The Doha Trade Round and Mozambique

WPS3717 The Doha Trade Round and Mozambique by Channing Arndt* Chapter 5 in Putting Development Back into the Doha Agenda: Poverty Impacts of a WTO Agreement, Thomas W. Hertel and L. Alan Winters (eds.) forthcoming from the World Bank, Washington, DC World Bank Policy Research Working Paper 3717, September 2005 The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the view of the World Bank, its Executive Directors, or the countries they represent. Policy Research Working Papers are available online at http://econ.worldbank.org. *Ministry of Planning and Development, Mozambique and Associate Professor Purdue University.  Summary This paper considers the potential implications of the Doha Development Agenda, as well as other trade liberalization scenarios, for Mozambique. An applied general equilibrium model, which accounts for high marketing margins and home consumption in the Mozambique economy, is linked to results from the GTAP model of global trade. In addition, a microsimulation module is employed to consider the subsequent implications of trade liberalization for poverty. The implications of trade liberalization, particularly the Doha scenarios, are found to be relatively small. Presuming that a more liberal trading regime will positively influence growth in Mozambique, an opportunity exists to put in place such a regime without imposing significant adjustment costs. ii  Introduction The Doha round of trade negotiations seeks explicitly to involve developing countries. In terms of process, developing countries are expected, as a group, to be much more engaged in the actual negotiations. Wealthier nations, on their side, are expected to place greater emphasis on the implications of any agreement for the developing countries, and particularly for poverty. The hope is to reach an agreement that enhances opportunities for developing countries to achieve poverty reducing economic growth through stronger trade linkages with the world economy. As the region with the highest rate of poverty and relatively weak linkages into the global economy, it seems logical to carefully consider the role of Africa within the Doha agenda. The African continent is both enormous and highly diverse. As a result, implications of any given global trade agreement will differ across economies on the continent. This paper considers the potential implications of trade liberalization scenarios for the case of Mozambique. Like all African economies, Mozambique has distinguishing features that render it unique. However, as will be discussed, it also shares many structural features with other African countries. The logic of some of the ideas developed here can therefore be applied to a number of other countries across the continent. The paper is structured as follows. Section 1 presents a brief description of Mozambique. Section 2 considers implications of various trade liberalization scenarios derived from an analysis that marries outputs from the GTAP model of global trade with a more detailed country computable general equilibrium (CGE) model of Mozambique. Poverty analysis proceeds using a separate household microsimulation module. Section 3 provides a critique of the main results that come out of the models. Section 4 concludes.  The transmission of prices to low-income households is a theme that is developed in particular detail throughout the paper. 1. Mozambique Mozambique is located along the South Eastern coast of Africa. In terms of total area, coastline and shape, it is roughly similar to (a mirror image of) the combined areas of the states of California, Oregon, and Washington that make up the western coast of the United States. Exploitation of natural resources underpins a substantial share of economic activity. Fisheries comprise a major export industry. The stock of arable land is large and much arable land remains unexploited. Important agricultural exports include cotton and tobacco. Forestry is also important. With its long coastline and abundance of natural harbors, Mozambique provides port and transport services to neighboring countries. Exploitation of natural gas, uranium, titanium, and other mineral resources has also begun. Finally, Mozambique's natural beauty, particularly her beaches and coral reefs, attracts tourists. These favorable attributes are spread out over a relatively small population of not quite 19 million people. Nevertheless, more than half of the population is categorized as absolutely poor. This implies that slightly more than one person in two has difficulty in meeting very basic survival needs in terms of calorie consumption and basic non-food necessities such as housing and clothing. This pervasive poverty is the result of a complex historical legacy that included weak human capital development over the colonial period even by African standards, failed socialist policies initiated shortly after independence in 1975, and finally, a brutal 2  civil war that endured for more than a decade. The cessation of hostilities in 1992 coincided with one of the worst droughts on record. The cumulative effect of these disasters earned Mozambique the unwanted moniker of "poorest country in the world" in the early 1990s. Since then, the economic record has been considerably more positive. From a low base, economic growth has averaged in the range of 7-8 percent per annum for more than a decade. This growth coincided with the implementation of a fairly standard structural adjustment program. Very considerable flows of external assistance clearly helped to fuel growth and provided major funding for social initiatives with particularly large investments in basic health and education.1 By most objective indicators, living conditions for the Mozambican population have improved considerably. In 1996-97, about 69 percent of the population was characterized as absolutely poor using real consumption as a metric. By 2002-03, this number had fallen by 15 percentage points to about 54 percent using the same metric. Indicators such as crop production, asset ownership, income of rural households, school enrollments, infant mortality, and child vaccination coverage rates also showed improvements (MPF et al. 2004). Because initial development levels were so low, a decade plus of rapid growth and rapid improvement in many social indicators has placed Mozambique near Sub- Saharan African averages for a range of indicators. In short, the trends are positive but the absolute levels of such indicators remain dismal. The clear challenge is to maintain the positive momentum developed over the past decade. Over the coming decade, international trade will likely play a prominent role if growth is to continue. Growth in the past decade has been driven in large measure by 1 For a more complete historical review, see Arndt, Jensen, and Tarp (2000). 3  internal reconstruction needs (usually donor funded) and production of basic goods and services that often have been consumed at very local levels, frequently within the household where they are produced.2 While these sources of demand are likely to continue to be important, at least through the medium term, there is also a clear need to strengthen links to international markets, particularly with respect to exports of labor intensive products. This thumbnail sketch illustrates many aspects of Mozambique that are unique on the African continent. However, Mozambique also shares many essential structural features that are quite common. A non-exhaustive list includes: