bank (2014a) confirms that in 133. For more details see Brenton et al (2011). Malaysia, informal workers and those in the agriculture 134. World Bank (2015a). sector are the groups with high concentration of households in the bottom 40 percent. 135. WTO (2012 and 2014). 64 136. Maertens et al. (2011) and Kadigi et al. (2010). 168. Porto et al. (2011). 137. World Bank (2012). 169. François and Wooton (2010). 138. Keyser et al. (2015). 170. Pigato (2001). 139. See Keyser (2012). 171. Kunaka (2011) and Sobrado et al. (2014). 140. Keyser and Jensen (2012). 172. World Bank (2012). 141. Limao and Venables (2001). 173. Brenton and Gillson (2014). 142. Andres et al. (2013). 174. World Economic Forum (2012). 143. Clark et al. (2004). 175. Mbeng Mezui et al. (2013). 144. WTO (2004) 176. There are other commodity exchanges in Kenya, namely the 145. Atkin and Donaldson (2014). Nairobi Coffee Exchange and the Tea Auction. 146. Hummels (2007). 177. Qiang et al. (2013). 147. Hillberry and Zhang (2015). 178. Mbeng Mezui et al. (2013). 148. Volpe Martincus et al. (2015). 179. Qiang et al. (2013). 149. Among the various policy areas, the improved availability of 180. Dalberg (2012). trade-related information, simplification and harmonization 181. Mitchell and Ashley (2010). of documents, streamlining of procedures and the use of 182. WTO-OECD (2013). automated processes would have the greatest impact on trade volumes. See Moisé-Leeman and Sorescu (2013). 183. OECD (2012). 150. Beverelli et al. (2015). 184. Calí (2015). 151. Another example of ICT use to support more efficient trade is 185. Calí (2014). the use of GPS tracking devices on trucks in transit trade by 186. Anderson, Ivanic and Martin (2013). transit country customs authority. This can provide real-time 187. See World Bank (2015d). information on the location of trucks to allow traders and customs officials to prepare ahead for clearance and could 188. See Ahmer Ahmed et al. (2012). reduce the upfront financial burden for small-scale traders if 189. World Bank (2015c). it can replace the transit bond guarantee system. 190. See Dihel (2015). 152. The forthcoming 2016 World Development Report on the 191. Kunaka (2011). Internet discussed the role of the Internet in development, including through trade, in more detail. 192. An exception perhaps is a recent report by the World Bank (2015b) which integrates trade issues into a broader analysis 153. Jensen (2007). of poverty and vulnerability. 154. Suominen (2014). 193. OECD (2012). 155. Centre for the Promotion of Imports from Developing 194. Brenton et al (2013). Rwanda, for example, has recognized Countries (CBI) (2013). the importance of small-scale trade for economic 156. WTO document number WT/WGTDF/W/74 (available from development and broader macroeconomic balances, based www.wto.org). upon extensive and ongoing survey work by the National 157. Although detailed discussion of the enabling factors is Bank of Rwanda, and has developed a National Cross- beyond the scope of this publication. The 2008 Commission Border Trade Strategy. Similarly, Uganda, through the on Growth and Development Report surveyed the critical Uganda Bureau of Statistics, has been collecting detailed policies needed to facilitate sustained growth. WTO (2014) information on small-scale trade at its borders, including also discussed these issues. those with DRC, to inform its trade and borders policies. COMESA has developed the Simplified Trade Regime for 158. Le Goff and Singh (2013). small-scale trade. 159. Arvis et al. (2013). 195. It is expensive and time-consuming to collect household 160. Hostland and Giugale (2013). consumption data to measure poverty of households. 161. World Bank (2013). A new methodology paired with new technology allows measuring consumption in a cost- and time-efficient way 162. Almeida et al. (2009). while still being comparable to full consumption surveys. 163. Independent Evaluation Group (2014). The goal is achieved by collecting only a subset of items 164. World Bank (2012a). from each household; but administering different items to different households so that the full consumption can be 165. World Bank (2012a). estimated within the survey. In addition, the survey is carried 166. Kunaka (2011). out using tablets, which combines several advantages. It is cost-efficient, can be monitored in real-time and can 167. Argent and Begazo (2015). 65 The Role of Trade in Ending Poverty provide a significantly cleaner dataset, especially with 199. Tang and Wei (2009). respect to number-heavy data like quantities and values 200. Handley and Limão (2014). of consumption items. This combination allows estimating consumption aggregates within days rather than months. 201. Flexibilities in the WTO have been extensively discussed in This approach has been developed by Pape and Mistiaen WTO (2009). (2015) and applied effectively in Somalia and South Sudan. 202. Wolfe (2003). 196. See World Bank (2015c) for further discussion. Mystery 203. Busse et al. (2012); OECD and WTO (2013); ODI (2012). shoppers are prospective customers who are used to inquire Calí and te Velde (2011). about the availability and pricing or products and services, 204. In 2011, the Basel Committee agreed to modify its rules who then report back on their experiences in a consistent on short-term, self-liquidating trade finance instruments to and comparable way. Crowd-sourcing gathers information reduce the risk weighting on low-income countries (which from large groups of people via mobile or internet-based proved to be no more risky than other countries), and devices to gauge the pricing and quality of different goods to allow for capital requirements to be matched with the and services. In that report it is shown how crowd-sourcing effective product maturity (hence waiving the one-year information from poor small-scale traders can provide maturity floor applying to letters of credit and the like). In information on delays and costs in getting across borders. 2013 and 2014, the Basel Committee took further favorable Farmers can provide information on the costs of seeds and decisions with regard to the treatment of trade finance fertilizers and the prices they receive for the produce. instruments traditionally used by poor countries, such as 197. Ianchovichina and Martin (2001). letters of credit, regarding liquidity requirement and the 198. 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(1999) “Capital Goods Trade and R & D Spillovers in the OECD,” The Canadian Journal of Economics 32(5): 1258-1274. 75 The Role of Trade in Ending Poverty The expansion of international trade has been essential to development and reducing poverty but the relationship between economic growth, poverty reduction and trade is not a simple one. This publication looks into this relationship and examines the challenges poor people face in benefiting from trade opportunities. Written jointly by the World Bank Group and the World Trade Organization, the publication examines trade and poverty across four dimensions: rural poverty; the informal economy; the impact of fragility and conflict; and gender. The publication looks at how trade could make a greater contribution to ending poverty through increasing efforts to lower trade costs, improve the enabling environment, implement trade policy in conjunction with other areas of policy, better manage risks faced by the poor, and improve data used for policy-making.