Trade and Employment From Myths to Facts - International Labour ...

Trade and Employment: From Myths to Facts
the formal economy and toward the informal economy as the formal economy must
cut costs due to the increased competition that opening up of trade brings about.
Under flexible labour markets, the informal economy workers benefit at the cost of
entrepreneurs, while in rigid labour markets the urban self-employed tend to benefit
more. It may be noted here that different approaches often lead to similar results.
Description of a Benin model
A CGE model for Benin was developed by Paquet and Savard (2009) using 1999
macroeconomic data. In the model, the authors distinguish between formal and informal
households (households that work in the informal economy), and also the
re-exportation industry, by dividing into Benin’s eight most important export sectors.
The model has incorporated informality aspects in a stylized form where the informal
sector undertakes trade with Nigeria. Paquet and Savard carry out simulations where
import tariffs were reduced. The model findings demonstrate a great sensitivity of
government revenue to the activity of the informal economy. The SAM helps in
identifying the imports that went into the re-exporting sector because all imports are
categorized as domestic consumption. The SAM is also useful in identifying productby-product
trade. There are two factors of production: labour and capital. The agents
in the model are the Government, households, firms, the rest of the world and Nigeria
(because Benin’s economy relies on re-exportation to Nigeria). All households are
separated into formal and informal types. Informal households are the ones that
work in the informal economy of re-exports while the formal households are those
that work in any other sector of the economy. We assume that the workers in the
informal and the formal sectors are distinct and separate. The informal economy is
more capital intensive, contrary to the general idea that low capital intensity is a
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Box 4-5: Building a global knowledge tool to analyse trade
and the informal economy
There is a need for wider use of national-level data and government statistics to
develop a database that could capture and assess the impact of open trade policies
on the organization of production and employment, and hence on wages, wage differentials
and worker welfare. The economy-wide models based on macro-level data
as developed in India could be used to develop further the framework with which to
incorporate the informal economy and trade into CGE models.
The CGE studies discussed in this chapter have used national-level data to analyse
the issue of informality and have demonstrated that such analyses are possible.
Studies by Sinha and Adam (2006), Sinha (2009), and Paquet and Savard (2009),
show the possibility of using economy-wide models to study the impact of globalization
on informal workers, employment and wages.
Annex 4.A provides additional details on how to design a CGE model that can be
used to analyse the impact of trade on informality. These can be used to provide
policy-makers with advice based on quantitative analysis to design policies aimed at
improving the informal sector’s efficiency as well as addressing equity concerns, such
as poverty reduction. It can thus be part of a global knowledge tool on trade and
employment.