Is Trade Good for the Poor?

A Second Look

Daniel TironeDaniel TironeUniversity of PittsburghUniversity of Pittsburgh

dct8@pitt.edudct8@pitt.edu

Nita RudraNita RudraUniversity of PittsburghUniversity of Pittsburgh

rudra@pitt.edurudra@pitt.edu

1. Economists argue trade improves health of the poor

Recent studies by economists claim that trade leads to enormous health benefits, particularly in the world’s poorest countries (Owen and Wu 2007, Bhagwati 1998, Levine and Rothman 2006, Smith, Blouin and Dreger 2005).

If trade helps improve health in the world’s poorest nations, then low-income countries that have become more open should see improvements in their life expectancy.

1. But life expectancy improved at a faster rate before openness

Life Expectancy in Low Income Countries

0

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-5 -4 -3 -2 -1 0 1 2 3 4 5

Period prior to/after Liberalization

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(Y

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1. Economists neglect political mediating conditions

Problem: recent studies of the trade-health relationship by economists fail to develop an adequate political theory that supports such a link.

The neglect of the political conditions that enable (or not) better health outcomes in open economies can produce misleading results.

Policy implications may be profound

1. Research Question

What are the supporting domestic political conditions necessary to ensure that global integration leads to more beneficial health

outcomes in poor countries?

1. Our theory and findings (in brief)

We draw on the literature in political economy and identify three conditions under which the political architecture of poor countries might link openness with beneficial health outcomes: (1) democracy; (2) lower levels of ethnic heterogeneity; and (3) a more equitable income distribution.

Openness is ‘good for your health’ only in developing countries with low levels of socioeconomic diversity (low inequality, less ethnic fragmentation).

Our conclusion: in socially polarized societies, weak institutions of conflict management (independent jury, rule of law, freedom from arbitrary arrests, non-corrupt bureaucracy, etc) are responsible for hindering better outcomes for the poor as markets expand.

2. Existing literature ignores domestic institutional dynamics

The argument that trade leads to better health rests on knowledge spillovers as the primary causal mechanism

Problem: existing literature ignores domestic institutional dynamics:

(1) leading causes of death in developing countries are preventable and involve low-tech solutions.

(2) Governments have long been subsidizing health of the rich

Governments must have incentives to direct trade benefits towards the well-being of the poor; otherwise, the real danger is that trade might exaggerate the existing two-tiered health-care system (rich vs. poor), slowing overall advancements in health outcomes such as life expectancy.

3. Our hypotheses: democracy, ethnicity, inequality

Democratic nations will focus greater attention to health needs of the poor. Democracies encourage electoral competition(Meltzer and Richards

1981, Boix 1998)

Allow greater interest group competition ( Brown & Hunter, 1999; Grossman&Helpman, 2002).

Democracies are more likely to provide public goods (Cox 1987, Bueno de Mesquita, Smith, Siverson, & Morrow, 2003; Lake & Baum, 2001).

Ethnically homogeneous societies will have better social welfare outcomes (Easterly and Levine 1997; Alesina, Baqir and Easterly 1999 , Alesina and Ferrara 2005)

Different ethnic groups have different preferences over which type of public good to support

Each ethnic group will undervalue the particular public good if other groups also use it.

BUT causality (in terms of health-related public goods) not clear

3. Our hypotheses: democracy, ethnicity, inequality

Countries with more equitable income distribution will have higher public good provision (Perotti 1996, Waldmann 1992, Easterly and Levine 1997,

The rich have incentive to lobby for lower cost specialized care rather than affordable basic public health care services for several reasons:

They already have access to high-cost (substandard) hospital-based care

Higher-income groups in developing countries have long had exit options for healthcare, but this is costly.

More equitable societies tend to have larger middle classes, who have incentives to lobby for affordable public health care

3. Our hypotheses (summary)

• H1: As trade increases, more democratic nations will

experience improvements in overall health outcomes

• H2: As trade increases, less ethnically diverse nations will experience improvements in overall health outcomes

• H3: As trade increases, nations with more equitable distribution of income will experience improvements in overall health outcomes

Hypotheses

4. Original Owen and Wu results : A Second Look

Table 1. Replication of Owen and Wu (2007) using Life Expectancy

 

Model 1 Model 2 Model 3 Model 4 Model 5

Owen and Wu Results

(Full Sample)

Replacing GDP per capita

(Full Sample)

Replacing Openness

(Full Sample)

Developing Countries

Developed Countries

GDP per capita 2.93**     2.483*** 0.211

  (1.27)     -0.687 (0.995)

Openness 4.99*** 0.42   0.738 1.899**

  (1.93) (0.37)   (0.477) -0.959

Openness X GDP per capita -0.58***        

  (0.27)        

Income Level 1   -0.88 -0.072    

  (0.45) (0.891)    

Openness X Income Level 1   -0.27**      

    (0.11)      

Health Adjusted Imports   -0.337    

    (1.280)    

Health Adjusted Imports X Income Level 1     1.691    

      (2.041)    

Education 0.91*** 1.33*** 1.738** 0.611*** -0.022

  (0.27) (0.28) -0.843 -0.12 (0.056)

Population Growth 2.65 3.76 3.325 25.125*** -0.201

  (2.65) (3.44) (9.255) -5.321 (4.797)

Constant 35.88*** 57.09*** 52.919*** 33.361*** 58.204***

  (9.04) (1.76) -2.52 -4.589 -8.815

N 848 687 244 347 303

5. Model: domestic political & international economic variables

Life Expectancyit = ln(Openness)t-1 + ln(Openness)t-1 * Conditioning

Variable + Democracy + Ethnic Fragmentation + Income Inequality + Ln(GDP per capita)t-1 + Educationt-1 + Population Growth + ui

Sample: All countries for which data are available between 1960 and 1995, with observations taken in 5-year increments

Estimation: Ordinary Least Squares with country fixed-effects run on two different populations: countries that are members of the Organization for Economic Cooperation and Development (OECD) and non-members

Alternative Dependent Variable: Infant Mortality

6. Results: Beneficial effects of trade decrease at higher levels of diversity

Democracy: little evidence that the benefits of trade are conditional on democracy

Ethnic homogeneity: the beneficial effects of trade decrease, at higher levels of ethnic diversity

Income Inequality: the benefits of trade decrease as income inequality increases.

Interpretation of results?

We know from the IPE literature that trade effects distributional conflicts;

Weak institutions of conflict management are responsible for hindering better outcomes for the poor as markets expand.

This implies that institutions supporting electoral competition in developing countries (i.e., democracy) may simply not be enough to help improve the welfare of the poor, particularly in the face of increasing openness.

6. Results: Trade improves health in rich countries

Developing Countries

OECD Countries

Marginal Effect of Openness Conditional on Socio-Economic Diversity

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Upper 95% CI

Marginal Effect of Openness Conditional on Socio-Economic Diversity

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7. Implications: If political preconditions are not in place, trade can hurt the poor

As economists argue, trade can in fact be beneficial for the health of developing nations

However, our results suggest that political factors must be considered when evaluating how the benefits of trade are distributed

Factors such as income inequality and ethnic heterogeneity can affect the extent to which countries benefit from trade, because conflict-management institutions are weak in these countries

Therefore, to maximize these benefits policy-makers must focus not only on trade liberalization, but also on other areas of domestic policy

6. Results (cont)

Marginal Effect of Openness Conditional On Income Inequality

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Income Inequality

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Upper 95% CI

Marginal Effect of Openness Conditional on Income Inequality

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Income Inequality

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Developing Countries

OECD Countries

6. Results (cont)

Developing Countries

OECD Countries

Marginal Effect of Openness Conditional on Ethnic Fractionalization

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Ethnic Fragmentation

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Marginal Effect of Openness Conditional on Ethnic Fractionalization

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6. Results (cont)

 

Model 4

S.E. Diversity

Life ExpectancyInfant

Mortality

GDP per capita 6.93*** -40.357***

  (1.11) (6.583)

Openness 6.77*** -31.289**

  (2.33) (13.829)

Democracy 0.017 -0.169

  (0.056) (0.331)

Socio-Economic Diversity 8.78* -38.776

  (4.69) (27.680)

Population Growth -18.06 117.975*

  (11.84) (68.058)

Female Education 0.72*** -2.395***

  (0.13) (0.751)

Openness X Socio-Economic Diversity -2.44** 11.292*

  (1.07) (6.301)

Constant -15.01 472.633***

  (10.97) (64.231)

N 159 159

Overall R2 64.8 59.6

6. Results (cont)

 

Model 3

Income Inequality

Life ExpectancyInfant

Mortality

GDP per capita 5.993*** -35.608***

  (1.076) (6.502)

Openness 9.611*** -40.48**

  (3.279) (19.782)

Democracy 0.03 -0.261

  (0.055) (0.333)

Income Inequality 0.615* -2.259

  (0.326) (1.962)

Ethnic Fractionalization -0.239** 0.916

  (0.102) (0.619)

Population Growth -14.96 105.218

  (11.669) (68.258)

Female Education 0.758*** 2.49***

  (0.130) (0.752)

Openness X Income Inequality -0.189** 0.762

  (0.080) (0.478)

Constant -2.441 403.435***

  (14.176) (85.137)

N 158 158

Overall R2 51.2 39.2

6. Results (cont)

 

Model 2

Ethnic Fractionalization

Life ExpectancyInfant

Mortality

GDP per capita 6.064*** -34.645***

  (1.103) (6.427)

Openness 4.316** -35.57***

  (2.068) (12.095)

Democracy 0.034 -0.221

  (0.056) (0.329)

Income Inequality -0.139** 0.739*

  (0.066) (0.386)

Ethnic Fractionalization -0.037 -1.069

  (0.162) (0.946)

Population Growth -19.843 147.243**

  (12.215) (69.208)

Female Education 0.683*** -2.321***

  (0.128) (0.719)

Openness X Ethnic Fractionalization -0.036 0.435**

  (0.031) (0.180)

Constant 15.52 388.787***

  (11.373) (66.499)

N 159 159

Overall R2 59.0 45.3