Trade Adjustment Costs in Developing Countries: - World Bank ...

150Gordon H Hansonshares and factor supplies. Compared to rich households, poor households spenda higher share of their budget on food and other basic items and have low schooling.Porto (date) found that tariff cuts related to Mercosur led to an increase inthe prices of goods intensive in low-skill labor, such as food and beverages, towhich poor households allocated more of their spending. He also found that therelative price fell for non-traded goods, such as health, education, and leisuregoods, to which rich households allocate more of their spending. Together, theseresults imply Mercosur’s tariff cuts were associated with a rise in the inequalityof household welfare in Argentina.In related work, Nicita (2004) extended Porto’s (date) framework to Mexico. Hefound that during the 1990s, tariff changes in Mexico led to an increase in realdisposable income for all households, with richer households seeing a 6 per centincrease and poorer households seeing a 2 per cent increase. As a consequenceof these income gains, there was a 3 per cent reduction in the number of householdsin poverty. While Mexico’s tariff cuts appeared to lower poverty, they alsoappeared to increase inequality in income.Taking a reduced form approach, Topalova (2004) examined the differentialexposure of Indian districts to trade liberalization to identify the effects of tradeon poverty. Over the period she studied, poverty rates were falling sharplythroughout India (the reasons for which her approach cannot address). She foundthat districts more exposed to trade reform had smaller decreases in poverty; herresults on inequality were not precisely estimated. We again see examples of tradehaving different effects in different countries. In one country trade appears to reducepoverty (Mexico), while in another it appears to slow its decrease (India).Porto (2006), Nicita (2004), and Topalova (2004) are notable for using consumptionbased measures of well-being to examine the effects of trade reform, ratherthan much of the rest of the literature, which focuses on wages, whose relationto welfare is less clear cut.5. DISCUSSIONDuring the last decade and a half, there has been an explosion in research on howchanges in trade policy affect developing countries. While there are a number ofrobust findings in the literature, the mechanisms behind many of the outcomesare not well understood. Following the liberalization of trade, less productivefirms become more likely to exit production, average industry productivity rises,and firms increase the fragmentation of production across borders. The literatureis just beginning to assess how the impact of trade on firm and industry productivitytranslates into changes in wage and employment outcomes in an economy.Recent evidence suggests that the fragmentation of production is associatedwith greater employment volatility. Interestingly, changes in industry productivityare largely associated with the reallocation of resources among firms withina sector. Between-sector employment shifts do not appear to be a general outcomeof trade reform, though in some instances post trade reform churning in the distributionof firms has been associated with greater informality.