Are export promotion and trade liberalization good for Latin America's poor?: a comparative macro-micro CGE analysis

Since the late 1980s, almost all Latin American countries have gone through a process of far-reaching economic reforms, featuring in particular trade, financial and capital account liberalization. Contrary to expectations the reforms have failed to give economic growth a major boost. At the same time, income inequality has risen in a context where inequality was already very high to begin with. Not surprisingly, little progress has been made on poverty reduction since 1990. Indeed poverty has been rising in the region as growth slowed down after 1995. An important and natural question to ask is whether the reforms are the reason or at least a significant contributing factor in the poor performance of the region since the mid 1990s? Did they contribute to the growth slowdown and the rise in poverty and inequality? These are crucial questions the more so, because the countries in the region are considering further trade integration under the flag of the Free Trade Area of the Americas (FTAA) and the regulations of the World Trade Organization (WTO), subscribing to further trade liberalization. Key players from the region, like Brazil, were instrumental in blocking a new global trade agreement under WTO aegis in September 2003 precisely because of concerns about the developmental and equity effects of freer world trade. In this paper we apply a rigorous comparative analysis of the impact of trade reforms on growth, employment and poverty.1 We use computable general equilibrium (CGE) models for sixteen countries in the region, covering over 90% of its population and of its GDP. We also develop a micro simulation model to translate the macroeconomic, sector and labor market impacts analyzed through the CGE model into changes in poverty and inequality. Our short answer to the main questions posed above is that trade liberalization and the switch to export-led growth are not the cause of the growth slowdown in the region. Nor are they the cause of rising poverty and inequality. On the contrary for most countries their impact is mildly positive for both growth and poverty reduction. But overall, the impact of the reforms or of export growth while positive, are small. Trade reforms increase the skill-intensity in labor demand distributing the gains unevenly. Some social groups win (mostly the better-educated workers and profit earners) and some lose (often agricultural and unskilled workers) in the process providing the explanation towards rising inequality observed in most country experiences. So while the trade reforms are not to blame for the region’s woes, they do not appear – by themselves – to be the solution for them either