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

1Trade Adjustment Costs inDeveloping Countries:Impacts, Determinantsand Policy ResponsesBERNARD HOEKMAN AND GUIDO PORTOIntegration into the global economy offers an enormous opportunity for reducingpoverty, hunger, and economic injustice. Increasing competition on thedomestic market, thus lowering prices and increasing choices for consumers andimproving access to new knowledge, products and technologies, generatespotential sources of aggregate efficiency gains. The gains from trade openness arenot guaranteed, however. They are conditional on various factors, such as a soundinvestment climate (Freund and Bolaky, 2008), a sufficiently large “absorptivecapacity” (e.g., human capital) to capture the spillover benefits from trade (Keller,1996; Borensztein, De Gregorio and Lee, 1998), and an absence of major domesticdistortions (Bhagwati, 1971; Krishna, this volume) such as credit constraints(Chesnokova, 2007; Manova, this volume).Globalization also generates costs. Trade liberalization will result in a re-allocationof factors of production within and between firms and sectors. This is thesource of the efficiency improvements that underpin the gains from trade, but it alsobrings with it adjustment costs. There are winners and losers. This distributionalconflict is dynamic — the transition to a more open trade situation can be hazardousto both losers and winners. How agents adjust to take full advantage of thenew trading opportunities, what they do to ease the burden of adjusting to reforms,and the factors that drive the adjustment are questions to which only limited attentionhas been devoted by trade economists. Attenuating the negative effects ofintegration for disadvantaged groups is an important task for governments. In principle,the gains from trade generate the resources that can be used by governmentsto do so. The design of public policies to facilitate the transition and smooth the adjustmentprocess needs to be informed by an understanding of the impacts of tradereforms and the responses by firms, workers and households.The goal of this book is to summarize the state of knowledge in the economicliterature on trade and development regarding the costs of adjustment to tradeopenness and how adjustment takes place in developing countries. The book com-