Globalization and poverty changes in Colombia

Globalization and poverty changes in Colombia Maurizio Bussolo OECD Development Centre Jann Lay Kiel Institute for World Economics April 2003 Abstract. Assessing the final impact of globalization on poverty is a difficult task: (a) globalization affects poverty through numerous channels; (b) some linkages are positive and some are negative and therefore cannot be analyzed qualitatively but require quantitative assessments, i.e. formal numerical models; and (c) trade expansion and growth (key aspects of globalization) are essentially macro phenomena, whereas poverty is fundamentally a micro phenomenon. In this paper we use a new method that combines a micro-simulation model and a standard CGE model. These two models are used in a sequential fashion (as in a recent paper by Robilliard et al (2002)). The CGE model and the micro-simulation model are calibrated using a recent SAM and household survey for Colombia and together they capture the structural features of the economy and its detailed income generation mechanisms. We use this framework to analyze the important income distribution and poverty changes occurred with the great trade liberalization of the 90's. A major policy conclusion is that trade liberalization can substantially contribute to improve the poverty situation. Abstracting from simultaneous additional shocks and labor supply growth, the beginning of the 90s tariff abatement seems to have accounted for a very large share of the total reduction in poverty recorded from 1988 to 1995. This holds in particular for rural areas. Furthermore distributional impacts differ fundamentally between rural and urban areas, and our methodology highlights that aggregate net results, such as the change in the poverty ratio (headcount), conceal important flows in and out of poverty. This framework allows us to capture important channels through which macro shocks affect household incomes and possibly to help in designing corrective pro-poor policies.  1 Introduction During the last two decades, bilateral and multilateral donors' policy advice to developing countries has been centered on greater market openness and better integration into the global economy. This advice is based on two major assumptions. First, that outward-oriented economies are not only more efficient and less prone to resource waste, but have also performed well in terms of overall development. Second, that raising average incomes benefit all groups within countries, i.e., the notion that as long as inequality is not increasing, economic progress will reduce poverty. However, these assumptions have recently been challenged, and the effects of globalization on poverty are generating growing concern. To address these concerns and, at the same time, to assist in the formulation of better pro-poor policies, a clearer understanding of the complex relationship between globalization and poverty is needed. This paper's main objective is to determine the sign and strength of the effects of trade liberalization, an important globalization shock, on poverty in the context of a case study for Colombia. At the beginning of the 90's Colombia abandoned its import substitution industrialization policy and started a process of trade liberalization which culminated with the drastic tariffs cuts of the 1990-91. Colombian trade reform has been one of the most swift import liberalization of Latin America, within a few months tariffs were more than halved and a series of institutions delegated to regulate commercial policy, including the Ministry of Foreign trade, had been created or reformed. In addition to the trade liberalization policy, the government implemented a series of other structural reforms ranging from labor reform and foreign exchange deregulation, to financial markets reforms, including establishing the independence of the central bank, and to the promulgation of a new constitution. In the same period, poverty recorded some improvements in the urban areas but stagnated in the rural ones, and inequality registered a significant countrywide increase. Identifying the poverty and inequality effects of each of the mentioned reforms, as well as those originating from additional technology and external shocks that affected Colombia in the first half of the 90's is a complex task, even when two well conducted households surveys provide data before and after the reform effort, namely for the years 1988 and 1995. To tackle this task, this paper follows an approach quite different from that of a large, although not uncontroversial, literature that analyses the links between openness and growth (Rodriguez  and Rodrik (2000) and references cited therein), or from those studies that extend these links to include poverty (Dollar and Kraay, (2000)). This literature relies on cross-national regressions and, although they provide some evidence on the positive relationship linking openness to growth and poverty, in the words of Srinivasan and Bhagwati (1999) "nuanced, in-depth analyses of country experiences [...] taking into account numerous country-specific factors" are needed to plausibly appraise the connections between openness and growth. Their arguments apply, even more strongly, to the case of the links between globalization and poverty. In this case, country- specific characteristics