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Global Poverty Reduction 2001 : II. Regional Experiences
D. Latin America and the Caribbean42. Since the mid-1980s, many countries in Latin America and the Caribbean introduced market-friendly reforms. Among the most salient changes are those that took place in the area of trade. Average tariffs fell from close to 50 percent in 1985 to around 10 percent in 1996, and maximum tariffs fell from an average of 84 percent to just 41 percent. By 1996 nontariff barriers affected only 6 percent of imports, while in the pre-reform period they affected 38 percent (IADB, 1998). 43. To the extent that openness contributes to higher economic growth, it is beneficial for poor people, unless trade reform causes inequality to rise to such an extent that the positive effects of growth on the incomes of the poor are offset. In principle, basic trade theory predicts that trade liberalization would result in an increase in the demand for low-skilled labor, thereby improving the relative earnings of this group compared with the more skilled. Everything else being equal, such a process would contribute to lower overall income inequality, but the data show that for most countries inequality was approximately equal in the 1990s to the levels observed in the 1980s. However, in seven out of the 18 countries that were analyzed inequality increased, in four of them sharply (IADB, 2001b). The experiences of Chile and Mexico (particularly since the North American Free Trade Agreement) also illustrate the benefits that greater integration with the world economy might bring. 44. Is there a link between observed trends in inequality and trade liberalization? Cross-country analysis shows that reforms on average have had little effect on income distribution. Openness to international trade in particular appears to benefit poor people as much as everyone else (World Bank, 2000a). However, reforms may have very different effects on specific countries and what happens on average provides no guide. In the case of Mexico, for example, inequality rose sharply between 1984 and 1994 and rising returns to skill accounted for 20 percent of the increase in the inequality (Gini coefficient) in household per capita income (IADB, 2001a). To what extent did this widening gap in the returns to skill result from trade liberalization? 45. One study by Hanson and Harrison (1999) found that the reduction in tariffs and the elimination in import licenses in Mexico can account for 23 percent of the increase in the relative wage of skilled labor over the period 1986-1990. As an explanation for this result—which runs contrary to the simplified version of theoretical predictions—the authors argue that Mexico offered relatively high protection to the unskilled-intensive sectors (such as apparel) during the inward-looking development stage and, hence, those were the sectors hardest hit with the removal of barriers. In addition, although Mexico is abundant in low-skilled labor when compared with, for example, the US, Mexico may have an intermediate abundance in skilled labor vis-à-vis other developing countries, such as the PRC. 46. Other countries show a similar pattern in terms of rising wage disparities. Country studies done for Brazil, Chile, Colombia, and Venezuela show that the premiums paid to skilled workers have increased in all them (World Bank, 2001f). Several forces, some associated with trade liberalization, may lie behind this trend. There is evidence that during the 1990s low-skilled labor ceased being the most abundant production factor in Latin America (Spilimbergo et al, 1997). The shift was provoked by the entry of several large unskilled-labor abundant countries into the international market. A study by Robbins (1997) found that trade liberalization accelerates physical capital flows and technology transfers in a sector-biased pattern, and that capital-skill complementarities and bundled technology raise the relative demand for skilled workers. Another cross-country study for Latin America found, however, that wage gaps have increased because of the lower relative price of capital induced by financial liberalization more than by trade liberalization per se (IADB, 2001b). 47. Even if trade liberalization results in a higher wage premium for the workers who are more skilled, this should not be used as an endorsement for reversing the liberalization process. First, the evidence suggests that the contribution of trade liberalization to overall inequality is rather small. Other factors, particularly skill-biased technical change, play a larger role. Second, a large part of the unequalizing effect is transitory, the result of a “once-and-for-all” shock of encountering more competition for industries that could not survive it. Third, the medium-term strategy to reduce the inequality stemming from skill-differentials should be investing in upgrading the skills of the low-skilled workers and educating the children who live in poor families. Since private incentives to acquire higher skills will rise, programs that will provide loans for skill acquisition may be effective. 48. Nevertheless, even in the cases where trade liberalization has no effect on the distribution of income, there will still be losers and winners from reform. Some of the losers may already be poor or people who become poor (while others may get out of poverty) as a result of liberalization. The fact that during the transition there will be losers that are or become poor points to the importance of social policies to ease the burdens that reforms impose. This is particularly important for the poor whose assets, particularly the human capital of their children (such as nutrition and education), can be irreversibly affected by negative shocks on the household’s income, even if the shocks are temporary. At present, Latin America and the Caribbean countries still need to improve their mechanisms of social protection to address the transitional costs of opening up their economies.
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