The Doha Trade Round and Mozambique

Channing Arndt, Purdue UniversityMinistry of Planning and Development, Mozambique

Outline

• Background information• Macroeconomic results from country CGE model

linked to GTAP model of global trade.• Poverty implications from a microsimulation

model using 8700 households.• Conclusions.

Purpose of Trade Liberalization

• Shift resources to sectors with comparative advantage.

• Foster links with the global economy which is thought to yield dynamic advantages.• Technology transfer• Skills acquisition• Large demand source

Attributes

• Large volume of reasonably high quality arable land• Long coastline

• Fisheries• Tourism• At least three decent natural harbors (transport services to

interior)• Mineral and other natural resources• Not quite 19 million people

National Accounts: 1996-2002

Cumulative AnnualGDP 1.62 8.4%Consumption 1.50 7.0%Population 1.20 3.0%

Poverty

• Despite growth and the positive attributes, more than half the population is classified as absolutely poor.

• About 90% of the population lives on less than twice the line defining absolute poverty.

• Measured poverty rates are declining• 54% in 2002-03• 69% in 1996-97

• Overall, trend good – level bad.

History

• Weak human capital development over the colonial period even by African standards,

• Failed socialist policies initiated shortly after independence in 1975, and

• A brutal civil war that endured for more than a decade.

“Poorest country in the world” at the cessation of hostilities in 1992.

Commonalities with other Countries

• A predominantly rural population with economic and social indicators at less favorable levels in rural areas (About 3 out of 4 poor people rural).

• An overwhelming dependence on agriculture in rural areas.• Large distances and poor transport infrastructure which result in

substantial transport costs particularly between distant regions. • Large price changes within seasons (post-harvest low to pre-

harvest high) for many basic commodities.• High food shares in the total budget of the poor (around 70% in

the case of Mozambique).

Indicators of Food Price Dispersion

Spatial Domain

Avg. Price Ratio

Urban/ Rural

1 Niassa and Cabo Delgado-rural 1.572 Niassa and Cabo Delgado-urban 1.90 1.213 Nampula-rural 1.004 Nampula-urban 1.38 1.385 Sofala and Zambezia-rural 1.396 Sofala and Zambezia-urban 1.73 1.247 Manica and Tete-rural 2.348 Manica and Tete-urban 2.42 1.049 Gaza and Inhambane-rural 1.51

10 Gaza and Inhambane-urban 1.72 1.1411 Maputo Province-rural 2.4912 Maputo Province-urban 2.78 1.1213 Maputo City 2.70

Maize Price Series

.00

1000.00

2000.00

3000.00

4000.00

5000.00

6000.00

7000.00

Met

icai

s/kg

Mean National Price Sofala

Home Consumption Expend. Share

Urban Rural TotalMacroeconomic Share 7.8 35.7 22.0Population Weight Share 15.7 58.2 44.6Poor Pop. Weight Share 19.5 59.2 47.1

Impact of Trade Margins

• Pe=Pwe(1-te)*exr-ice*Pice50=100 – 50 (initial equilibrium)60=110 – 50 (proportional magnification)

• Pm=Pwm(1+tm)*exr-icm*Picm100=50+50 (initial equilibrium)105=55+50 (proportional dampening)

Macro Structure (2001)

Share (%)Private Consumption 72.4Private Investment 11.2Government 28.9Exports 20.6Imports -33.0Total 100.0

Mozambique’s Three Economies

• Mega projects• Aluminum smelting• Hydro electric power generation• Large scale mineral extraction (natural gas etc.)

• Subsistence and informal sectors• Rest of the formal sector

Import Competition Indicator

Overall Production Value Share

Share of Total Supply

Share of Production

Total Economy 100.0% 82.1% 88.8%Agriculture, Forestry and Fisheries 15.1% 98.2% 98.5%Primary Product Processing 12.9% 46.1% 53.4%Other goods 8.1% 74.6% 74.5%Services 63.9% 89.1% 95.5%

Specialized1

1The figures in the above Table are drawn from production and import information for 144 sectors representing all commodities. The intent is to discover which productive sectors compete intensively with imports and which are specialized meaning that either commodity supply comes 90% from domestic production or 90% from imports.

Static CGE Model

• Disaggregation• 47 commodities• 6 factors• 2 households

• Accounts for marketing wedges for domestic products, exports, and imports.

• Accounts for home consumption• Neoclassical closure

Simulations

Simulation DescriptionUniLib Unilateral complete trade liberalization by Mozambique uniquely.Global Complete global trade liberalization excluding Mozambique.FL Complete global trade liberalization including Mozambique.DHAll Deep Doha cuts.DHSDT Doha with Special and Differential Treatment.

NB: Due to tariff binding overhand, Mozambican tariff cuts in the Doha scenarios are essentially zero.

Macroeconomic Results

UniLib Global FL DHAll DHSDTTotal Absorption -0.7 0.6 0.0 -0.1 -0.2Real Exports 4.4 0.0 4.4 0.2 0.2Real Imports 0.5 1.9 2.4 -0.3 -0.4Real Exchange Rate 4.3 -3.4 0.8 0.2 0.4Terms of Trade -1.4 0.8 -0.6 -0.6 -0.7

Welfare Results

Base UniLib Global FL DHAll DHSDTUrban 2539 -0.55 0.49 -0.09 -0.16 -0.22Rural 2631 -0.75 0.53 -0.19 -0.15 -0.17Total 5170 -0.65 0.51 -0.14 -0.16 -0.20

Microsimulation (Post Sim)

• Use data on 8700 households from household survey to obtain information on expenditure shares and shares in factor earnings.

• Obtain price changes by commodity and wage changes by factor from the CGE model.

• Use this information to determine the first order welfare impact of reform on each household in the sample.

Note: For home produced/consumed commodities, the first order welfare impact of price changes is zero.

Micro-simulation for DHSDT0

1020

30

-1.5 -1 -.5 0 .5 -1.5 -1 -.5 0 .5

Urban Rural

Per

cent

Welfare ChangeGraphs by =1 if rural, 0 if urban

Critique of Current Model

• Price transmission.• “Engineering issues” associated with linking to

the global model. In particular, excessive export price declines when Mozambique liberalizes.

• Evasion, exemptions, and revenue replacement.

Robust Conclusions

• Static implications of Doha scenarios very small due to:• Lack of domestic tariff cuts• Isolation of much of the economy

• Home consumption• Insulation due to import margins• Tendency of much of the economy to be “specialized”

• Even with full domestic liberalization, the static implications for poverty are likely to be small.

Implications

• Winters, McCulloch, and McKay (2004): More liberal trading regimes are associated with higher rates of economic growth.

• Mozambique has an opportunity to move to a much more open trade regime at relatively small adjustment cost.

NB: Full trade liberalization is not a sufficient condition for growth.

Future Research

• Price transmission.• Implication of large margins between FOB export

prices and farm/factory gate prices for exportable commodities.

• Revenue replacement with evasion and exemptions considered explicitly.