Seeking Shared Prosperity through Trade
Increasing the trade integration of developing countries can make a vital contribution to boosting shared prosperity, but it also exposes producers and consumers to exogenous shocks that alter relative prices, sometimes positively and sometimes negatively. This paper discusses the short-run effects of trade-related shocks on households to capture the potential welfare impact on the poor. The discussion explores the channels through which trade shocks are transmitted to households in the bottom of the income distribution, namely through consumption, household production, and market-based labor activities. The degree to which price shocks are passed through from borders to point of sale is a key determinant of the gains from trade and the ultimate welfare impact. Trade changes in agriculture directly affect households through their consumption basket. Lower agricultural prices reduce the cost of consumables, but these welfare gains may be offset by lower earnings for households that produce these same goods. Poorer households tend to be net consumers of agricultural products, suggesting a net welfare gain, but agricultural wage workers could suffer from wage cuts. Because poorer households tend to consume relatively fewer nonagricultural products, that is nonessentials, any trade-related shocks to prices of nonagricultural product are likely to be transmitted via labor channels. Despite significant evidence that nonagricultural trade reform ultimately leads to job creation and enhanced productivity, the short-run effects can be mixed. The costs incurred by workers to transition to new jobs slow the adjustment of the economy to a new steady state. Labor mobility costs, which tend to be higher in developing countries and for unskilled workers, reduce the potential gains to trade by diverting labor market adjustment from its most efficient path.
Summary: | Increasing the trade integration of
developing countries can make a vital contribution to
boosting shared prosperity, but it also exposes producers
and consumers to exogenous shocks that alter relative
prices, sometimes positively and sometimes negatively. This
paper discusses the short-run effects of trade-related
shocks on households to capture the potential welfare impact
on the poor. The discussion explores the channels through
which trade shocks are transmitted to households in the
bottom of the income distribution, namely through
consumption, household production, and market-based labor
activities. The degree to which price shocks are passed
through from borders to point of sale is a key determinant
of the gains from trade and the ultimate welfare impact.
Trade changes in agriculture directly affect households
through their consumption basket. Lower agricultural prices
reduce the cost of consumables, but these welfare gains may
be offset by lower earnings for households that produce
these same goods. Poorer households tend to be net consumers
of agricultural products, suggesting a net welfare gain, but
agricultural wage workers could suffer from wage cuts.
Because poorer households tend to consume relatively fewer
nonagricultural products, that is nonessentials, any
trade-related shocks to prices of nonagricultural product
are likely to be transmitted via labor channels. Despite
significant evidence that nonagricultural trade reform
ultimately leads to job creation and enhanced productivity,
the short-run effects can be mixed. The costs incurred by
workers to transition to new jobs slow the adjustment of the
economy to a new steady state. Labor mobility costs, which
tend to be higher in developing countries and for unskilled
workers, reduce the potential gains to trade by diverting
labor market adjustment from its most efficient path. |
---|