22 July 2014

Trade Facilitation andPoverty in Developing
Countries

Nickson J. Cabote / MPP-IP!
Case Study: International
Political Economy

Outline
A. Introduction!
1. Trade, Growth and Poverty!
2. Trade Facilitation!
B. Data Analyses and Methodology!
C. Results and Conclusion!
D. Policy Recommendations

Basic Premise
TradeNational
IncomeHouseholdIncomePoverty❖

When an economy opens itself to the global community, in particular,
world trade. It allows itself to reap the benefits of globalization.!

❖

Trade is expected to increase the over-all national income.!

❖

The increase in national income can then paved for the improvement of thecitizen’s welfare through augmented household incomes.!

❖

Which then translate to poverty alleviation in some sectors of the economy.

Empirical Evidences on the Positive Relationship Between Tradeand Growth in Developing Countries
Source and Country!
Coverage

Trade Orientation !
Index

Michaely (1977)

Rate of growth and exports share

Balassa (1985)

Trade orientation index defined on thebasis of difference between actual
exports and predicted exports

World Bank (1987)

Dollar (1992)

Results
Positive (rank) correlation between export and growth!

Outward oriented countries tend to grow faster

Countries classified in four groups:!
strongly inward oriented, moderately!
Outward oriented countries tend to grow faster.
inward oriented, moderately outward!
oriented, strongly outward oriented.

Exchange rate distortions.

Average per capita growth in the least distorted quartile of(mostly Asian) countries was 2.9%; the next quartile had agrowth rate of 0.9%, the third quartile - 0.2%, and the most
distorted quartile - 1.3%.!

!

Reduction of the real exchange rate distortion to the Asianlevel would add 0.7 percentage points to Latin American
growth and 1.8 percentage points to African growth.

As summarized in David, D.B; Nordstrom, H.; Winters, A. (2000) “Trade, Income Disparity and Poverty” WTO

Empirical Evidences on the Positive Relationship Between Tradeand Growth in Developing Countries
Source and Country!
Coverage

Trade Orientation !
Index

Harrison (1995)

Seven Index:!
Trade Liberalization (1960-84),(1978-88), Black Market Premium,
Trade Shares, Real Exchange rate
distortions, Movemens towards
international prices. !
Bias against agriculture

Matin (1993)

Focused on Sub-saharan africa!
Four indexes:!
Trade shares,!
Black market premium,!
Trade liberalization index,!
Real exchange rate distortion.

Balasubramanyam,
Salisu and Sapsford(1999)

World Bank Openness Indicator

Results

All statistically significant indexes show a positive
relation between a liberal trade regime and GDP
growth.!

!

The causality between a liberal trade regime and growthruns both ways. Lagged values of growth are significant
in explaining openness, and lagged values of openness
are significant in explaining growth.
All indexes that are statistically significant point to a
positive relation between a liberal (less distortive) trade
regime and growth.!

!

The openness-growth performance link for Sub-SaharanAfrica is as strong as in a control sample of other
African countries.

Low trade barriers enhance the efficiency of FDI andindirectly growthAs summarized in David, D.B; Nordstrom, H.; Winters, A. (2000) “Trade, Income Disparity and Poverty” WTO

Trade and Poverty❖

Dollar, D. and Kraay, A. (2002), “Trade, Growth, and Poverty”. The Economic
Journal, 114: F22–F49!
❖

Level of growths and development has been significantly higher in “globalizer”
developing economies as compared to the “non-globalizer”. !

❖They noted that trade openness contributed to the surge in national income,without exacerbating the level of inequality in the sampled countries.!

❖

The increase in growth rates from expanded trade on average translates into
proportionate increases in income of the poor. !

❖Actual data actually pointed that Absolute poverty in the globalizing
developing economies has fallen sharply in the past 20 years. The evidence
from individual cases and from cross-country analysis supports the view that
open trade regimes lead to faster growth and poverty reduction in poor countries.

Trade and Poverty❖

Bhagwati J. and Srinivasan T.(2002), "Trade and Poverty in
the Poor Countries," American Economic Review, American
Economic Association, vol. 92(2), pages 180-183, May.!
❖

Support the central argument which proceeds in two steps:
trade promotes growth; and growth reduces poverty.!

❖In theory via Stolper-Samuelson : Freer trade help in the
reduction of poverty when a developing country employs
their comparative advantage to export labor-intensive
goods.

Main Focus
However, the focus of this study is not about trade openness andtariff related distortions to trade…!
!

The Study will look into the Trade Facilitation as the main variable
that attempts to explain poverty in developing countries.

Trade Facilitation
The main objective of trade facilitation is to reduce international
trading’s transaction cost through simplification of the customary
and technical regulations (United Nations, 2002)!

❖!

It also mean to simplify and improve efficiency of international trade
procedures (United Nations, 2002; Wilson et al., 2003, 2005; Engman,
2005; Iwanow and Kirkpatrick; 2007)❖

Engman, M. (2005), "The Economic Impact of Trade Facilitation", OECD Trade Policy Working Papers, No. 21, OECD Publishing.	

Iwanow, Tomasz and Colin Kirkpatrick (2007), “Trade Facilitation, Regulatory Quality and Export Performance”, Journal of International Development, 19, 735–753	

United Nations (2002), Trade Facilitation Handbook: For the Greater Mekong Subregion, Economic and Social Commission For Asia and The Pacific, United Nations, New York	

Wilson, J., C. Mann and T. Otsuki (2003), “Trade Facilitation and Economic Development: A New Approach to Quantifying the Impact”, World Bank Economic Review, 17 (3): 367-389.

Trade Facilitation
Trade facilitation includes improving the ports (point of entry andgoods exchange) and lower the transactions by harmonization ofprocedures on international movements of goods and services(Wilson et al., 2003, 2005; Iwanow and Kirkpatrick; 2007)!

❖!

Trade facilitation has been put in the agenda of WTO since 1994, andthe member governments of WTO have started negotiations on tradefacilitation since 2004 (Duval, 2007)❖

Duval, Y. (2007), “Trade facilitation beyond the Doha Round of negotiations”, Chapter I in ESCAP (2007), Trade facilitation beyond the multilateral trade negotiations: Regional practices, customs 	

valuation and other emerging issues – A study by the Asia-Pacific Research and Training Network on Trade, (United Nations, New York).	

Iwanow, Tomasz and Colin Kirkpatrick (2007), “Trade Facilitation, Regulatory Quality and Export Performance”, Journal of International Development, 19, 735–753	

Wilson, J., C. Mann and T. Otsuki (2005), “Assessing the Benefits of Trade Facilitation: A Global Perspective”, World Bank Economic Review, 17 (3): 367-389.

Impact of Trade Facilitation
The direct impact of trade facilitation is to increase the international
trade. Improving port efficiency, customs and e-business have apositive effect on trade flows. Wilson et al. (2005) !
❖Reduction in inefficiencies in transport costs can result in an increasein bilateral trades of countries to the US, Clark et al. (2004).!
❖A10 percent improvement in trade facilitation can increase the export
volume by around 5 percent, Iwanow and Kirkpatrick (2007).!
❖!

Heavy regulatory environments can harm the trade flows (Inefficient
trade facilitation harms trade).!
❖Number of days to clear goods through customs has a negative effecton exports in developing countries, Dollar et al. (2006)❖

Clarke, RG. (2005), “Beyond tariff and quotas: why don’t African manufacturing enterprises export more?” World Bank Policy Research Working Paper no. WPS3617.	

Wilson, J., C. Mann and T. Otsuki (2005), “Assessing the Benefits of Trade Facilitation: A Global Perspective”, World Bank Economic Review, 17 (3): 367-389.

Impact of Trade Facilitation!
❖

An additional day that a product is delayed can decrease theinternational trade volume by around one percent, Djankov
et al. (2010).!

!
❖

Trade facilitation improvement can promote export
diversification in developing countries. A 10 percent
reduction in the export cost can lead to a three percent
increase in export diversification, Recently, Dennis andShepherd (2011).

Djankov S, Freund C, and Pham CS (2010), “Trading on time”, Review of Economics and Statistics 92: 166-173	

Dennis, A. and B. Shepherd. 2011. “Trade Facilitation and Export Diversification.” World Economy, vol. 34, no. 1,
pp. 101-122.

Trade Facilitation and Poverty
Improved trade leads to employment generation and tends to increase overtime.
Expansion of export-oriented sectors can create employment for low skilledworkers, Hoekman and Winters (2005). !

❖!

There is positive association between trade facilitation and employment(Dennis, 2006; ESCAP, 2009; Zaki, C., 2011)!

❖!

Trade facilitation contributes to growth in GDP and economic welfare(increase income) (e.g., APEC 1999; Kinnman and Decreux and Fontagné, 2006;
Hertel and Keeney, 2006; Lodefalk, 2007).!

❖!

There is positive association between the trade facilitation level andgovernment revenue and foreign direct investment. Engman (2005)❖

Decreux, Yvan and Lionel Fontagné (2006), “A Quantitative Assessment of the Outcome of the Doha Development Agenda”, CEPII Working Paper No. 2006-10.	

Dennis, A. (2006), “The Impact of Regional Trade Agreements and Trade Facilitation in the Middle East North Africa Region”, World Bank Policy Research Working Paper 3837,The World Bank, DC. Washington.	

Hoekman, Bernard, and L. Alan Winters. 2005. “Trade and Employment: Stylized Facts and Research Findings.” World Bank Policy Research Working Paper no. 3676. Washington, D.C.: World Bank.	

Kinnman, Susanna and Magnus Lodefalk (2007), “What is at Stake in the Doha Round?”, World Economy, 30(8), 1305-1325.

Trade Facilitation and Poverty
Trade facilitation can affect per capita GDP, poverty and inequality.
More specifically, deterioration in trade facilitation which is measured byan increase in the number of documents and days for exports and import
can reduce per capita GDP. Nguyen (2013)!

❖!

Countries with a larger number of documents and more time for imports
and exports tend to have higher poverty (measured by the headcountand poverty gap index) and higher inequality (measured by the Gini
index) than other countries.!

❖!

In the same study, he also noted that the Logistics Performance Index canbe used.

❖Nguyen, Coung (2013). “Poverty, Inequality and Trade Facilitation in Low and Middle Income Countries”. MPRA Paper No. 50312, posted 1. October 2013 12:30 UTC

-5000

0

5000

10000

15000

Better Trade Facilitation: Higher Income

.6

.8

1
log_lpi
95% CI
gdp_pc_ppp

1.2
Fitted values

1.4

0

20

40

60

80

Better Trade Facilitation: Lower Poverty Incidence

2

2.5

3
lpi

95% CI
pov_hcFitted values

3.5

Hypothesis of the Study❖

Trade Facilitation when improved aids in dispersing thegains from trade through the rest of the population,
hence contributes to poverty alleviation in countries.!

❖

Comparing the policy of improving a country’s tradefacilitation compares to other social policies, such asincreased education spending, in alleviating poverty inthe developing world.

Logistics Performance Index, why is it a good indicator?
❖

Following the recommendations of Rodrik in his critiqueon the Dollar and Kraay Paper. It is important to find asuitable variable that is correlated to poverty but is notindependently related to income.!

❖

From the previous graph, LPI is actually positively
correlated with income. However, it is consists of six
components, and there is reason to believe that among
these components, there is at least one that can serve as asuitable instrument that would help us trace therelationship of trade facilitation performance and poverty

What we know …
1. The LPI is composed of six indicators:!
A. Policy regulation variables, indicating
main inputs to the supply chain(customs, infrastructure, and quality oflogistics services).!
B. Service delivery performanceoutcomes variables (timeliness,international shipments, and tracking
and tracing).!
!
At a glance, its easy to see that fastermovement of goods and the ability to
track and trace shipments are not directly
related to income and/or poverty. (To be
confirmed via OLS)
Source: World Bank

Logistics Performance Index
Logistics Performance Index reflects the efficiency of customs clearance process, qualityof trade- and transport-related infrastructure, ease of arranging competitively priced
shipments, quality of logistics services, ability to track and trace consignments, andfrequency with which shipments reach the consignee within the scheduled time. !
!
The index ranges from 1 to 5, with a higher score representing better performance. Data
are from Logistics Performance Index surveys conducted by the World Bank in
partnership with academic and international institutions and private companies andindividuals engaged in international logistics.!
!
Scores for the six areas are averaged across all respondents and aggregated to a single
score using principal components analysis

World Bank. Accessed from http://data.worldbank.org/indicator/LP.LPI.OVRL.XQ

DATA STRUCTURE❖

The study involves 66 developing countries from Asia,
Africa, South America and Europe.!

❖

The data was constructed by taking the mid-term averageof each variables: Period 1 —2005-2009 and Period 2 —2010-2014. This is done to correct for the missing data.!

❖

Total number of observation: 131 data points

DATA
Dependent Variable: !
Poverty - [log of] Poverty headcount ratio at national poverty line (% of population) !

Explanatory Variable:!
Trade Facilitation Performance - World Bank’s Logistics Performance Index!

Control Variables:!
Income Share of the Poorest - Income Share held by the Bottom 10% of population(World Bank) !
Income - GDP per Capita!
Average Tariff Rates - Generated with the use of simple averaging of tariff rates
imposed on agricultural and non-agricultural products (World Bank)Data - Logistics Performance Index
1. Infrastructure Score (INSCORE) indicates the countries’
infrastructure score; this is the rating of the quality of trade andtransport infrastructure (e.g. ports, railroads, information
technology)!
2. Customs Score (CSCORE) indicates the customs score ofcountries, which is based on the efficiency of customs and bordermanagement clearance!
3. Shipments Score (SHSCORE) signify the capacity of countries toeasily arrange shipments, this involves the ease and affordability
associated with shipping products to or from the stated country

Data- Logistics performance index
4. Logistics Competence (LSCORE)—this comprises theevaluation of the level of competence of the logistics
industry (e.g. transport operators, customs brokers)!
5. Track and Trace Score (SCORE) signifies the ability to
track and trace your consignments when shipping to orfrom a certain country!
6. Timeliness (TISCORE) pertains to the frequency withwhich shipments reach consignees within scheduled or
expected delivery times

Methodology❖

Estimate the partial effects of trade facilitation topoverty using Ordinary Least Squares!

!
log(POV) = β0 + β1log(LPISCORE) + β2log(TAVE) + β3log(GDP) + β4B10INSHARE + β(1)Methodology❖

To check the first model and to know if the previous
model suffers from endogeniety we estimate a newequation using a Two-Stage Least Squares.!

❖Firstly, we look at which component of the LPI does not
explain poverty and income!
log(POV)! =a0 + a1log(LPIComponenti) + a2log(GDP) + a (2)2 Stage Least Squares
The 2SLS regression is specified as:!
!

(Equation 3)!
log(POV) = Y0 + Y1log(LPISCORE) + Y2log(TAVE) +Y3log(GDP) + Y3log(B10INSHARE) + v !
!

(Equation 4)!
log(LPISCORE) = P0 + P1log(TTSCORE) + P2log(TICORE) + u

Results

Results

Test Results❖

Sargan Test (Over-identification): We fail to reject Ho —hence the instruments used are valid.!

❖Wu- Hausman Test (Endogeneity): We cannot reject the Ho,contending that the regression is exogenous — suggestingthat the OLS is already sufficient. But given economic
intuition and the p-value of the test, the probability that
endogeniety exists is not zero.!

❖

Nonetheless, the results based from the OLS and the 2SLS are
not to different. Suggesting consistency of the coefficients.

Beta Coefficient Analyses of Comparative Policies
Dependent:
Poverty (log)

Coefficient

P-value

Beta values

Logistics
Performance
(log)

-2.25

0.000

-0.494

Education (log)-0.2120.204-0.148

Health (log)-0.0690.537-0.069Human
Development
Index (log)

-1.37

0.000

-0.699Explanatory
variables

Conclusion
The study confirms the negative correlation between LPI score andpoverty incidence, that is, a competitive logistics system reflects lower
poverty incidence. !
❖ Moreover, by means of a Two-Staged Least Squares Estimation, thefactors of Trade Facilitation that directly impacts economic growth
was netted out before employing trade facilitation as an explanatory
variable for poverty. !
❖ The results points that trade facilitation significantly explain poverty
across countries, controlling income levels and the income share of thebottom quintile and that of average tariff rates.!
❖ Moreover, from the beta coefficient analyses, poverty is more reactive
to the improvement of trade facilitation as compared to the increase ineducation spending or health spending, at least in the medium-term.
❖Policy Recommendation
The government alongside their private sector partners can improve
trade facilitation quality. Given the results of the study there isconsiderable reason to direct public policy towards the improvement ofinternal transportation and communication infrastructure and pushingfor an efficient customs procedure.!
!

The government can also craft policies that will encourage competitionin the logistics industry to facilitate the reduction in the cost of services
imposed by private carriers and port operators while encouraging them
to beef up the quality of their services to remain competitive.!
!

With the improvements in Trade Facilitation it can provide synergistic
effects on the reduction of poverty.

Appendix