66669 KCP Perspectives January 2012 Putting Knowledge to Work Volume 1 • Issue 2 Message from the Editor Trade Policy and Development A lthough globalization offers opportunities for economic development, trade liberalization hasn’t boosted economic growth in many developing countries, and particularly so in the Least Developed Countries (LDCs). Many of these countries are increasingly marginalized in world trade. From rice farmers in Vietnam to cotton growers in Zambia, poor farmers in the developing world face huge challenges in benefitting from trade opportunities brought on by improved access to export markets. These challenges include financing inputs such as seeds and fertilizer, connecting to local markets and supply chains, and competing with farmers that benefit from high agricultural subsidies in the developed world. Martin Ravallion, Director Development Research Group Preparing for the 2005 WTO Hong Kong ministerial meetings, donors and development partners World Bank were interested in a comprehensive analysis of these challenges and their policy implications. A se- ries of KCP projects1 focused on the question of how multilateral disciplines negotiated in the WTO It’s a pleasure to present our second could help address some of these challenges, and sought to quantify the impact of both prevailing issue of “KCP Perspectives� to our trade policies and possible reforms to benefit farmers in developing countries. KCP partners. As you know, the ratio- nale for this publication is to examine Key lessons from the KCP projects the findings and impact of completed Three projects on trade policy were funded by the KCP. Each concluded that trade and WTO projects funded by the KCP. Once rules are conducive to economic development, provided that certain conditions are met. The first completed, the outputs are dissemi- project, Agricultural WTO Trade reforms & Their Impact on Poverty: Consumption & In- nated extensively and published in dif- come Effects (TF053519), focused on the impact of trade reforms in agriculture on household ferent media outlets, such as journals, behavior and outcomes in developing countries. This research shows that economic benefits at books, databases, and web-based the household level from global trade reforms are higher when trading opportunities are comple- publications. However, the impact is mented with domestic reforms. The second, Agricultural Trade Policy (TF051758), looked at usually not visible until several years a large number of case studies in developing countries, which have undertaken significant policy later. In this issue, we will take a look reforms in agriculture. Here too, the research shows that reforms can be conducive to poverty at two very different KCP-funded re- reduction, if they are designed and implemented through a multi-commodity approach. The third search topics that have had a positive KCP project, The WTO and Economic Development (TF090455) set out to answer the ques- impact. tion: ‘What is the benefit of the WTO institution from the perspective of developing countries?’ The study finds that WTO rules can make a difference in having a sizable and pro-development The first covers three KCP projects in effect on developing countries’ trade flows. the area of “Trade Policy and Devel- opment,� two of them specifically on Global reform of agriculture: Complementary policies matter agricultural trade, which is of great The KCP project, Agricultural WTO Trade reforms & Their Impact on Poverty: Consumption importance to the poorest countries. & Income Effects (TF053519), developed an empirical model to assess the impact of trade re- The findings of the KCP projects indi- forms in agriculture on household behavior in developing countries. Specifically, this project devel- cate that trade liberalization can have oped a model that analyzes the impact of the prices of consumption goods and sources of income both benefits and drawbacks for poor countries, depending on the structure 1 Agricultural Trade Policy (TF051758), Agricultural WTO Trade reforms & Their Impact on Poverty: Consumption & Income Effects (TF053519) and The WTO and Economic (continued on page 3) Development (TF090455). KNOWLEDGE CHANGE for ThE WOrlD BAnk Development Economics KCP newsletter2 1-29-12.indd 1 1/29/12 3:28 PM KNOWLEDGE CHANGE for What does country experience Do WTO rules work for poor people? teach us? Expanding from the discussion of agricul- The KCP project, Agricultural Trade Pol- tural trade reform to the general WTO insti- icy (TF051758), conducted a large number tution, the KCP supported The WTO and of case studies in developing countries that Economic Development (TF090455), have undertaken significant policy reforms which set out to answer the question: in agriculture and produced an award- ‘What is the benefit of the WTO institution winning book, Global Agricultural Trade from the perspective of developing coun- and Developing Countries.2 By providing a tries?’ The project revolved around a case comprehensive analysis of market devel- study designed to examine and quantify opments and the impact of policies for a the value of certain WTO rules to export- set of commodities that are most important oriented economic activity in developing for producers in developing countries, the countries. The WTO, for example, imposes (from agricultural production and wages), report provided a rich narrative of the com- constraints on trade policy in safeguard and also a tool to estimate the relevant de- plex ways that the poor succeed in taking measures, which involves imposing trade mand and wage responses and applied the advantage of the opportunities offered by barriers by a government to protect a do- model to rural Mexico and rural Zambia. trade and trade reform in agriculture or mestic industry from import competition. ways through which they fail. The project An important and potentially pro-develop- The model predicts that economic benefits identified both the key policy instruments ment feature of these WTO rules is that the at the household level depend on the price that distort competition and the likely win- application of new import restrictions must impact of greater trading opportunities. ners and losers from global reforms, includ- exempt the trade from firms in poor export- That impact depends in turn on a variety of ing producers, consumers and taxpayers. ing countries. The case study investigated factors that determine the extent to which Knowing who is likely to gain or lose from the import restrictions on steel by the US, world price changes (as a result of global re- a given reform is critical for sequencing re- EU and China in 2002–2003 and the impact form) are “passed through� to households. forms and putting in place complementary they had on steel-producing firms in India, The effect depends on where households policies, including assistance to reduce a relatively nascent industry at that time, live—the farther away from the border or the cost of adjustments in noncompetitive which the WTO rules mandated would be port, the lower it is. The policy implication is sectors. In this sense, the book expands exempted from the newly imposed trade that for farmers to benefit from higher world on the research findings of previous re- barriers.3 Estimating the impact of this un- prices following global trade reforms, there search and provides a comprehensive list expected market-access shock using firm- must be domestic reforms that improve the of examples. The main conclusion is that level data for Indian steel producers, the connection between farmers and markets global agricultural trade policy reforms can paper shows how firms were able to take while addressing supply constraints. This be conducive to poverty reduction, if they advantage of new export opportunities re- result was illustrated with case studies for are designed and implemented through a sulting from the application of WTO rules, the countries mentioned above. These find- multi-commodity approach. This will allow ings helped underpin the argument that “Aid countries to trade off gains in some com- 2 Global Agricultural Trade and Developing for Trade�* should be used to complement modities against likely losses in others. For Countries. Edited by M. Ataman Aksoy and John C. trade reforms in the WTO. The ideas ex- example, the book shows that world sugar Beghin. Washington, D.C.: World Bank, 2005. The plored in this project were part of the core price increases alone would offset about book received a quality of communication award from American Agricultural Economic Association. issues discussed in the sixth annual meeting half of the loss in quota rents for countries 3 Bown, Chad P. and Guido Porto (2009) “Export of the Global Development Network (GDN) whose preferential access to protected Preferences, Export Surges and Hysteresis: Indian held in Dakar, Senegal in January 2005. sugar markets would be eroded as a result Steel Firms and Import Safeguards,� unpublished These ideas featured prominently in the dis- manuscript, September. See also Bown, Chad P., of liberalization. The findings of this project “Adjustment to Foreign Changes in Trade Policy cussions and deliberations in the run-up to were extensively used in the WTO nego- under the WTO System,� in Bernard M. Hoekman the WTO ministerial meeting in Hong Kong tiations and disseminated widely through and Guido Porto (eds.), Trade Adjustment Costs in Developing Countries: Impacts, Determinants at the end of 2005, where the Aid for Trade conferences and seminars in both indus- and Policy Responses, London, UK: CEPR and the initiative was formally launched. trial and developing countries. World Bank, 2010, 237–251 (chapter 15). 2 n KCP Perspectives KCP newsletter2 1-29-12.indd 2 1/29/12 3:29 PM KNOWLEDGE CHANGE for and they continued to export, even after known as the Maquette for MDG Simula- (continued from page 1) the temporary benefit provided by the WTO tions, or MAMS, with financial support from rules expired along with the safeguard im- the KCP. The KCP funded the develop- Message from the Editor port restrictions by the US, EU and China. ment and application of MAMS through a of the country’s economy. Therefore, project, Poverty reduction and human trade reforms need to be comple- The results of the three KCP projects sug- Development: Analysis of Alternative mented with domestic economic re- gest that trade can be a catalyst for change Strategies within an Economy-Wide forms to ensure a wider and larger by promoting conditions that enable the Framework (TF055565). The framework benefit at the household level. Both poor to raise their income levels. However, was fine-tuned with a follow-up KCP agricultural trade studies (Agricul- they also demonstrated that the poor can project, Micro Simulations of Poverty tural Trade Policy and Agricultural be particularly vulnerable in the reform pro- reduction and Service Delivery in a WTO Trade reforms & Their Im- cess. Among the many lessons from the User-Friendly Economy-Wide Frame- pact on Poverty: Consumption & studies was the need for household- and work (TF057817), which strengthened the Income Effects) were critical for the firm-level analysis of the impact of global empirical validation of the MDG production intellectual underpinning of the “Aid for trade reforms and for policy makers to functions and enriched the scenario used Trade� initiative.* carefully consider the need for comple- to describe and analyze MDG strategies. mentary policies that promote pro-poor The second story is about MAMS, growth with social protection. What’s MAMS? which stands for the Maquette for Mil- MAMS is an extended, dynamic recursive lennium Development Goals (MDG) CGE model that analyzes the relationship Simulations. This is an analytical tool Development Policy between a set of building blocks, such that was developed and refined almost as government fiscal policy, the balance exclusively with support from the KCP. Analysis with MAMS of payments (including foreign trade and The whole idea for developing this tool aid), and domestic production and con- was to assist client countries in their ef- D evelopment thinking has shifted from a near-exclusive concern with eco- nomic variables, such as GDP, toward a sumption. The model simulates the ef- fect of spending on infrastructure, health fort to simulate “Human Development� outcomes related to specific changes and education services, and analyzes the in economic policies. The results have broader perspective, which covers poverty, channels through which the economy is been encouraging and the use of the health, education and other indicators of affected. The fact that the MAMS frame- MAMS tool is increasing among policy human development. These broader con- work addresses issues high on the devel- makers in developing countries. There- cerns are manifested in most discussions opment agenda has led to strong demand fore, the World Bank (Bank) continues of development policy, including country for analyses inside and outside the Bank. to train government economists from a strategies to reduce poverty and achieve MAMS has since presented an opportunity wide range of client countries on how to the MDGs. However, economists and other for economy-wide, country-level analysis use this unique tool. social scientists often lack analytical tools of medium- and long-run development that can help policy makers think about the policies, including strategies for reducing We are planning on two more issues in consequences of different decisions about poverty and achieving the Millennium De- 2012 in order to continue to show how taxation and how to allocate spending out velopment Goals for developing countries. knowledge has been a catalyst for posi- of available resources, including foreign tive and constructive change in devel- aid, across different areas such as human Innovations that serves national oping countries. development and infrastructure. governments The two projects have fulfilled their broad- * Aid for Trade is a multilateral initiative to To address this gap in the toolbox and er objectives as they have succeeded in assist developing countries, especially low- income countries, to integrate into the world help countries monitor progress toward (i) creating and establishing MAMS as the economy as a way to spur growth. Launched the MDGs and deal with questions about leading economy-wide model for human formally in 2005 at the Hong Kong Ministerial the strategies for achieving the goals, the of the WTO, the initiative was designed to development analysis, and (ii) building a help developing countries take advantage of Bank has developed a new analytical tool, global community of analysts in developing market openings. Putting Knowledge to Work n 3 KCP newsletter2 1-29-12.indd 3 1/29/12 3:29 PM KNOWLEDGE CHANGE for For more information Global Agricultural Trade and Developing Countries http://go.worldbank.org/QKP3THKZC0. Agricultural WTO Trade reforms & Their Impact on Poverty: Consumption & Income Effects http://go.worldbank.org/41X5S9W170 Agricultural Trade Policy MAMS training session in Uganda http://go.worldbank.org/41X5S9W170 and developed countries, with experience in Uganda, was the all-important bridge be- The WTO and Economic Development and willingness to continue using MAMS for tween the Bank and the government of http://go.worldbank.org/NM24STSPM0 applied policy analysis. Currently, the model Uganda. “There was a real impact when has been applied to some 40 countries.4 the main message of the MAMS simula- Poverty reduction and human Develop- Perhaps most importantly, findings from tions was heard from national researchers, ment: Analysis of Alternative Strategies MAMS-based research have served as in- such as Albert,� recalls Dino Merotto, a within an Economy-Wide Framework puts to policy making. For example, two gov- senior economist at the World Bank and a http://go.worldbank.org/STCLLCBVJ0 ernments5 have used the framework for their Uganda country economist. “MAMS was an own analysis of MDG strategy. In addition, it integral tool in the development of the mac- Micro Simulations of Poverty reduction is worth noting that MAMS has contributed roeconomic and fiscal strategy components and Service Delivery in a User-Friendly to World Bank reports and other World Bank of Uganda’s National Development Plan Economy-Wide Framework products in 11 countries, including 8 coun- (NDP) for 2010/11–2014/15,� Albert Mu- http://go.worldbank.org/G15N3S4HX0 tries in Sub-Saharan Africa. Among these, sisi acknowledged (Government of Uganda, the Uganda Country Economic Memoran- 2010, pp. 54–60; Musisi 2009). “Training dum (CEM) titled “Uganda—Moving Beyond on the underlying model provided with the from reducing the cost of using the model, Recovery: Investment and Behavior Change support of the KCP truly helped us appreci- in terms of time and skills required to use for Growth� stands out, as it gave rise to ate the usefulness of the tool, particularly in it. Once the MAMS interface has been beta strong government interest. The CEM team policy,� he added. tested and fine-tuned, we anticipate that it was among the recipients of the World Bank will serve as a vehicle for additional MAMS Africa Region Chief Economist’s Best Prac- What should come next? applications and training activities in different tice Award for Economic and Sector Work in MAMS has since become popular among parts of the world,� predicts Hans. In order 2007. The success was achieved as a result international researchers. In addition to to reach a critical mass of analysts with ap- of training and collaborative research that the training activities, as of May 2010, the propriate backgrounds and ensure that the the KCP has greatly supported. MAMS program had given more than 50 impact is sustainable and not limited to the presentations and courses all over the world World Bank, it is important that continued An example from Uganda and contributed to more than 65 written support is provided for training and research When MAMS was first applied in Uganda, products. Hans Lofgren, the key author of activities in regions and around the world. there was much debate over development the model and computer-code, gave credit policy. MAMS simulations explored the ef- to KCP funding for this outreach effort, say- 4 See www.worldbank.org/mams for a complete fect of foreign aid and concluded that more ing that the fund was a catalyst for a large list with details on each country (several countries aid was required for Uganda to make sub- number of activities that attracted additional have multiple applications). 5 With technical support from the World Bank, stantial gains in reaching the MDGs. Albert resources and financing. He now looks be- Ethiopia and Uganda have used or are using Musisi, a highly qualified economist and gov- yond the wide dissemination of project out- the framework for their own analysis for MDG ernment official at the Ministry of Finance of puts. “The highest future payoffs will stem strategies and National Development Plan. 4 n KCP Perspectives KCP newsletter2 1-29-12.indd 4 1/29/12 3:29 PM