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

16Bernard Hoekman and Guido Portojustment costs may be so high that the potential benefits of trade are only partiallyrealized if at all or are distributed in a very asymmetric way, e.g., accruing primarilyto higher income, urban households.The appropriate measures to encourage and support adjustment to greater tradeopenness are not the primary focus of this volume. One general conclusion thatcan be drawn from the development literature is that the business environmentor investment climate broadly defined should be at the centre of policy attention.Without a stable macro-economy and realistic exchange rate, adequate infrastructure,human capital and functioning input markets, the benefits of opennessare reduced. The research focusing on adjustment to trade helps to identify other,more specific areas for government policy or action. These centre on the functioningof factor markets, rural product markets and other input markets – reducingthe various fixed costs discussed above and enhancing the productivityof domestic firms and farmers.Much of the more policy-oriented literature on adjustment costs centres on theneed for, and design and effectiveness of programs to assist poor or vulnerablehouseholds to cope with shocks. This is not a focus of most of the chapters in thisbook for the simple reason that such programs should not be targeted towards orlimited to the social adjustment costs of changes in trade. There is a long historyof direct assistance for restructuring of firms or industries in developed countries.This spans subsidies and bailouts and government involvement in downsizingindustry or managing supply through “crisis cartels” and forced consolidationthrough mergers. Such policies are often very costly, in part be prolonging the adjustmentperiod and distorting competition (Noland and Pack, 2003). Policies arebetter directed at facilitating adjustment through pro-active labour market policies,retraining programs and financing for skills enhancement (Richardson, thisvolume). Khanna, Newhouse, and Paci (2010) suggest a policy package that combines(1) income maintenance programs – that is, cash transfers to low-paid poorworkers; (2) interventions that facilitate flexible-hours arrangements; and (3)policies that compensate workers for temporary reductions in standard workinghours – for example, by granting partial compensation from the unemploymentbenefit system or by providing paid training opportunities.Taking advantage of the opportunities created by trade and investment liberalizationoften requires substantial effort and investment in upgrading the productionprocess. At a general level, neither theory nor experience providesunambiguous guidance regarding the design of policies to support such investments.As discussed in the chapter by Javorcik, much depends on whether thereare spillovers, whether these are international or intra-national, and on the capacitiesof firms and workers to absorb and adapt new technologies. 6Exit by low performers and entry of new firms with incomplete information ontheir “capacity” is a major channel for the efficiency gains from trade reform.6 Hoekman, Maskus and Saggi (2005) argue that appropriate policies in this area follow a technologyladder, with the priority in poor countries with weak institutions and limited R&D capacitybeing to improve the business environment and encourage imports of technology embodied in goods.