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Impact of Agricultural Trade Liberalization on poverty: A Quantitative Assessment for Bangladesh

Problem Statement

Bangladesh’s economy remains primarily agrarian with 52% of the total employment (BES 2007). Thus agriculture is a key sector for poverty analysis. Liberalisation, de-collectivization in agriculture has a huge impact on agricultural households and consumers since the beginning of 1990s. The huge policy development of Bangladesh’s import and export would lead significant changes in the prices of tradable commodities. Doha ministerial declearation 2001 indicated that international trade can play a major role in the promotion of economic development and the alleviation of poverty.

The country poverty measured by income level and counting the number of persons consuming less than 2,122 calories per day is especially high in Bangladesh. Income poverty in 1991-92 observed about 59 percent (BES, 2007) and most estimates from 1983–84 through 1991–92 indicated that about 50 percent of the overall population could not afford a diet meeting the caloric norm (Ahmed et.al, 2000). Recent estimates showed that the average incidence of poverty in both ways have declined to about 40 percent, between 1991 and 2005 (BES, 2007). Most analysts agree that the great majority of the poor live in rural areas and that more than half the rural population live below the poverty line, compared with about one-third of urban dwellers (Ahmed and Karim, 2006).

In Bangladesh, where agricultural production contributes heavily to national income and poverty is overwhelmingly rural, the success or failure of any policy reform crucially depend on the treatment of agriculture and the rural sector. Agricultural policy reforms carried out by Bangladesh through input market related reforms, and output market related reforms. Import and export of foodgrain policies reformed with liberalized world economy through reduction in tariff rates and removal of quantitative restrictions. Bangladesh has substantially simplified and rationalized its tariff structure, and reduced the number of tariff rate. Total number of restricted items has been reduced from 20 in 1991/92 to 13 in 2000/01 and maximum tariff rates have been reduced from 100 percent to 37.5 percent (CPD, 2006). With the change of tariff structure the imported product price level has been changed.

Objectives

To examine the implications of WTO provisions on Bangladesh agriculture

To analyze the impact of agricultural trade liberalization on rural households and poverty and

To quantify welfare gain and losses due to liberalization of agricultural trade.

Literature Review

The relationship between trade liberalisation and poverty has attracted a lot of attention in development economics. Winters (2000) developed a theoretical framework that attempts to link trade liberalization to poverty. He suggests that in order to get a better understanding of this relationship, one need to identify the channels through which trade policy might be transmitted. The transmission channel identified for static trade policy effects were enterprises, distribution channels, governments and households. The paper concludes that trade affects poverty in the long run through economic growth and that the transmission channel for static effects of trade shocks on households is mainly through product and factor markets. The other channel through which trade indirectly impacts on households is through fiscal policy outcomes via spending on social services.

Glewwe et al (2000) attempted to investigate whether certain households fared better under the impressive growth performance in Vietnam in the 1990s, using the same household data set that Niimi et al (2003) used, i.e, the two waves of the Vietnam Living Standards Survey, VLSS (i.e., 1992/93 and 1997/98). The authors concluded that the gains of the strong growth performance had indeed been well distributed. Simple decomposition analyses and multinomial logit models were used in the paper.

Winters et al (2002) explore the impact of trade liberalisation and related shocks on poverty. They examine the empirical evidence of this relationship in the context of four channels which are identified in the conceptual framework developed by Winters (2000). A key conclusion reached by the authors is that no simple generalisations can be made about the relationship between trade liberalisation and poverty. In other words the empirical evidence based on the conceptual framework was inconclusive. Niimi et al, 2003, makes an important contribution to the empirical literature that tries to establish a link between trade liberalisation and extreme poverty. They establish an analytical framework that links trade and poverty The Vietnam Living Standards Survey was used by the Niimi et al (2003) study.

Ocran et al (2006) conducted a study to identify the trade liberalization impact on poverty in Ghana. The research approach is adopted from the Winters (2000) framework of studying the link between trade liberalization and poverty. They applied a limited dependent variable estimator in estimating the probabilities of households escaping or being trapped into poverty following trade liberalisation using the econometric model that Niimi et al (2003) used. A comparison of the trade augmented models of 1992 and 1999 respectively appear to suggest that trade liberalization have actually enhanced the odds of households escaping poverty. Quite clearly the study indicated that food crop farmers have indeed been made worse off by trade liberalisation policies in Ghana.

Raihan Selim and Abdur Razzaque (2007) analysed the global liberalisation of agricultural trade on Bangladesh economy using CGE modeling framework of GTAP. They conclude that a full global agricultural liberalisation will lead to a high welfare loss and a significant rise in poverty indices. They also mentioned, the Hong Kong ministerial will generate negative impact on the welfare and will result in some increases in poverty. They argued that the achievements in poverty reduction in Bangladesh during the 1990s could come under threat if significant global liberalisation of agriculture takes place.

Some studies have addressed trade and poverty relationships within the context of partial equilibrium frameworks (see for instance Goldberg and Pavcnik, 2005). Others have also used general equilibrium models (Porto, 2004; Chen and Ravillion, 2004b). Balat and Porto (2005) investigates the connection between globalisation and poverty in Zambia during the 1990s. A basic premise in their study is that economic reform impacted households as both consumers and income earners.

Conceptual framework

The Uruguay Round Agreement on Agriculture (URAA) established new rules for world trade in agricultural commodities, initiated modest reductions in protection and support in the negotiation of trade liberalization agreements. The attempt of this study is to build up a relation between agricultural trade liberalisation and rural poverty. Winters (2000), McCulloch, Winters and Cirera (2001) and Winters (2002a) developed a framework to examine trade liberalization issue by analysing the links between trade liberalisation programmes and household poverty. They explore how the effects of trade reforms trickle down to households via their direct effects on product and labour (and other factors) markets and, indirectly, through changes in labour revenue and public spending on social sectors. Using this framework this study will be conducted to find out the potential impact on household income and rural poverty.

The effect of trade liberalisation on household poverty through the product markets operates by means of changes in prices, which affect nominal and real incomes of households in their capacity as producers or consumers of the product (Winters, 2002a). The lowering of tariff barriers is likely to reduce the price of imported goods in the domestic market. Consequently, the household real income will increase and they can more for consumption. In other hand the local producer will be looser due to the reduced market price of the same product but it will be minimized by the lowering the input price due to the tariff reduction.

Trade liberalisation policies can also affect household poverty due to the changes in wages and employment occurred in the labour markets and through changes in government revenues and social spending. If there is a fall in government revenue following the reduction of tariff barriers, the government might cut social expenditure on education, health and social security, thereby adversely affecting poor households (Winters, 2002a).

Methodology

To assess whether the observable dimensions of liberalisation have influenced household outcomes and contributed to poverty alleviation using the formal analysis of household data, a Multinomial Logit Model will be used. The model is analytically advanced and we can explore whether the policy changes have helped or hindered poverty reduction. Glewwe et al 2000 and Niimi et al 2003 studies considered the multiple choice outcome as a result of trade liberalisation using a panel household data. Ocran M.K et al 2006 adopted a Logit model to analyse in the case of Ghana though different household were sampled in each of the waves. For this study Logit model will be adjusted like Ocran M. K et al 2006 with non-panel data.

Two latest waves of the Household Income and Expenditure Survey (HIES), 2000 and 2005 will be used in the study of the linkage between trade liberalisation and poverty in Bangladesh between 2000 and 2005. The field work of HIES were conducted in both rural and urban enumeration areas across the country and the number of households covered in those survey was 7440 and 10080 respectively. The surveyed sample is representative for the country research.

Research Plan: Implementation to the future

Trade liberalisation in Bangladesh is a wide ranging issue and this study attmpt to deal with one of the major aspects which will help to know the changing poverty scenrio due to trade liberalisation. In policy level the findings will help to apply further strategies to make the situation better off. However, other areas which need to be examined for a through understanding of the dynamics of trade liberalisation in Bangladesh. The issue of multilateral trade liberalisation such as WTO agreements is very crucial for Bangladesh economy and thus need to be examined properly.

References

• Ahmed R. and Z. Karim. 2006. Bangladesh: Uncertain Prospect. Agricultural Research and Development in the Developing world. International Food Policy Research Institute. Washington D.C. Chapter 6.
• Bangladesh Economic Review. 2007. Finance Department, Ministry of Finance, Bangladesh.
• CPD. 2006. Impact of Agricultural Trade Liberalization on Cropping Pattern in Bangladesh. Centre for Policy Dialogue (CPD), Dialogue Report, No. 82, Dhaka, Bangladesh.
• Glewwe, P., Gragnolati and Zaman. 2000. Who Gained from Vietnam.s Boom in the 1990s? An Analysis of Poverty Trends and Inequality Trends. The World Bank, Washington.
• Hossain M. 2004. Poverty Alleviation through Agriculture and Rural Development in Bangladesh, Centre for Policy Dialogue (CPD), Paper 39, Dhaka, Bangladesh.
• Justino, P and Litchfield, J (2002b) “Poverty Dynamics in Vietnam: Winners and Losers during Reform”, PRUS, Working Paper No.10.
• Niimi, Y., P. Vasudetta-Dutta and A. Winters. 2003. Trade Liberalisation and Poverty Dynamics in Vietnam. Poverty Research Unit at Sussex, PRUS Working Paper No. 17.
• Raihan S. and A. Razzaque. 2007. Global agricultural trade liberalization: Implications for the Bangladesh Economy. WTO and regional trade negotiation outcomes: Quantitative assessment of potential Implications on Bangladesh. Pathak Shamabesh Book. 27 Aziz Market, Dhaka, Bangladesh.
• Winters, A. L. 2000. .Trade and Poverty Is there a connection?. In Ben David D., Nordstrom H. and Winters L. A (eds.). Trade, Income Disparity and Poverty, Geneva: WTO.
• Winters, L.A. (2002b) “Trade Liberalisation and Economic Performance: An Overview”, mimeo, University of Sussex.

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