Conclusion

1.20 percent for the poorest quintile and gains of 0.56 percent for the richest, according to the Household Impacts of Tariffs database analysis (see table 3.1). Once the impacts of all adjustments are estimated over the medium and long term, though, the effects become regressive. Even though all households are better off, the gains for the poorest quintile are 1.1 percent but are 1.9 percent for the richest qunitile. The positive consumption effect of lower food prices is outweighed by the income effect, which favors richer households with wage premiums for skilled workers increasing.

What can policy makers do to ensure that the gains from trade are distributed more equally? One way is by upgrading skills for migrant workers, which will benefit both workers and firms. Another is by facilitating better mobility and impoving information and communication technology. A third way is by enforcing progressive labor standards and policies that protect vulnerable workers, especially unskilled migrant women.

Conclusion

The chapter focuses on understanding the distributional impacts of trade in five low- and middle-income countries—Mexico, Bangladesh, South Africa, Brazil, and Sri Lanka—using ex post and ex ante methods. The countries were chosen because they have all undergone significant trade reforms in recent decades (or in the case of Sri Lanka are considering extensive reforms), provide a broad scope of coverage in terms of region and development level, and have high-quality data for econometric analyses of local labor markets. The key findings and lessons are as follows.

■ Mexico. Increasing exports to richer countries does not necessarily lead to better welfare indicators at the local level. The results show that, although exports have a large and positive impact on total labor incomes, their impact on poverty reduction and per capita household incomes is small. This could be driven by the fact that higher exports lead to a decline in nonlabor income by reducing the volume of remittances. Also, higher exports lead to lower out-migration and higher inflows of return migrants from the United States, leading to a disproportionate increase in unskilled workers at the municipality level, which tends to raise poverty and inequality. By contrast, although exports do not have a significant effect on per capita household incomes, they do affect relative incomes in a progressive way. These findings suggest that, for developing countries to fully reap the benefits of higher integration with rich economies, it is essential to foster stronger links between the tradable and nontradable sectors. ■ Bangladesh. Trade can be a key driver of development that extends beyond the exporting industries, workers in those industries, or localities where exporting firms cluster. This study finds that wages increase and informality decreases in subdistricts more exposed to Bangladesh’s export shock, which is sector-specific and limited predominantly to the female-intensive garment and textile sector.

Unlike in other countries, though, these local labor market effects spread quickly.

Over the long run, after higher exports of goods produced by female-dominated workforces, the male-female wage gap closed considerably across the country and not just in apparel. In Bangladesh, which specializes in one specific industry (apparel), the labor market seems to be more integrated compared to larger countries, suggesting that labor adjustment costs could be lower in smaller countries specializing in one sector. Helping Bangladeshi firms increase their exports should thus remain a policy priority. ■ South Africa. Apartheid-era housing and labor policies created long-lasting barriers to workers’ movement across regions, sectors, and occupations. Following its democratic transition in 1994, South Africa introduced substantial and relatively abrupt tariff cuts as part of a broad post-apartheid liberalization process. Although homelands no longer exist, differentials in economic outcomes still mirror the borders of former homelands. Local labor markets more exposed to tariff cuts experienced slower growth in employment and income per capita, the long-term effects on income per capita being stronger than the short-term ones. Facilitating geographical labor mobility may be key when mobility has been historically constrained. Other place-based policies can help revitalize areas negatively affected by trade shocks and strengthen regional cohesion. ■ Brazil. Increasing exports benefits workers across industries, though the magnitude of gains varies. This study finds that a decrease in export costs in the manufacturing sector affects all workers, irrespective of their original sector.

After an increase in exports, the manufacturing sector attracts workers from other industries within the same microregion because of the large costs to move between microregions. Workers in remote regions benefit less from this positive shock compared to workers in urban areas. The optimal labor market policy must thus be both region- and industry-specific. ■ Sri Lanka. The impact of lower trade barriers would differ both spatially and temporally. This study finds that, if Sri Lanka reduced its trade barriers, there would be a faster expansion of GDP and international trade, as well as less poverty.

There would also be greater wage inequality with a concentration of gains in urban areas. It also finds that, in the short term, paratariff liberalization enhances welfare and tilts the effect of price changes toward the poor. Once all adjustments are accounted for in later years, economic effects become regressive even though all households are better off. This is because the positive consumption effect of lower food prices is outweighed by the income effect (which favors richer households with skilled wage premiums increasing). Possible policies to help smooth the transition of workers across regions and sectors include upgrading skills for migrant workers, facilitating better mobility and communication, and enforcing progressive labor standards and policies that protect vulnerable workers.

All of these case studies have significant policy implications. The next chapter focuses on policy responses to mitigate negative distributional impacts related to