In the context of India’s recent decision not to join the Regional Comprehensive Economic Partnership (RCEP), the issue of the effects of trade liberalization on poverty has come to the fore. In their new book, Good Economics for Hard Times, Nobel Laureates in Economics Abhijit V Banerjee and Esther Duflo provide an in-depth discussion of the impact of international trade on poverty.
Specifically, they write about the work on India of their former doctoral student, currently at the International Monetary Fund (IMF), Petia Topalova, “ The national poverty rate fell rapidly in the 1990s and 2000s, from about 35% in 1991 to 15% in 2012.
But, against this optimistic backdrop, greater exposure to trade liberalization clearly slowed down poverty reduction – contrary to what Stolper-Samuelson theory would tell us, the more a particular district was exposed to trade, the greater the reduction. poverty was slow in this district.
Not a bad conclusion
Based on this statement, the reader could be forgiven for concluding that if India had not undertaken trade liberalization, it would have experienced faster poverty reduction than it did. There are, however, several reasons why such a conclusion would be incorrect.
First, Topalova’s results, based on analyzing the links between trade and poverty using the district as the unit of analysis, are quite different from an article I co-authored with Rana Hasan and Beyza P Ural (bit.do/fipeF). Working with states and regions (a region being a collection of districts within a state with similar agro-climatic characteristics) as units of analysis, we found that the areas where workers were, on average, faced with a greater increase in exposure to foreign competition tended to have experienced greater reductions in rural, urban and aggregate poverty rates (and poverty gaps).
While working with districts may have some advantages from an econometric point of view, it also has serious drawbacks. For example, the sampling methodology at the time of the National Sample Survey Organization (NSSO) household expenditure surveys used to estimate poverty did not allow representative poverty rates to be calculated directly at the district level. In addition, district boundaries change over time.
An individual district, compared to a state or region, is also more likely to be specialized in its production.
Districts specializing in importable products will not have the product diversification that can generate offsetting effects of improving real incomes from expanding export sectors. Moreover, regardless of whether or not this makes qualitative differences in the results, Topalova highlighted as its main determinant of poverty the overall average tariff weighted by employment, including tariffs of non-negotiable industries, which she noted. fixed at zero.
In our study, we have limited our attention to the weighted average for the tradable part of the economy only, since non-tradable employment itself responds to tradable tariffs. In addition, the non-negotiability of a good stems precisely from its prohibitive (non-zero) commercial cost (price included). Our analysis focuses on tariffs and non-tariff barriers, using several alternative measures of poverty.
Second, it should not be concluded that trade liberalization has harmed the cause of poverty reduction. As Banerjee himself correctly pointed out, based on the analytical methods used in both studies, one can only say which states (or districts) have reduced poverty faster or slower through trade liberalization, and not what this liberalization has done to poverty at the national level.
It’s a bit rich
Today, the national poverty rate has certainly declined more rapidly during India’s post-reform period. Of course, the economic reforms of 1991 led to more than just trade liberalization. But being a key component of reforms, trade liberalization is likely to have contributed to higher economic growth and reduced poverty. The fact that all the boats were lifted – although some more than others – is consistent with our study and that of Topalova.
Admittedly, these results do not support Banerjee and Duflo’s conclusion that “greater exposure to trade liberalization has clearly slowed down poverty reduction”, which is likely to be misinterpreted by lay readers. This statement is all the more surprising given that Topalova’s results on urban poverty are mostly statistically insignificant, i.e. lacking in precision.
Importantly, in some of our analyzes we have allowed the transmission of tariffs to change with distance from ports and the quality and density of transport infrastructure which vary from state to state. Hasan and I subsequently extended our analysis in an article co-authored with Jewelwayne Cain, where we added a subsequent set of NSSO data. All of our previous results have survived and we have also found that financial development contributes to this channel of trade and poverty reduction.
Interestingly, a common finding in both Topalova’s study and ours concerns the role of labor market regulation. While our study found that labor market flexibility increased the relative speed of poverty reduction in open states, in Topalova’s we found that it reduced the relative slowness of poverty reduction. poverty in open districts. Overall, given the data available today, it seems impossible to unambiguously conclude that trade is bad for the poor. In fact, in the case of India, the exact opposite applies.
(The author is Professor of Economics, Maxwell School of Citizenship and Public Affairs, Syracuse University, New York, USA. Contributed by Rana Hasan)