Trade & Poverty Project Papers

This information was first posted on the SALDRU site: http://www.saldru.uct.ac.za/saldru_trade&poverty.html

About the Trade and Poverty Project

South Africa is currently engaged in various trade negotiations at the multilateral, regional and bilateral level. The net impact of the resulting trade reforms should be to contribute to growth, employment and raising average incomes. However, the expected benefits of reform do not accrue automatically and equally to all households or communities, and in some cases poverty and unemployment may rise.
 
The study draws on the McCulloch, Winters and Cirera (2001) framework to analyse various links between trade liberalization and poverty in South Africa. In particular, the analysis concentrates on the three pathways through which trade liberalization has a direct effect on poverty:

• Price transmission – trade liberalization affects the prices of goods consumed and produced by the poor;
• Enterprises – trade liberalization affects households through its impact on profits, employment and wages; and
• Taxes and spending – trade liberalization affects the government’s fiscal position.

These three pathways are analysed at different levels of aggregation within 5 broad sections:

Section A. Review of trade and poverty in South Africa

Trade policy reform

The study begins with a review of South Africa’s existing trade and tariff structure, as well as some analysis of global patterns of trade and protection. The main purpose of this initial analysis is to isolate the sectors and products that have been and are most likely to be the subject of significant trade reforms, both within South Africa and in its key export markets. This will include a review of South Africa’s past liberalisation process, in addition to some analysis of possible future reforms (including the TDCA). The expected impact of these reforms on the border prices of key imports and exports, and on government revenues, will also be evaluated.
 
Researchers: Lawrence Edwards and Chris Stevens

Evidence on trade-poverty linkages in South Africa

While substantial research is available on trade, poverty and employment in South Africa, it has not been synthesized into a coherent study dealing directly with the trade-poverty relationship. This paper uses the methodological framework provided by McCulloch et al. (2001) to review existing evidence of the relationship between trade and poverty in South Africa. In addition to this synthesis, the paper also highlights useful avenues for future research, some of will be dealt with in the current study.
 
Researcher: Niki Cattaneo and Samantha Dodd

Section B: Industry level analysis of trade, enterprise production and employment

Trade, enterprise production and employment

The impact of trade on industry and employment is one of the pathways through which international trade affects poverty. Trade liberalization causes a restructuring of production across sectors and thus displaces employment in some sectors, while creating employment in others.
 
Using the data derived from the review of trade policy this paper analyses the relationship between trade flows, trade liberalisation and factor demand. This includes an analysis of the correlation between tariff changes and employment, the impact of trade flows (by region) on factor demand and estimates of the impact of trade flows and tariff liberalization on technological change and labour productivity within manufacturing.
 
The focus of this analysis is both historical and forward looking. These techniques will enable us to identify how trade has affected employment during the 1990s. In addition, we will be able to describe the impact of external reforms on exports, domestic production and employment, for those sectors and products which are mostly likely to see an increase in global demand. Finally, the identification of import and export competing sectors, feeds into the household level analysis in the subsequent sections of the project.
 
Researchers: Lawrence Edwards and Paul Dunne

Section C: Household level analysis of trade and poverty

This section presents a household level analysis of trade and poverty in South Africa. It comprises of three components. The first component presents a brief review of the determinants and scale of poverty in South Africa at the household level. The second component assesses the vulnerability of household income to trade related shocks and the third component assesses the vulnerability of household consumption to trade shocks.

Poverty and vulnerability in South Africa

Substantial material is available on the extent and determinant of poverty in South Africa, and these will be briefly reviewed. Much less is known about the spatial dimensions of poverty and how this might affect the trade-poverty relationship. Differences in production and employment across regions, as well as differences in the distance to markets, suggests that trade, via its impact on consumption and income, will not have a uniform impact upon poverty across regions. This component will therefore utilise various geographical categorisations (rural/urban, provincial) to identify regional differences in the vulnerability of households to various trade related shocks.  

Household income analysis

Existing evidence suggests that unemployment is a critical determinant of poverty in South Africa. However, not all households are equally vulnerable to trade-induced losses of employment. This section, therefore, proposes to use household survey data (IES 2000) to explore the vulnerability of different households to employment/income losses that might arise from trade reform, particularly in the most protected manufacturing sectors. Key factors might include access to land, alternative sources of employment (informal or formal), and transfers from the state or other family members.

Household consumption analysis

To evaluate the scale of the expected price effects, it is important to identify the goods consumed by the poor and the extent to which they would benefit or are vulnerable to changes in border prices arising from tariff reform or exchange rate movements. Consumption patterns differ significantly across household income categories with poor households spending relatively more of their income on food, transport and other basic need goods. This component will use data from the 2000 Income and Expenditure Survey to profile consumption patterns across various households in urban and rural areas, and to identify the extent to which the existing tariff structure is biased against or towards poor households. Further, we propose to draw some conclusions regarding the vulnerability of these households to trade related price shocks.
 
Researchers: Murray Leibbrandt, Kalie Pauw, Sten Dieden, Lawrence Edwards and Reza Daniels

Section D: Sector specific analysis and case studies

The above analysis is highly quantitative and is expected to provide new insights in the relationships between trade, employment, production, consumption and income. But it cannot possibly show how different industries have responded to and benefited from the price effects arising from trade liberalisation; it also does not address some of the remaining non-tariff barriers to exports and imports. These factors will be evaluated more fully through a select number of industry and product specific case studies.

Price transmission mechanism

To evaluate the scale of the expected price effects, it is first important to identify the goods consumed by the poor (or key inputs in the domestic production process) and the extent to which consumers (and producers) should benefit from changes in border prices. This is explained above. But it is equally important to assess whether changes in border prices are passed through to the rest of the economy. Sector specific analysis might be necessary to map the movement of a select number of goods through the production chain from foreign producer to domestic consumer (and producer). This will help to show how prices are transmitted in the economy and identify key constraints (lack of competition; transport costs; regulatory barriers etc.).
 
Researcher: Prof. Eric Schaling

Industry Case Studies

The proposed analysis provides a useful description of the relationship between trade, production employment and poverty at the aggregate level; it does not focus on the details of individual sectors. The study is therefore complemented with a number of case studies of sectors deemed to be particularly vulnerable to changes in international prices. These include:
·  Clothing and textiles (Christi van der Westhuizen)
·  Food (wheat industry) (Simon Hobson)
·  Auto industry (Nzeni and Frank Flatters)
·  Appliances (Taz Chaponda)
·  Chemicals and plastics (Simon Roberts)
 

Services

Resistance to trade liberalisation in the service sector is intense, largely because many services are public goods and cannot be adequately provided by the private sector. This gives rise to two main concerns. First, increased competition from imports might undermine public provision. Second, increased exports might absorb resources from the public sector for private gain or raise domestic prices. These problems are not unique to services. The same concerns have been voiced in support of subsistence farmers - deemed vulnerable to a reduction in the tariff on the food they produce for domestic consumption. Nor are they necessarily valid. As in the goods sector, the net effect of liberalisation on the poor will depend on the extent to which liberalisation will lead to a different allocation of domestic resources and production and whether this reallocation of resources will lead to a reduction or increase in the consumption of those services consumed by the poor. Data in the services sector is weak and empirical analysis near impossible. But the study will explore the relevance of the above analyses to the services sector and describe the different ways in which service liberalisation might benefit or harm poor South Africans.
 
Researcher: Matthew Stern

Section E. Policy simulations

Simulating the impact of tariff liberalization and other policy changes on poverty

Trade affects poverty both through consumption and employment linkages. So far the proposed studies in this project have focused on each pathway independently of the others. Yet together these pathways will determine the net impact on household welfare and poverty. Analysing the net impact is also of importance to government policy makers. This paper uses a computable general equilibrium (CGE) model of the South African economy to analyse the net welfare impacts on households arising from trade liberalisation during the 1990s. The model consists of around 300 activities, 350 households and 81 labour categories and links to the 1995 and 2000 OHS/IES.
 
Researcher: James Thurlow

Summary

The Research Team

Project coordinators/researchers

Dr. Lawrence Edwards, School of Economics, University of Cape Town.
 
Matthew Stern, Sega II (USAID), Development Network Africa.
 
Researchers
Prof. Murray Leibbrandt, School of Economics, University of Cape Town.
Kalie Pauw, School of Economics, University of Cape Town.
Reza Daniels, School of Economics, University of Cape Town.
Prof Christopher Stevens, IDS, Sussex.
Prof. Paul Dunne, Economics, University of the West of England.
Christi van der Westhuizen, IGD, Johannesburg.
Prof Eric Schaling, Department of Economics, University of Johannesburg.
Taz Chaponda, Bophilo Consultants.
Nzeni Netshitomboni, Industrial Development Corporation.
Prof. Simon Roberts, School of Economic & Business Sciences, Witwatersrand.
Niki Cattaneo, Department of Economics and Economic History, Rhodes University.
Samantha Dodd, Department of Economics and Economic History, Rhodes University.
James Thurlow, International Food Policy Research Institute.
Sten Dieden, University of Gothenburg.

The project was funded by the Department for International Development through Trade and Industrial Policy Strategies and the RTFP, USAID and the Department of Trade and Industry.