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

Trade Adjustment Costs in Developing Countries 15aim being to compensate farmers for the changes while still achieving the objectiveof the CAP of ensuring a “fair standard of living” for farmers and “stabilizingmarkets.” Swinnen argues that while farm incomes are directly affected bythe CAP, the observed catch-up to incomes in other sectors has been the resultof non-CAP payments (for example, the integration of rural areas in factor marketsand in the rest of the economy). Furthermore, there is no evidence of any impacton long-run employment levels in EU agriculture. Second, he argues that theevidence on stabilization is more nuanced. The old CAP system of price interventionsreduced price variability but did not necessarily provide a good safetynet. The current direct payment system has less or no impact on price variability,but does reduce income variability and reduces risk in farming households byproviding a guaranteed source of income. Looking forward, Swinnen argues thatthe periodic reforms of the CAP have been successful in reducing market distortionsbut he doubts the Single Farm Payment system will address key challengesof the future, such as climate change and ensuring food quality.3. IMPLICATIONS FOR POLICY AND RESEARCHThe benefits of trade and trade reforms are conditional on many factors. The contributionsto this volume make clear that a variety of domestic distortions andtransactions costs can be major impediments to adjustment. Government policies(or the absence of policies) therefore can play an important role in the adjustmentprocess. Indeed, a key responsibility of governments is not only to ensure thateconomic units confront the “right” incentives to induce investment in activitiesin which a country has a comparative advantage, but also to assist in facilitatingadjustment to technological changes and policy shocks. Such assistance willgenerally reflect a mix of economic and social motivations, i.e., ranging from afocus on overcoming market failures and other distortions that constrain adjustmentto the realization of equity (distributional) objectives.The conventional wisdom in the trade literature is that the aggregate gains fromtrade will generally exceed aggregate losses, in principle allowing the winners tocompensate the losers while still remaining better off. In practice, of course, losersoften are not compensated, in part because compensation is difficult to implement—governments may not have the instruments needed. 5 The chapters in this volumehave generally not focused on the policy implications of research. However, oneconclusion that can be drawn is that the focus of policy should not be limited toassisting the losers or attenuating negative impacts—issues that have tended to attractmuch attention in the policy literature (see, e.g., the chapter by Richardson) –but should span efforts to remove or reduce the transactions and other costs thatlimit desirable adjustment and therefore reduce the aggregate gains from trade. Ad-5 Verdier (2005) notes that trade integration can be expected to affect the redistributive capacityof governments in several ways. Trade opening may change the structural parameters of the economy,making redistribution more or less difficult. From a political perspective, it may affect the patternof political power and coalitions, preventing or promoting compensation through theredistribution of resources inside the economy.