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

4Bernard Hoekman and Guido Portoequipment and tools – but generally not the quantity of employment. This observationmay not hold, however, for developing countries where there is significantunder-employment prior to trade opening – trade opportunities maytranslate into investment in tradable sectors and increase formal employment.In the short run, unemployment may rise as a result of reforms or a trade shock.Some studies have concluded that transitional unemployment is not very largerelative to total employment. 2 However, there is little evidence on the nature andextent of transitional unemployment in developing countries, at least in partowing to the difficulties of measurement. Economically meaningful work cannotbe equated with formal employment in low-income developing countries as mostemployment is informal (Maloney, 2004). A further unknown is whether thosewho lose employment as a result of a trade shock are disproportionately poor. 3Whatever the overall size of the short-run labour market effects, the impacts willoften be significant for those who lose their jobs. Indeed, the contributions tothis volume focus on such short(er) run effects of trade reforms and openness –and the factors that affect the magnitude of the adjustments induced by changingtrade opportunities and incentives.2. OVERVIEW OF THE CONTRIBUTIONSThis book is divided into four parts. The first comprises analyses of the magnitudeof trade adjustment costs in the presence of frictions in factor markets. Thesecond discusses the impacts of trade shocks and greater trade openness. A widerange of topics are explored including the overall adjustment of the manufacturingsector, the nature of labour reallocation, the consequences of offshoringand migration on labour markets, the role of labour income risk, adjustment inchild labour and schooling, the consequences of increased FDI, and generalpatterns of adjustment to changes in trade policies. The third part deals with someof the factors that affect the way trade, especially exports, adjust, including varioustypes of transaction costs (e.g., transportation, search, market penetrationand learning costs), access to credit and finance, or the need to comply with stringentproduct standards in export markets. Finally, the forth section provides abrief overview of trade adjustment assistance programs in the U.S. and compensationschemes for farmers in the EU.2 A multi-country study of trade liberalization before 1985 (Papageorgiou, Michaely and Choksi,1991) argued that experiences varied from case to case, but that, on the whole, transitional unemploymentwas quite small. In a survey of more than fifty studies of the adjustment costs of trade liberalizationin the manufacturing sector, mostly in industrialized economies, Matusz and Tarr (1999)also find that unemployment duration is generally quite short.3 Some evidence is available on the relationship between public sector job loss and poverty. Althoughsuch job losses are not due to trade shocks, they do provide information on transitional unemploymentresulting from a reform. In Ecuador, employees dismissed from the central bank earned,on average, only 55 per cent of their previous salary 15 months later (Rama and MacIsaac,1999). InGhana, Younger (1996) found that most laid off civil servants were able to find new work, albeit atsubstantially lower income levels, but that income levels and poverty incidence after job loss werenot substantially different from the average for the country.