Global Trade and Poor Nations: The Poverty Impacts and Policy Implications of Liberalization

Chapter 4: Madagascar

As shown in chapter 2 of this volume, the overall impact of multilateral trade liberalization is expected to be minor in Madagascar, as in most other least developed countries. However, a small overall effect might still mean a large impact for some parts of the population. This chapter analyzes the effects that multilateral trade liberalization would have across income groups and between urban and rural areas, identifying possible winners and losers. The analysis explores the effects on households’ real income of the two scenarios introduced in chapter 2: a business-as-usual scenario, which involves a 40 percent reduction in bound tariffs, and a more ambitious multilateral trade liberalization. The empirical approach is based on the trade and poverty framework developed by Winters.1 First, changes in prices and quantities of goods and factors consequent on changes in trade policy are estimated using the partial equilibrium model described by Kee, Nicita, and Olarreaga in chapter 2. Then these changes are mapped onto the consumption and production bundles of individual Malagasy households. This chapter is organized as follows. A brief section describes the extent and distribution of poverty in Madagascar, followed by a section analyzing MadaMadagascar alessandro nicita 4 77 The author wishes to thank Jorge Balat, Marcelo Olarreaga, Guido Porto, and Isidro Soloaga for helpful comments and discussions. 1. Winters (2002). gascar’s exposure to international shocks by looking at household production and consumption patterns to gauge the likely effects of changes in trade policy on household welfare. A third section sets out the empirical framework used for the simulations, a fourth section presents the results, and a final section concludes. The findings suggest that the implementation of a business-as-usual multilateral trade liberalization would have little impact on household real income and even less impact on overall poverty in Madagascar (on average, it would produce an increase of about 0.6 percent in real income). The implementation of more ambitious trade liberalization would have a larger impact on household real income (an average increase of 1.8 percent), with rural areas benefiting slightly more than urban. In the ambitious scenario, poor households would benefit the most; their real income would rise by between 2 and 3 percent. There are several reasons why multilateral trade liberalization (and in particular in the business-as-usual scenario) would have only a limited effect on poverty in Madagascar. First is the small supply response of the Malagasy economy to movements in international prices. Second is the limited effect of the proposed liberalization measures on the products that are exported by Madagascar and for which Madagascar has a comparative advantage. Third is the weak infrastructure and pervasive subsistence economy in the country’s rural areas, which largely isolate households from the effects of international price changes. Poverty in Madagascar Madagascar is one of the poorest countries in the world. Macroeconomic indicators suggest that the nation became steadily poorer over the forty years prior to 2001.2 In that year, about 70 percent of the population lived in poverty. The 2002 political crisis produced a rapid rise in the poverty rate so that 73.6 percent of the population was estimated to be poor in 2003. Poverty rates are quite different across geographic regions and between urban and rural areas. Table 4-1 reports the percentage of people living in poverty as observed from household surveys. Among the different regions, poverty rates have been worsening the most in Taomasina, Fianarantsoa, and rural Toliara. By contrast, poverty rates have fallen dramatically in the Antananarivo region, especially in urban Antananarivo, where poverty has declined from about 52 percent in 1997 to 29 percent in 2001. Over the past decade, poverty has receded somewhat in urban areas but increased in rural areas. Urban areas benefited from growth in the export sectors during the late 1990s, which created employment and pushed up labor earnings.3 But rural areas have lagged behind, and three-quarters of 78 alessandro nicita 2. Per capita GDP declined from about $430 to $230 between 1960 and 2001. 3. Nicita and Razzaz (2003). Table 4-1. Percentage of Population in Poverty (Headcount Index) in Madagascar, 1993–2001a 1993 1997 1999 2001 Location Total Urban Rural Total Urban Rural Total Urban Rural Total Urban Rural National 70 50.1 74.5 73.3 63.2 76 71.3 52.1 76.7 70.1 48.1 76.5 Province Antananarivo 68 42.4...