to poor Mexican households because they are more expensive (due to lack of targeting), regressive, and distort prices.<sup>8</sup>

# **3.3. Household impact of trade shocks in non-agricultural sectors**

In non-agricultural sectors the short-term impact of trade-related shocks on the twin goals is likely to transpire mainly via labor channels rather than consumption channels. Households at the bottom of the income distribution have very low shares of consumption of non-agricultural products. In Nigeria, for example, non-commodity items account for only 8 percent of total household expenditures for the two lowest quintiles, and only 10 percent in Tanzania (Lederman and Porto 2013). In addition, only a small share of household enterprises is engaged in non-agricultural production. Moreover, low income households – particularly non-rural households – are often employed in unskilled non-farm activities. These include non-tradable services such as retail trade and transport, manufacturing activities (tradable and non-tradable), and tradable services such as tourism. The labor channel is therefore likely to be critical to explaining the short-term impact of non-agricultural trade shocks on poverty and shared prosperity.

Empirical evidence supports the assertion that non-agricultural trade reform can be welfareimproving. For example, the Vietnam-US bilateral trade agreement (BTA) of 2001 had a marked poverty reducing effect in Vietnam through boosting exports of labor-intensive manufacturing products (McCaig 2011). The impact was especially favorable for the poor, given the preponderance of unskilled labor, and reduced the skilled-unskilled wage premium (Fukase 2013). It is well established in the literature that exporters are larger and more productive than nonexporting firms (Bernard and Jensen 1995, Bernard and Jensen 1999, Bernard, Jensen, Redding and Schott 2007, Clerides, Lach and Tybout 1998). To test the employment effect of expanding exports within firms, we apply the methodology of Cebeci, Ledermanand Rojas (2013) to a sample of 27 ECA countries.<sup>9</sup> As shown in Appendix Table 1, we find a positive and statistically significant correlation between increases in export share in total sales and increases in level of employment and level of unskilled employment using World Bank Enterprise Survey data. A one percentage point increase in the share of sales that are exported is associated with a 0.27 percent increase in total employment levels and a 0.41 percent increase in unskilled employment levels. We find no evidence on the direction of causality (the instrumental variable regression results were not significant) for the ECA sample as a whole, but firm survey data from Georgia shows that raising the export share leads to higher employment (Hollweg and Ruppert Bulmer 2015).<sup>10</sup> The spill-overs from liberalized trade that increases demand for manufactures can also increase welfare through boosting trade-supporting activities. For example, increased demand for logistics

> 8 Gouel and Jean (2012) argue that a combination of insulating trade policies and subsidies to storage in times of domestic surplus provides a potentially effective policy option.

> 9 We use World Bank Business Environment and Enterprise Performance Surveys from 2002, 2005 and 2009 for the following countries in the sample: Albania, Belarus, Georgia, Tajikistan, Ukraine, Uzbekistan, Russia, Poland, Romania, Serbia, Kazakhstan, Moldova, Bosnia and Herzegovina, Azerbaijan, Former Yugoslav Republic of Macedonia, Armenia, Kyrgyzstan, Estonia, Czech Republic, Hungary, Latvia, Lithuania, Slovakia, Slovenia, Bulgaria, Croatia, and Montenegro.

> 10 Brambilla, Lederman and Porto (2012) and Cebeci, Lederman and Rojas (2013) identify a positive causal effect of changes in the exporting behavior of firms on employment levels, namely that increases in Turkish exports to the EU as a share of total sales for Turkish firms lead to higher employment levels within firms (there is no observed impact on wages).

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