Export led growth, pro-poor or not? Evidence from Madagascar's textile and apparel industry

WPS3841 Export led growth, pro poor or not? Evidence from Madagascar's textile and apparel industry* Alessandro Nicita Abstract Madagascar's textile and apparel industry has been among the fastest growing in Sub-Saharan Africa. Fueled by low labor costs, a relatively productive labor force, and preferential access to industrial countries, Madagascar's exports of textile and apparel products grew from about 45 million USD in 1990 to almost half a billion USD in 2001. The impact of this export surge has been very large in terms of employment and wages; albeit less so in terms of poverty reduction. To address the concern of whether the poor benefit and to what extent, this paper follows a new approach suited to identify the beneficiaries of globalization and to quantify the benefits at the household level, so as to understand which segments of the population benefit most and which, if any, are marginalized. The analysis focuses on the labor market channel which has been recognized as the main transmission between economic growth and poverty. The methodology uses household level data and combines the wage premium literature with matching methods. The results point to a strong variation in the distribution of the benefits from export growth with skilled workers and urban areas benefiting most. From a poverty perspective, export led growth in the textile and apparel sector has only a small effect on overall poverty. This study points to two reasons for this. First, a large majority of the poor are unable to enjoy the new employment opportunities given their lack of skills sought by the expanding textile and apparel export industry. Second, most of the poor reside in rural areas, where the employment effect is very small. The results indicate that the effects of an increase in exports of textiles for poverty reduction are felt only in urban areas, mostly through creation of employment (rather than increases in wages). Indeed, some of the urban poor are good candidates for finding employment in the expanding sector. However, the urban poor are likely to find employment only in unskilled jobs. Given that unskilled wages are kept low by a large reserve labor sector, the gains are limited, and the overall impact on poverty is small. More generally, the results of this study suggest that two factors are required if export-led economic growth is to significantly reduce poverty. First, growth and job creation must not be restricted to a few geographic areas but need to reach areas where the majority of the poor live. Second, poor people must be assisted in obtaining the skills sought by expanding industries. Keywords: Africa, Madagascar, Poverty, Trade, Employment. World Bank Policy Research Working Paper 3841, February 2006 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. *The author wishes to thank Jaime de Melo, Marcelo Olarreaga, Jos