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Stitches to Riches is motivated by South Asia’s urgent need to create more and better jobs for a growing population. This book investigates the region’s potential for expanding and improving jobs in the labor-intensive apparel sector. It estimates the effects of rising wages in China on apparel exports, employment, and wages in South Asia, and provides policy recommendations to leverage the sector for greater job creation.
EU Trade Minister Cecilia Malstrom has been in Washington, meeting with US Trade Representative Michael Froman and trying to give the Transatlantic Trade and Investment Partnership (TTIP) negotiations a nudge. Developing countries are watching closely and assessing the potential implications for exports to what are the two largest markets for many of them. But should they be rooting for Malstrom and Froman to fail?
Policymakers for the United States and European Union all say that they want to complete negotiations this year, “provided that the substance is right,” in the words of EU chief negotiator Ignacio Garcia Bercero. (Minister Malstrom used exactly the same phrase in a speech at the Peterson Institute on Thursday.) President Obama and US Trade Representative Michael Froman would like to have one more achievement to burnish their trade policy legacies. European leaders would like to complete the deal this year because they cannot be sure that the next US president will place the same priority on getting it done.
And herein lies the conundrum. There isn’t enough time to wrap up all the difficult outstanding issues on agriculture, services, investment, government procurement, and energy, and sign an agreement this year. The negotiators could try to reach an agreement in principle, but it would be up to the next US president to sign it. Why would EU negotiators make the politically difficult decisions that would be needed to get an ambitious deal when there is no assurance that a President Trump, or even a President Clinton, would stand by the deal?
Given the ambivalent (at best) congressional reaction to the Trans-Pacific Partnership agreement, why would EU negotiators put their best offers on the table until after they see the vote on the TPP deal? That vote almost certainly will not take place until after the election, especially with trade having become such a political hot potato this election cycle.
In my view, there is no chance of a TTIP deal, even in principle, this year. And the outlook beyond this year is cloudy at best. Should the rest of the world be happy about that? On the one hand, no TTIP means no new sources of trade discrimination against third countries, something that developing countries in particular fear. On the other, lack of a deal might signal that the United States, one of the most open economies and a leader of the global trading system, is turning inward. Nobody wins from that.
In the 2000s, Côte d’Ivoire plunged into a decade of political violence. In September 2002 the Forces Nouvelles de Côte d’Ivoire (FNCI), a coalition of three rebel movements, occupied the northern half of the national territory (Figure 1). Unlike other rebel movements in Liberia and Sierra Leone, which allegedly used “scorched-earth” and “denial-of-resource” tactics, the FNCI opted for an autonomous self-governance system. They preserved some of the public infrastructure, including power plants and water systems. Small businesses like bakeries, convenience stores, restaurants, and even a few factories continued to operate. Local and international NGOs were allowed to provide a minimum service in education and health.
The rebels also introduced an unprecedented agricultural trade reform: they cut export taxes on cocoa beans produced in their territory by nearly 50 percent.
That may seem to be a trivial detail of what amounted to civil war, but it does set the conditions to empirically test the causal effects of export taxes on the welfare of farmers, which is what I do in a paper forthcoming in Economic Development and Cultural Change.
Figure 1: Rebel-held North and Government-Controlled SouthThe demarcation line separating the rebel-held north is a buffer zone placed under the surveillance of international forces. Regional and provincial boundaries are described by thick and thin black lines, respectively. The colored regions, with different levels of degradation, represent the districts split between the two states.
Why Export Taxes?
Many countries with dysfunctional or ineffective tax collection sidestep that institutional inefficiency by turning to more targeted collection schemes, such as agricultural export taxes. Policymakers may favor export taxation instead of widespread taxation in weaker institutional settings for three major reasons: (1) taxing exports can generate high and reliable incomes for governments, (2) export taxes are easy to collect at borders and ports, and (3) export taxes are not forbidden under the WTO rules. Nonetheless, economists have warned that high and persistent export taxes may depress farmers’ earnings, deter production, and eventually decrease public receipts. While this argument has an intuitive appeal, empirical evidence of a causal link between agricultural export taxation and farmers’ living standards is scarce. I fill this gap by exploiting an exogenous trade policy shock (the FNCI’s 50 percent tax reduction) to examine how cocoa export taxation affects rural farmers’ lives.
Measuring Effects of the Trade Reform
Côte d’Ivoire’s government maintained export taxes at the prepartition rates of $0.44 per kilogram, while exporters faced on average $0.20 per kilogram in the rebel-held areas, according to Global Witness. Did this large reduction in export taxation actually translate into tangible benefits for cocoa farmers in the rebel-held north? Or did the deleterious political environment generated by the conflict obscure expected gains from the liberalization policy?
To answer these questions, I gathered prepartition (2002) and postpartition (2008) information on cocoa and non-cocoa farmers across the government-controlled south and the rebel-held north, and I built a triple-difference estimator. Specifically, I compare changes in consumption between cocoa and non-cocoa farmers in the rebel-held districts with changes in consumption between cocoa and non-cocoa farmers in the government-controlled districts, before and after the division. To refine the identification, I also use a subsample of communities that resided in districts split by the demarcation line separating the two de facto states. Because district creation often obeys certain socioeconomic, cultural, and geographic coherences, treatment and control groups from these split districts have the advantage of being more comparable.
Figure 2: Cocoa Export Taxation and Consumption – A Triple Difference EstimationThe top half of the figure shows log per capita consumption expenditure for cocoa farmers, and the bottom half shows log per capita consumption expenditure for non-cocoa farmers. Blue lines indicate measures in the rebel-held north, and red lines indicate measures in the government-controlled territory. Difference estimation measures from pre- and postpartition periods are given to the right, with double-difference between the north and south shown, as well as a triple-difference estimation in the middle showing a 50 percent increase in per capita consumption expenditure among cocoa farmers in the rebel-held north.
Welfare Gains from Lower Export Taxation
My baseline specification suggests that cocoa farmers in jurisdictions with low export taxes experienced approximately a 50 percent increase in consumption expenditure, relative to their counterparts in high-export-tax districts (Figure 2). The affected farm households allocated relatively more resources to basic needs such as food, clothing, and health care. However, relative investments in children’s education decreased as a result of the cocoa export tax reduction. This is not surprising because favorable conditions in the cocoa sector and anticipation by farmers of a long-lasting beneficial policy often pull children away from schools and into the cocoa fields. Looking at potential mechanisms, I also show that farm-gate prices were 12 percent higher in the north, with exporters facing lower taxes willing to pay a higher price to the farmers. More reassuring, the apparent modest increase in prices generated revenue that was twice as much as the relative change in consumption expenditure.
Overall, my paper has three key policy implications:
Agricultural export taxation has a sizable effect on farmers’ earnings.
While countries with large market power, like Côte d’Ivoire in the cocoa market, can often justify the use of export taxation, non-optimal levels of export taxes could shift farmers’ incentives toward alternative crops or activities and be detrimental to the country’s market shares.
Efforts to design optimal export taxation in countries with market power should be emphasized.
These findings suggest that relatively open policies, in addition to their well-known long-run benefits to development, could also enhance welfare in the short-run.
There are now reports that the parties to the Trans-Pacific Partnership will formally sign the deal on February 4 in New Zealand, and President Obama is expected to make a push for congressional ratification in his State of the Union address. I’ve written here and here about some of the elements in the TPP that are positive steps forward in US trade policy, and others that raise concerns, particularly as they affect developing countries. I’ve also written in our White House and the World series about how US trade policy could be more development-friendly overall. One particular concern with the TPP that President Obama could address without reopening negotiations is the negative impact on other poor countries in the region. He would need Congress’ help, however.
Vietnam is a major clothing exporter to the United States and will, eventually, get duty-free access to the US market under TPP (albeit with strict rules of origin). Vietnam is by far the poorest country joining the TPP, and improved access for a major export will help create jobs and reduce poverty in that country. But that shouldn’t, and needn’t, come at the expense of other poor countries in the region, notably Bangladesh and Cambodia. All the other high income countries already provide duty-free, quota-free market access on most or all products for the UN-designated least developed countries, including clothing exports from Bangladesh and Cambodia. The United States is the only hold-out, and now is probably the last chance to act.
So, when President Obama pushes for Congress to ratify the TPP sometime this year in his speech, I hope he also asks Congress to join with the rest of the developed world and extend duty-free, quota-free market access to the world’s poorest countries as part of the package.
Trade ministers, while attending the World Trade Organization (WTO) meeting in Nairobi, again managed to pull a rabbit out of the hat. Faced with the prospect of complete failure, ministers worked overtime to cobble together a package of mostly small, symbolic agreements at the WTO’s Tenth Ministerial Conference. India’s leaders deserve kudos for standing up to intense political pressure and not blocking the agreement. But even though they identified a few areas of consensus, developed and developing countries remain deeply divided over the future of the WTO negotiating agenda and how to move forward. So, while the outcome is not being greeted with the same dismay, Nairobi looks more like the Copenhagen summit on climate change than the recent session in Paris, which managed to bridge North-South differences.
Director-General Azevêdo hailed the deal on agricultural export competition as the “most significant outcome on agriculture” in the WTO’s history—less impressive praise when you realize it is the only such agreement. The WTO’s predecessor, the General Agreement on Tariffs and Trade, banned export subsidies decades ago because they are among the most trade-distorting measures. But there was an exception for agriculture at long last removed in Nairobi. Dig into the details and we find that the European Union agreed to eliminate export subsidies that it no longer uses, and the United States accepted “disciplines” on its food aid and agricultural export credit programs that allow it to keep doing what it’s doing. India and China secured commitments to continue negotiation on their demands to further loosen disciplines on their trade-distorting support for farmers.
Agreements aiming to improve market access for poor cotton exporters and other least-developed countries “encourage” members to “consider” taking steps in the right direction. In other words, they are likely to have little or no impact on actual behavior. The most commercially significant decision was the expansion of the Information Technology Agreement (ITA). Under this “critical mass agreement,” a subset of two dozen developed and developing WTO members, accounting for 90 percent of the trade, will eliminate tariffs on more than $1 trillion in information technology products. The tariff cuts are on a “most-favored nation” basis, meaning that consumers in all WTO member countries will benefit. The ministerial decisions are here.
The question of what to do about the Doha Round of multilateral trade negotiations proved unresolvable, however. India, China, and other developing countries insisted to the end that the hopelessly deadlocked Doha Development Agenda must remain the basis for negotiations going forward. US Trade Representative Michael Froman was equally adamant that it could not. The ministerial declaration affirms the commitment of all members to “advance negotiations on the remaining Doha issues” and to “maintain development” at the center of the organization’s work, but it also effectively buries the long-suffering Doha Round.
The question now is what comes next and whether the WTO will continue to have a role in setting the rules of trade. The Financial Times’ Shawn Donnan identified the core of the dilemma in a piece over the weekend:
The tension is akin to that in UN-sponsored climate talks. This month’s climate agreement in Paris was reliant in many ways on developing countries such as China recognising that the world had changed since the Kyoto protocol of 1997, which bound advanced economies but not emerging ones.
But at the WTO, that is something developing nations have failed to do.
In Paris, three key players—the United States, China, and India—realized that climate change was a great enough threat that things needed to change even where it meant confronting difficult political circumstances at home. While it didn’t happen in Nairobi, the key players will need to summon similar courage to safeguard the future of the multilateral trade system.
For this week's podcast, our last of the year, we're doing something slightly different. Befitting the holiday theme, we asked a veritable choir of CGD experts to weigh in on what has been the stand-out moment in development in the last twelve months; and, as we enter the post-2015 development era, what they hope to see in 2016 and beyond.
Emerging market countries that manage to diversify and upgrade their production and export base grow more rapidly and enjoy greater welfare gains than those that do not. Foreign direct investment in manufacturing is concentrated in middle- and upper-skilled activities -- not lowest-skilled operations -- and thus offers many opportunities for structural transformation of the host economy. But the challenge of using FDI to diversify and upgrade the local production and export base is fraught with market failures and tricky obstacles. Contemporary debates about industrial policy as a development tool focus on how best to overcome these market failures and other difficulties.