final draft_discussing the impacts of trade liberalisation upon poverty in brazil

Student No. 6256082 Globalisation & Economic Development April 2014

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The Impacts of Trade Liberalisation Upon Poverty in Brazil

Introduction

This paper discusses the impact of trade liberalisation –hereinafter referred to as

liberalisation- upon poverty in Brazil between 1988 and 2009, during which time Brazil’s

poverty headcount ratio at both the $1.25 and $2 a day level declined almost 60%

(World Bank, 2014). This timeframe enables discussion surrounding both the short and

long-term effects of Brazil’s ‘Washington Consensus’ style trade policies. The discussion

will be organised as follows. Section 1 introduces economic trade theory and discussion

surrounding the connection between liberalisation and poverty reduction. Section 2

briefly considers the complexities pertaining to the conceptualisation and measurement

of poverty. Section 3 summarises Brazil’s initial liberalisation reform while section 4

reviews some of the empirical literature that focuses upon the impacts of liberalisation

upon Brazilian poverty. Evidence discussed in this paper does not imply a causal

relationship between Brazil’s trade liberalisation and poverty. However, it is suggested

that the immediate effects of liberalisation appeared to contribute to a rise and/or sustain

poverty levels, while in the long run liberalisation has -to some extent- contributed

toward poverty reduction in Brazil.

1.Trade Liberalisation and Poverty: Theory and Relationship

“Identifying the relationship between poverty and trade liberalization poses a

tremendous challenge.” (Goldberg & Pavcnik, 2004:10)

The impact of liberalisation upon poverty is theoretically and empirically analysed

through two distinct types of neo-classical argumentation: static and dynamic (Bhagwati

& Srinivasan, 2002). The static argument centres around the idea that poverty is

affected through effects on demand and, thus, real wages of workers possessing labour

but no financial or human capital. This argument links to the Heckscher-Ohlin (HO)

Stolper-Samuelson (SS) models which theorise that liberalisation should assist in

reducing poverty in developing countries that utilise their comparative advantage to

export (unskilled) labour intensive goods (2002). The dynamic argument links trade with

poverty through the channel of economic growth. The principle argument for this is that

trade stimulates growth and growth reduces poverty (2002) with Berg and Krueger


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(2003:25) stating that trade liberalisation has no “systematic effects on the poor beyond

its effect on overall growth”. Both theories include a number of assumptions; namely, the

HO model assumes capital is immobile while the SS model assumes an economy

consists of just two broad sectors. The two-step liberalisation-growth-poverty process is

problematic also. Firstly the relationship with liberalisation and growth is complex;

secondly it assumes growth automatically translates into poverty reduction.

Ravallion (2005) notes that an extensive literature using different data sets, regression

specifications and control variables attempting to disaggregate the impact of

liberalisation upon growth/poverty exists, often producing differing results. One such

study is that of McCulloch et al., (2001)1 who consolidate various liberalisation-growth-

poverty linkages into three channels: enterprise (whereby households are affected by

changes in trade policy through profits, wages and employment) distribution (via the

transfer of border price changes to consumers), and government (where government

revenues are affected and thus the scope for pro-poor expenditures). Rodrik and

Rodriguez (2000:265) discredit searching for any such liberalisation-growth-poverty

relationship claiming trade policy indicators such as reduced tariff levels “…are highly

correlated with other sources of poor economic performance.” However, refuting

Rodrik’s claim Bhagwati & Srinivasan (2002) state that adopting an outward looking as

opposed to an import-substituting strategy requires macroeconomic stability to be

maintained and this should, therefore, be regarded as endogenous to liberalisation-

oriented policies.

The above demonstrates the lack of consensus amongst scholars to the liberalisation-

poverty relationship, apparent also with regards to poverty measurement as discussed

below.

2.Poverty Measurement

“…whether liberalisation is seen as good or bad for poverty reduction depends in part on

how poverty is measured.” (Conway, 2004:10)

Multiple poverty measurement frameworks exist, namely the Multidimensional Poverty

Index (MPI); arguably a more holistic measurement than the World Banks’ favoured

poverty headcount ratio (PHR) income approach. Moreover, national poverty lines often 1 Cited from Conway_(2004:11-12).


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use alternative methods of measurement. The distinctions between these

measurements -among others- can often produce varied and/or distorted results,

including a large margin of error or downward bias in poverty estimates (Wade, 2004). 2

Figure 1 illustrates how different approaches toward poverty measurement can lead to

substantial variances in poverty incidence for Brazil. Furthermore, calculating poverty at

the aggregate level can be inadequate, particularly in Brazil where poverty is heavily

characterised by geography, urban/rural divisions (Ferreira, et al., 2001) and race

(Telles, 2004:112). The dissimilarities in poverty measurement –including its

disaggregation- problematize the way in which liberalisation’s impact upon poverty can

be evaluated empirically.

The difficulties in identifying the true liberalisation-poverty relationship are all applicable

to the Brazilian case. Whilst this paper does not attempt resolve these matters, it is

necessary to be aware of such limitations before discussing liberalisation’s impact upon

poverty in Brazil.

3.Brazilian Trade Liberalisation

Trade reforms represented an opening of the Brazilian economy to the world after many

decades pursuing an import substitution industrialisation (ISI) development strategy

(Barros, 2009). The first restructurings occurred as early as 1988, although the bulk of

change occurred with the arrival of the Collor government in 1990 who installed the

2 Wade notes that the Economic Commission for Latin America (ECLAC) uses a calories-and-demography poverty line, which estimates the poverty rate as much higher than the standard income approach.

Figure-1: Brazilian Poverty in 2006 – Survey: PNDS (OPHI, 2013)


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trade tariff as the primary trade instrument (Castilho et al., 2012). Figure 2 illustrates the

drastic decline in tariff rates, from 51% in 1987 to 25.3% in 1991, and 12% by 1994.

Moreover, in 1991 Brazil joined with Argentina to create MERCOSUR, inviting Paraguay

and Uruguay to join the initiative that primarily promoted the free movement of goods

and services between the countries (Ibid.:2). These initial trade reforms culminated in

Brazil’s accession to the World Trade Organisation in 1995 (WTO, 2014). Since then,

Brazil has instigated various bilateral agreements; namely free trade agreements with

Chile, Peru and Israel3 in 1996, 2005 and 2010 respectively (Pereira, 2006).

4.Trade Liberalisation’s Impact upon Brazilian Poverty

Discussion primarily focuses upon the short-run static outcomes, which (generally) are

empirically more manageable than long-run dynamic outcomes stimulated through

growth (Goldberg & Pavcnik, 2004). That said, the long-term trend in poverty reduction

and its relationship to liberalisation/growth will be briefly discussed also.

Using national poverty line data Castilho et al., (2012) study liberalisation’s impact on

household income poverty across Brazilian states (1987-2005). Their significant finding

implies that -within urban areas of states- a fall of one percentage point in their trade

3 See_http://mfa.gov.il/MFA/PressRoom/2010/Pages/Brazil-has-given-its-final-approval-for-%20free-trade-agreement-with-Mercosur-15-Mar-2010.aspx

Figure-2: Brazilian tariffs overtime. (Castilho et al., 2012:823).


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policy indicator4 would lead to a 0.65 and 0.28 percentage point increase in the PHR

and poverty-gap respectively; the negative effect being concentrated between 1987-

1996 when the bulk of Brazilian trade reform occurred. They observe no significant

effect within rural areas across the whole timeframe but do find a possible positive effect

on poverty occurred between 1997 and 2005.

The authors propose that one potential reason for these contrasting effects is due to the

urban population suffering unemployment from manufacturing industries where greater

tariff reductions were initiated. In comparison, the agricultural sector held a strong

comparative advantage where an abundance of natural resources and labour saw

agricultural exportation intensify (Fonseca & Rayp, 2011), exemplified by the sector’s

trade surpluses of $10-15 billion annually in the 1990s (Barros, 2009:8). Findings of

Green et al. (2001) also support this theory, highlighting that manufacturing employment

fell from its consistent 15%-plus share between 1985-1989 to 12.6% in 1998. In terms of

wages, Ferreira et al., (2007) claim the tariff reductions in the manufacturing sector

between 1988-1995 led to a decline in the relative prices of those goods, consequently

diminishing skilled worker wages relative to those of the unskilled; thus helping to

mitigate the poverty rate.

The above clearly aligns to traditional HO-SS trade theory. However, alternative

empirical evidence convincingly contests the above and contradicts the predicted

outcomes of the HO-SS models. Menezes-Filho and Muendler (2011) show that

unskilled workers made unemployed from import competing industries during the

liberalisation phase were not absorbed by exporters nor comparative-advantage

industries for many years; thus enlarging the informal labour market where earnings are

ordinarily less (Pavcnik et al., 2004). Carneiro and Arbache (2002) go further, stating

that greater liberalisation led to the importation of more capital goods and technology

across all sectors, subsequently leading to increasing demand for skilled labour and the

displacement of the less skilled. This finding correlates with those of Green et al.

(2001:1936) who show a significant and substantial rise in the returns to higher

education from 1992 onward compared to returns to primary and secondary education

4 This is a weighted average of national industry-level tariffs, where the weights correspond to the initial share of employment by industry within each state.


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where a downward trend occurred. Maia (2001) 5 identifies the extent to which

liberalisation impacted on the employment market estimating the importation of cheaper

more efficient technologies, contributed to a net loss of 5.4 million jobs across sectors.

Turning attention to the agricultural sector and rural poor specifically, Cassel and Patel

(2003) highlight the damaging effects liberalisation had upon smallholder producers in

being unable to compete with large-scale operations due to lower producer prices and

reduced state entitlements which prioritised export-oriented agriculture. Moreover, how it

affected the 4.8 million small family farmers (predominantly poor) who –through lower

prices- were discouraged from production for local markets –a vital source of their

income.6 In terms of wages, between 1989-1999 skilled workers’ real per capita wages

in the agricultural sector rose by 106% compared to 64% of unskilled workers (RAIS,

2010).7

These findings contradict traditional trade theory. To explain this, one can look at the

shortcomings of the HO-SS models. The HO model assumes capital is immobile while

the SS model assumes that an economy is made up of just two broad sectors. How this

applies to the Brazilian case is described below.

Alongside trade-liberalisation was financial-liberalisation also, opening the Brazilian

economy to large influxes of foreign direct investment (FDI) with net inflows increasing

from $989 million to $32 billion between 1990-1998 (World Bank, 2014). The

combination of reforms amplified mechanisation within the agricultural sector, which

instigated a substantial migration of formal/skilled workers to the poorer North-eastern

Brazilian states where many new foreign-owned and exporting agribusinesses began to

locate and operate (Nissanke & Thorbecke, 2010; Fonseca & Rayp, 2011). Conversely,

liberalisation is claimed to have contributed to the rural exodus of the poor “…with

conditions so intolerable in rural Brazil that millions of people (.) fled to the unwelcoming

cities.” (Cassel & Patel, 2003:21). This contrast in migration flows of skilled/unskilled

labour may help to partially explain the findings of Castilho et al. highlighted at the

beginning of this section.

The overall impact that the influx of skill-biased technology and mechanisation had upon

unskilled labour (and thus poverty) across sectors was partially neutralised however by 5 As cited by Carneiro & Arbache 6 Cited from World Bank(2003) 7 As cited by Fonseca and Rayp(2011)


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the growth experienced within the services sector, which was consistently more pro-poor

than both agriculture and industry during the immediate years following liberalisation

(Ferreira et al., 2009).

Figure 3 illustrates World Bank PHR data (1988-2009). A notable increase in poverty

levels occurred as the first tariff adjustments were enacted (1988) before stagnating at

both the $1.25 and $2 a day levels during the immediate years following Brazil’s main

liberalisation reforms (1990-1994). These data suggest that the abovementioned

immediate effects of liberalisation upon the labour market may have contributed to a rise

and/or sustained Brazil’s poverty levels.

Figure-3-Source- World Bank (2014)-Missing values for 1991,1994,20008

The Long Run

“…trade liberalization reforms in the early 1990s (…) also led to a significant increase in

the degree of openness in the economy, particularly since 2000, with significant impact

on per capita growth”.

(Adrogué, Cerisola & Gelos 2006:14)

8 Noteworthy is the sharp poverty reduction in 1995; largely attributable to the ‘Real Plan’, a stabalisation plan

enacted in 1994 to reverse the hyperinflationary pressures facing the Brazilian economy (Pereira, 2006:4).

0

5

10

15

20

25

30

35 Brazilian Poverty Headcount Ratio (%)

$1.25 a day

$2 a day

Year

%


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Figure 3 shows a long-run decline in poverty levels from 2003 onwards, more so at the

$2 a day level. The immediate effects of liberalisation and importation of skill-biased

technologies may have induced the displacement of unskilled labour and increased

poverty, but it is claimed that it also rapidly increased productivity across sectors;

bringing an estimated 6% increase “…in total factor productivity growth rate and a

similar impact on labour productivity” (Ferreira & Rossi, 2003:1). Moreover the

competiveness of the opened economy is said to have been “a remarkable source of

productivity change among Brazilian manufacturers between 1990-1998.” (Muendler,

2004:38).

Between 1991 and 2011 Brazil achieved an average export growth rate of 7.9% (9.5%

since 2000)9 with the country’s total value of exports increasing four-fold from $32.9

billion in 1991 to $125.7 billion in 2011 10 (World Bank, 2014); also achieving

substantially improved trade surpluses. 11 A distinct pattern between increased

productivity, export growth, economic growth and poverty reduction may be clear;

however, deciphering liberalisation’s role in this process is highly complicated. It could

be argued that improved productivity –initiated by liberalisation- has, in the long-run,

enabled Brazilian exporters to exploit an extended price and demand boom for many

primary commodities and manufactured goods (Mayer, 2010); partially contributing to a

sustained period of strong economic growth. This sustained economic growth, has

subsequently improved government revenues, which have enabled the propagation of

social assistance programs such as Bolsa-Familia, a programme which has benefitted

more than 11 million poor Brazilian families since its introduction in 2003 (Barros, 2009).

These linkages are complicated however. To imply trade liberalisation is the primary

cause of a trade volumes increase is debateable, as increased trade volumes can be

affected by various exogenous factors such as world demand and/or lower

transportation costs (Rodrik & Rodriguez, 2001). Moreover, how growth translates into

poverty reduction through equitable distribution of government expenditure depends

heavily upon institutional quality (Rodrik et al., 2004).

9 Appendix:1A 10 Appendix:1B 11 See http://www.brazilcouncil.org/news/brazil-posts-2009-trade-surplus-246-billion


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Conclusion

This paper has discussed the impacts of trade liberalisation upon poverty in Brazil,

primarily the short-run static effects upon the labour market and wage differentials in the

immediate years following Brazilian trade reform as well as briefly discussing the

potential long-run dynamic effects connecting trade, growth and poverty.

The empirical literature discussed in this paper presents contrasting findings; the

confliction arguably arising due to the differences in methodology and the use of

alternative poverty data sets by scholars; problems of which were discussed in sections

1 and 2. The evidence indicates some impacts appear to have been harmful to Brazil’s

poor in the immediate years following liberalisation, while other impacts may have

contributed to poverty reduction in the long run. On the one hand liberalisation led to an

influx of skill-biased technology, displacing a vast number of unskilled workers from

manufacturing industries who were not absorbed by the agricultural sector, which had

also become more mechanised for large-scale export-oriented production. This and the

demand for skilled labour across sectors increased wage divergence between

skilled/unskilled labour, led to an enlargement of the informal sector and contributed to

the migration of many rural poor to urban areas. These effects contradict the predicted

outcomes of traditional trade theory as stipulated by the HO-SS models. One possible

explanation for this is that accompanying trade liberalisation were financial liberalisation

measures that encouraged large FDI capital inflows into Brazil, something unaccounted

for in the HO model.

In the long run, improved total factor and labour productivity -initiated through

liberalisation- has partially enabled Brazil to take advantage of a recent extended price

and demand boom for many primary commodities and manufactured goods; contributing

to a sustained period of economic growth. Increased government revenues during this

time have enabled the propagation of social assistance programs, making a significant

contribution to poverty reduction in Brazil since 2003. Therefore, one may argue that

liberalisation in the 1990s has indirectly helped in the mitigation of poverty in more

recent years.

Overall, it has been noted that isolating the impacts of trade liberalisation upon poverty

in Brazil is a highly complex task. Numerous other liberalising reforms, monetary and


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fiscal policy adjustments occurring alongside trade reforms within Brazil, as well as

various exogenous factors have no doubt impacted upon Brazilian poverty in recent

decades. However, the evidence discussed in this paper suggests that the immediate

effects of trade liberalisation appeared to contribute to a rise and/or sustain Brazilian

poverty levels, while in the long run liberalisation has -to some extent- contributed

toward poverty reduction in Brazil.

Word Count: 2712

References

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Appendix:

1A

1B

64330

70793 76045

83952

96791

105822 111157

118047 118691

107860

120284 125684

60000

75000

90000

105000

120000

135000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

$US (Millions)

Year

Exports of goods and services (constant 2000 US$)

Exports of goods and services (constant 2000 US$)

6.58

16.55

11.68

4.01

-‐2.03 -‐0.42

11.02

4.91 5.71

12.86

10.05

7.42

10.40

15.29

9.33

5.04 6.20

0.55

-‐9.13

11.52

4.49

-‐10

-‐7.5

-‐5

-‐2.5

0

2.5

5

7.5

10

12.5

15

17.5

Grow

th (%

)

Year

Exports of goods and services in Brazil (annual % growth)

Exports of goods and services

final draft_discussing the impacts of trade liberalisation upon poverty in brazil

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