Trade Liberalization – Labor Productivity Nexus: The Case of Sub Saharan Africa

This paper summarizes the arguments and counterarguments within the scientific discussion on the weak growth of labor productivity in poor but open economies. The main purpose of the research is to estimate the welfare effects of the reciprocal preferential trade liberalization between Sub-Saharan Africa and the industrialized countries, taking into account the differences in labor productivity between the two trading blocs. Systematization literary sources and approaches for solving the problem of estimating the impacts of trade liberalization indicate that both trading partners shall benefit from trade liberalization assuming that their labor productivity growth rates are the same or remain unchanged. The relevance of the decision of this scientific problem is that the difference in labor productivity growth rates may grow over time and lead to inaccurate estimates of trade impacts on which many poor households’ welfare hangs. Investigation of the topic of trade liberalization and labor productivity nexus in this paper employs a General Equilibrium modeling framework relying on GTAP Data Base with eight aggregated sectors and thirteen aggregated regions. We analyze several scenarios based on different productivity growth paths under reciprocal tariff elimination. Methodological tools of the research methods were the results of seven years of research on modeling, data gathering and projection. The object of research is the impact of the negotiated reciprocal preferential access between the industrialized countries and Sub-Saharan Africa markets, because such preferential access permits the study of how the growing differences in labor productivity growth affect trade between poor and rich countries. The results show that Sub-Saharan Africa would lose about USD 12.6 billion per year if the region continues to trade under its current, low growth rates of labor productivity; the welfare losses occur mainly in Sub-Saharan Africa’s manufacturing sector. Elimination of reciprocal tariff with the European Union would cut the loss but only by USD 1.2 billion. The loss would be further cut by USD 2 billion if SubSaharan Africa agreed to a reciprocal tariff with not just the European Union, but all the industrialized countries. These gains, albeit significant, remain largely insufficient to cover the USD 12.6 billion loss. Our estimates suggest that Sub-Saharan Africa requires at minimum a sustained 3 per cent growth rate of labor productivity per year in its manufacturing sector to generate positive allocative efficiency and endowment effects from trade with the industrialized countries. The research empirically confirms and theoretically proves that trade liberalization is not a panacea for welfare improvement. If poor countries want to benefit fully from reciprocal preferential trade liberalization, they need to improve on their labor productivity. The results of the research can be useful for trade negotiation and pacts between poor and rich countries and especially for providing tools to help poor countries measure how much efforts and which sector they need to devote and target in order to achieve greater benefits from trade.