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

Trade Adjustment Costs in Developing Countries 19There are several themes that are not covered by the chapters but that are potentiallyrelevant for the adjustment costs/impact agenda. Two areas stand out.One is the nature of adjustment in factor markets in low-income developingcountries. The research on labour reallocation typically focuses on more advanced,middle-income economies, like Brazil or Uruguay; as well as developedcountries. There is much less knowledge on adjustment in low-income countries,especially in Africa, where the share of manufacturing is generally very smalland issues of agricultural adjustment at the smallholder level are much more relevant.The papers on the dichotomy between cash crops and food crops in Africaare good examples of the type of work that is needed, but needs to be expandedto include additional issues. Data limitations are of course a major constraint.The linked employer-employee data available in Brazil, for instance, does notexist in most poor countries with a large rural sector. Survey data on households,firms, and workers are, however, increasingly becoming available and will hopefullybe used more to study trade-adjustment issues.Another priority area for research is the role of domestic institutions, buildingon the types of insights that are developed in the chapter on distortions by KalaKrishna. While the term ``institutions’’ is often too broad to generate specific policyinsights or guidance, it is clear that a deeper understanding of how a giveneconomy adjusts to trade requires deep knowledge of the setting that characterizesthe functioning of the economy. This depends heavily on the institutionalcontext that governs incentives and therefore drives the adjustment process.The synthesis of research on adjustment to trade in developing countries collectedin this volume demonstrates that our knowledge is still very imperfect.However, it does suggest that for developing countries – especially low-incomeeconomies with large informal and agricultural sectors – the key issues go beyondadjustment by (wage) workers to a new equilibrium and the transitional costs ofunemployment, job search and so forth. These are issues that have attracted muchof the attention in the trade and labour literature, in part driven by political economyconsiderations (e.g., Sapir, 2000; Verdier, 2005). While certainly also relevantfor developing countries, identifying and addressing the constraints that impedethe ability of households to leave subsistence and the informal sector, and thatlimit the scope for firms, farmers and communities to benefit from greater tradeopportunities should be a research priority.Bernard M. Hoekman is Director of the International Trade Department of TheWorld Bank and a CEPR Research Fellow.Guido Porto is Professor of Economics at Universidad Nacional de La Plata,Argentina.