A global trade reform removing agricultural distortions is expected to reallocate resources between agricultural and non-agricultural sectors at the international level and within national states. Given global variations in: (a) the importance of the agricultural sector, (b) the agriculture to non-agriculture income premia, and (c) the within-sector income inequality, the resource reallocation following trade reform will have significant distributional effects _between and within countries_ . Can economic theory provide some guidance on the expected global welfare effects following the removal of agricultural distortions?

According to Winters (2000), McCulloch et al. (2001) and Hoekman et al. (2002), trade liberalization and household welfare are linked via prices, factor markets, and consumer preferences. International prices of agricultural products will, most likely, increase as a result of the removal of agricultural trade barriers such as subsidies and tariffs (Anderson, 2003). Assuming some degree of pass-through, the increase in international prices will be followed by a rise in domestic agricultural prices enhancing a redistribution of resources from non-agricultural to the agricultural sector of the economy. Based on Figure 1, such redistribution could help reduce global poverty and inequality. However, household consumption patterns will also change as a result of the shift in prices, making the link between agricultural trade liberalization and global household welfare a complex one. As a consequence of the agricultural reform, redistribution of _real income_ will take place between _net_ producers and _net_ consumers of agricultural products, with the welfare of the former improving at the expense of the latter.<sup>8</sup> Finally, factor prices will also change after trade liberalization, changing real incomes of households that are not directly involved in agricultural production.

The transition from trade theory to real world analysis presents serious challenges. A sound empirical strategy has to estimate the effects of the reform on: prices, monetary incomes (via profits in the case of farm households and returns to factors of production for non-farm households), consumption, and transfers.<sup>9</sup> The framework used in this paper, and described in more details below, accounts for the impact of agricultural trade liberalization through some of these channels.

# **3 Methodology**

The empirical analysis in this paper relies on the GIDD data and methodology.<sup>10</sup> The GIDD, developed at the Development Economic Prospects Group of the World Bank, combines a consistent set of price and volume changes from a global CGE model with micro data at the household level to create a hypothetical or counterfactual income distribution capturing the welfare effects of the policy under evaluation.<sup>11</sup> Therefore, the GIDD has the ability to map CGE-consistent macroeconomic outcomes to disaggregated household survey data.

> 8 A household is defined as a net producer (consumer) of agricultural products when the monetary income it derives from merchandising these products is greater (smaller) than the amount spent on them.

> 9 For an empirical application of trade’s effect on Mexican household welfare taking into account these effects see Nicita (2003) and De Hoyos (2007).

> 10 A detailed methodological description of the GIDD can be found in Bussolo, De Hoyos and Medvedev (2008), as well as on the GIDD website referenced earlier.

> 11 The GIDD uses the LINKAGE model as the global CGE framework; see van der Mensbrugghe (2006) for a detailed description of LINKAGE.

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