Brazil in the Global Economy_ Measuring the Gains from Trade_1_

					Brazil in the Global Economy:
Measuring the Gains from Trade


                 Sandra Polaski
    Carnegie Endowment for International Peace
                  April 9 , 2009
       Motivation for Study
• Trade can increase growth, create jobs
  and lift people out of poverty, although it
  creates both winners and losers

• During the global expansion of the past
  decade, the net impact of trade on
  employment and poverty in Brazil was
  positive but modest

• In the current crisis, trade is likely to
  shrink
      Motivation, continued

• The current crisis will likely slow trade
  negotiations; this is an opportunity to
  revisit the long term objectives of trade
  policy, as well as the distribution of gains
  and losses and the adjustment costs

• Our study includes evaluation of
  distribution of gains and losses among
  the regions of Brazil
     Motivation, continued

• It also includes detailed labor market
  information and recognizes that there is
  unemployment among low and medium
  wage workers

• These approaches allow us to explore how
  trade would affect different groups and
  regions in Brazil and to take adjustment
  costs into account
           Nature of Study
• We use two computable general
  equilibrium (CGE) models to simulate
  trade policy choices and external shocks

• A global model to evaluate trade
  scenarios:

     • A Doha Round agreement at the WTO

     • Various South-South agreements, including
       FTAs with China, India and South Africa
  Nature of Study, continued

• A country model is used to evaluate
  external shocks that would effect Brazil
  more strongly after trade liberalization

• Two external shock scenarios:
  – Further rapid growth of China, India

  – International price shocks and volatility
     • 50% increase in price of soybeans
     • 100% increase in price of wheat
     • 35% increase in price of crude oil
          Details of Study

• 11 aggregated regions of Brazil
  (Table C.2, page 100)

• Two types of labor in global model:
  skilled, unskilled

• Three types of labor in country model:
  Low, medium and high wage workers
  (Table C.4, page 102)
Main Results of Trade Scenarios

 • Each of the trade scenarios has positive
   but very small effects on overall economy
   and households as a whole

 • Both a Doha agreement and a broad
   South-South FTA would increase real
   income by about 0.4%

 • IBSA gain would be about 0.1%
           Macroeconomic Results of
              Different Scenarios
   PERCENT CHANGE
     • Figure 8.1
      2.50

       2.00

       1.50

       1.00

       0.50

       0.00
                 Full Doha            IBSA        IBSAC         IMSAC       China & India
               liberalization                                                TFP shock

                                    Welfare   Real Exports   Real Imports



Source: Global model simulation results.
              Doha Scenario:
       Major Changes in Production
   PERCENT CHANGE
     • 4.00
         Figure 4.1
       3.00

       2.00

       1.00

       0.00

       -1.00

       -2.00
                                                      agriculture
                  Cereal




                                                                                           Equipment
                                           products




                                                                    products
                  grains




                                                                     Leather
                                 Sugar




                                                                                           Electrical
                                                                               Oil seeds
                                            Animal




                                                       Animal




Source: Global model simulation results.
             Doha Scenario:
       Change in Welfare by Region
 PERCENT CHANGE
     • Insert figure 4.6
     0.20

     0.15

     0.10

     0.05

     0.00

    -0.05




                                                                            Other South
                                     Northeast

                                                 North
                        Pernambuco




                                                                                                   São Paulo
                                                         Central
               Bahia




                                                                   Paraná




                                                                                                                         Espírito
                                                                                                               Janiero
                                                                                          Gerais
                                                                                          Minas




                                                                                                               Rio de



                                                                                                                          Santo
                                                          West
                                      Other




            Doha food liberalization               Doha manufacturing liberalization               Doha full liberalization


Source: Country model simulation results.
   Global Commodity Price Increases:
        Macroeconomic Results
 PERCENT CHANGE IN REAL VALUES


           2

           1
                      Figure 8.2 here
           0

          -1

          -2

          -3

          -4
                        Welfare                Export Supply             Import Demand

                          Soybean price rise   Wheat price rise   Crude Oil price rise



Source: Country model simulation results.
   Global Commodity Price Increases:
      Change in Welfare by Region
   PERCENT CHANGE
     • Figure 7.2 here
     12.00

       8.00

       4.00

       0.00

      -4.00




                                                                                                                   Janiero
                                                                                                                             Espírito
                                                     North
                  Bahia




                                                                       Paraná




                                                                                                       São Paulo
                                                                                Other South
                            Pernambuco




                                                             Central
                                         Northeast




                                                                                              Gerais
                                                                                              Minas




                                                                                                                   Rio de



                                                                                                                              Santo
                                                              West
                                          Other




                          Soybean price rise                   Wheat price rise                Crude Oil price rise

Source: Country model simulation results.
      Effects of Different Scenarios
           on Unskilled Labor
   PERCENT CHANGE
     • 3.00
        Insert figure 8.4
        2.00

        1.00

        0.00

       -1.00

       -2.00

       -3.00
                  Full Doha     IBSA   IBSAC      IMSAC   China & India Soybean Wheat price Crude Oil
               liberalization                              TFP shock price rise    rise     price rise



Source: Global model simulation results for Doha, IBSA, IBSAC, IMSAC, and China and India total factor
productivity (TFP) shock; country model simulation results for soybean, wheat, and petroleum price rises.
      Effects of Different Scenarios
             on Skilled Labor
  PERCENT CHANGE

     • Insert figure 8.5
  2.00


  1.00


  0.00


 -1.00


 -2.00
            Full Doha     IBSA        IBSAC       IMSAC     China & India Soybean Wheat price Crude Oil
         liberalization                                      TFP shock price rise    rise     price rise




Source: Global model simulation results for Doha, IBSA, IBSAC, IMSAC, and China and India total factor
productivity (TFP) shock; country model simulation results for soybean, wheat, and petroleum price rises.
         Adjustment costs

• Different sectors gain or lose from each
  trade pact

• Capital and labor will move to expanding
  sectors and leave contracting sectors

• To estimate adjustment cost for Doha
  scenario, we summed the changes for
  each factor divided by the total amount of
  the factor used in the economy
Adjustment Costs, continued
• To give a sense of the extent of factor
  reallocations, we compare it to the
  amount of adjustment that Doha would
  induce in the European Union

• Brazil would face 4.5 times as much
  adjustment for unskilled labor, and
  almost twice the adjustment for capital

• However the EU would face higher
  adjustment costs for land
   Employment Adjustment

• In the trade scenarios, employment shifts
  from manufacturing to agriculture

• Wages, working conditions and job skills
  in these sectors are quite distinct

• Production typically does not occur in the
  same areas or regions and migration
  would be required
         Main Conclusions

• New trade agreements produce positive
  but small gains for Brazil—about 0.4%
  improvement in overall real income from
  Doha or broad South-South FTAs

• Further trade liberalization will leave
  Brazil more exposed to world price
  volatility, with the simulations showing
  gains or losses from price changes that
  are greater than from the trade pacts
  themselves
Main Conclusions, continued

• The distribution of gains and losses
  among Brazil’s regions is uneven and
  results in some redistribution of welfare
  and incomes

• The major trade pacts increase unskilled
  employment by about 0.4% to 0.6%

• At the same time, sectoral restructuring
  would be required that could result in
  transitional and perhaps longer term
  structural unemployment
Main Conclusions, continued

• Value-addition is lower in most expanding
  agricultural sectors than in contracting
  manufacturing sectors

• This raises the question as to whether the
  resulting structural adjustment would
  increase or reduce value addition and
  thus whether it would serve the country’s
  long-term development goals
Main Conclusions, continued

• As Brazil pursues trade liberalization
  policies, it will be important to plan for
  the distributional consequences between
  regions, workers and households as well
  as the long-term impact on the structure
  of the economy

• Additional transitional adjustment
  programs may be needed, particularly for
  unskilled labor
Brazil in the Global Economy:
Measuring the Gains from Trade

                 Sandra Polaski
    Carnegie Endowment for International Peace
                  April 9, 2009

				
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