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Trade Liberalization and Poverty Reduction Case Study on China andASEAN Countries
2010.6
IPRCC Report
Funded by International Poverty
Reduction Center in China, 2010
Abstract
Trade Liberalization and Poverty Reduction Case Study on China andASEAN Countries
Abstract
Program Leader
Prof. Laping Wu
China Agricultural University
June, 2010
Funded by
IPRCC
2001
3
Research Team
Dr. Laping Wu
Professor, College of Economics & Management, China Agricultural University
Mr. Weiming Tian
Professor, College of Economics & Management, China Agricultural University
Dr. Zhihao Zheng
Professor, College of Economics & Management, China Agricultural University
Dr. Ji Ma
Associate Prof., College of Econ. & Management, China Agricultural University
Dr. Yubing Wang
Associate Prof., College of Econ. & Management, China Agricultural University
Dr. Hai Lin
Assistant Prof. College of Economics & Management, China Agri. University
Ms. Xin Yang
Ph.D Candidate, College of Economics & Management, China Agri. University
Ms. Huiping Chen
Ph.D Candidate, College of Economics & Management, China Agri. University
Mr. Jianjun Qin
Ph.D Candidate, College of Economics & Management, China Agri. University
Contact Information
Dr. Laping Wu
College of Economics & Management
China Agricultural University
No.17, Qinghua East Road, Haidian District
Beijing, 100083, P.R. China
Tel: 86-10-62738573(Fax), 62738816
Moblie:13910658805
Email: [email protected]
4
Contents
1. Introduction ................................................................................................................ 5
1.1 Background ....................................................................................................... 5
1.2 Objectives and Content ..................................................................................... 5
1.3 Research Framework ........................................................................................ 6
2. The development of trade liberalization and new features of poverty ....................... 6
2.1 Trade liberalization and Free Trade Agreement (FTA) ..................................... 6
2.2 The poverty in the process of trade liberalization ............................................. 9
3. The Mechanisim of Trade Liberalization Impact on Poverty Reduction ................. 11
3.1 Emperical Research Review on Trade Liberalization on Poverty Reduction . 11
3.2 Mechanisim of Trade Liberalization Impact on Poverty Reduction ............... 13
4．Trade liberalization versus poverty: from provincial perspectives ........................ 16
4.1 The overall results ........................................................................................... 16
4.2 The comparative analysis across regions ........................................................ 17
4.3 The impact of trade on poverty ....................................................................... 19
5. Trade liberalization and poverty: from Household perspective ............................... 22
5.1 Rural households in poverty and their characteristics .................................... 22
5.2 An empirical analysis of the impacts of changes in prices of agricultural
products on the welfare of rural households in poverty ........................................ 24
6. The Impacts of CAFTA on Bilateral Poverty Reduction ......................................... 27
6.1 Baseline and Scenarios ................................................................................... 28
6.2 Simulation Result ............................................................................................ 29
6.2.1 The Overall Impact Analysis ....................................................................... 29
6.2.2 Impacts on CAFTA Members ...................................................................... 31
5
1. Introduction
1.1 Background
As we all know, trade liberalization is an important driver of economic growth,
while economic growth is an important way to solve the poverty problem. Some
studies show that although it can not be determined whether trade liberalization can
reduce poverty in developing countries, at least it is beneficial to the developed
countries. However, since this round of economic crisis, the developed countries have
frequently taken measures to block trade liberalization in order to recover their
economy and solve the unemployment problem. In contrast, the developing countries
have actively signed the free trade agreements with other countries to promote trade
liberalization. Therefore, people need to rethink the relationship between trade
liberalization and poverty, especially the impact of trade liberalization on poverty in
the developing countries. China and the ASEAN Free Trade Area (CAFTA) has been
fully launched in 2010. What effect will the CAFTA have on both economic growth
and poverty reduction? It has also been the common concern of people and
governments in China and the ASEAN countries.
In the current complicated economic situation, various trade barriers have
emerged, only through a better understanding of the effects of trade liberalization on
poverty, especially the mechanism and approaches in which trade liberalization affects
poverty in the developing countries, can we make better policies related to trade and
poverty reduction, and then ensure the trade development and economic growth can
benefit poor people, and more poor people can share the benefits of economic
growth. Therefore, it is worthwhile to research the mechanism, approaches and extent
of the impacts of trade liberalization on poverty (especially in the developing
countries).
1.2 Objectives and Content
The main goals of this research are: to explore deeply the impact mechanism of
trade liberalization on poverty, to analyze the impacts of trade liberalization on
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poverty in China empirically and analyze systematically the influences of full
implementation of the CAFTA on both economic growth and poverty of its members.
We hope the research can provide government suggestions for poverty reduction
policies. The contents are as followings:
Firstly, to review the development of trade liberalization and the new
characteristics of poverty; secondly, to summarize the impact mechanism of trade
liberalization on poverty; thirdly, to analyze empirically the impacts of trade
liberalization on poverty in China, especially the impacts of trade opening on China's
poverty reduction since China's reform and opening up, particularly since 2001 when
China joined the WTO; fourthly, to study deeply and systematically the potential
impacts of CAFTA on China, ASEAN members and other major countries/regions.
1.3 Research Framework
This research will study poverty from the international trade perspective and
within the broader global scale. We will summarize the relationship between trade and
poverty to explore the impacts of trade liberalization on poverty reduction, and we
will sum up the impacts of trade liberalization and market opening on poverty
reduction based on China's experience since joining the WTO, and finally focus on
the impacts of the full implementation of CAFTA on the bilateral poverty reduction. A
specific technical diagram is shown in Figure 1.
2. The Development of Trade Liberalization and New Features of Poverty
2.1 Trade liberalization and Free Trade Agreement (FTA)
So far the global trade has been showing the characteristics of alternating
between liberalization and protection (Table 1). By comparison, from World War II to
the mid 1970s, the extent of trade liberalization greatly improved, and trade developed
rapidly too. This is mainly reflected in following: firstly, the General Agreement on
Tariffs and Trade (GATT) was established, and through the multilateral trade
negotiations GATT dramatically reduced the import tariffs; secondly, the setup of
regional trade groups, where the group's internal tariffs were cancelled and free trade
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was implemented; thirdly, to implement the preferential tariff system in developing
countries, to give developing countries other preferential treatment; fourthly, the
restriction of import quantity was removed, which greatly improved free trade.
Figure 1 diagram of research framework
After the 1970s a new form of trade protectionism appeared. Some developed
countries pushed trade protection and made laws or regulations to protect trade, such
as the purchase domestic products law of America, etc. There emerged various trade
protection measures, not only market access (tariff and non-tariff policies) and
domestic support, but also export subsidies developed rapidly, leading to more goods
being protected.
Income
Supply
Employment
Price
Wage
Tax
Impacts of trade liberalization on poverty reduction
Conclusions and policy recommendations
AS
EA
N
Conclu
sio
n
Ch
inese
expe
rien
ce
Potential impacts
Process of CAFTA
Micro: Price transmission analysis
Industry: Employment, income transfer
tran
Background of ASEAN
countries
Macro: provincial analysis
Income
distribution
Economic
Growth
Impact Mechanism
China -
ASEAN FTA
Chinese free
trade case
Basic theory
Literature
review
Poverty reduction Trade liberalization
liberalization
liberalization
Background：Trade liberalization and the new characteristics of poverty
8
Table 1 Trade liberalization and development of trade protection
No. Period Phased characteristics Main performance liberalization /
protection
Leading
countries
1 The 15-17 th century European early capital
accumulation
Mercantilist, Export incentives and Import
restrictions trade protection
1 UK
2 Since the middle of
18th century
Industrial revolution, productivity
improvement, product surplus
Abolition of Corn Laws, Maritime law;
Cancel privileges of Trading Company Free trade UK
3 Since the 19th
century Period of free competition
The USA and Germany to protect infant
industries Trade protection USA; Germany
4 Since beginning of
the 20th century
The 1st global economic crisis;
monopoly State monopolized capitalism
Super Trade
Protection 2
USA
5 The 50s to 70s of the
20th century
Economic recovery and free
development of capitalism
Establishing General Agreement on Tariffs
and Trade (GATT) Trade liberalization USA
6 Since the 1970s The 2nd global economic crisis,
stagflation
Government participating in the "managed
trade"
New Trade
Protectionism 3
USA
7 Since the 1980s to
now
The rise of China & other
developing countries, rapid
development of global economy
The setting up of WTO
rapid development of FTA Free trade
China & some
other countries
8 early of the 21st
century
The 3rd Global Economic Crisis
(2007 U.S. subprime mortgage
crisis)
export restrictions, purchase domestic
products, strengthening government
regulation etc.
Trade Protection USA;EUand
other countries
1. Early mercantilist forbid import entirely and prohibits the outflow of gold and silver; to encourage exports for exchanging gold and silver.
2. Super protection trade mainly emphasizes government to protect the monopolized enterprises; it did not protect the weak or infant.
3. The new trade protection mainly stresses that government management trade becomes the norm.
9
After the mid-1990s, with the GATT Uruguay Round agreements and the
establishment of WTO, trade liberalization has improved greatly. The major members
of the WTO gradually opened their markets. During this period, the EU members
formed "a single common market", Australian and New Zealand have formed a Free
Trade Zone, the development of NAFTA, MERCOSUR, and ASEAN was also
accelerated.
The Free Trade Agreement (FTA) and economic integration are major forms of
trade liberalization. According to WTO statistics, Regional Trade Agreements (RTAs)
have become in recent years a very prominent feature of the Multilateral Trading
System (MTS). The surge in RTAs has continued unabated since the early 1990s. The
overall number of RTAs in force has been increasingly steadily, a trend likely to be
strengthened by the many RTAs currently under negotiation. Of these RTAs, Free
Trade Agreements (FTAs) and partial scope agreements account for 90%, while
customs unions account for 10 %.
2.2 Poverty in the process of trade liberalization
Global poor people are mainly located in low-income and middle-income
countries with slow economic growth. From the the regional distribution of poor
people, the poor people in South Asia is the world's largest, accounting for 43% of the
total, followed by Sub-Saharan Africa, accounting for 28%, the third is the East Asia
and Pacific region, accounting for 23%. The distribution of poor people in rural and
urban areas is different in different countries. In Asia and Africa, more than 80% of
poor people live in rural areas and the other 20% in urban areas. In Latin America and
Eastern Europe, about 40% of poor people are in rural areas.
From the domestic geographic environment, the majority of poor people in
developing countries live in mountainous and semi-mountainous areas, desert and
remote areas, where they lack resources and non-agricultural job opportunities, the
living environmental is degredated, social services and infrastructure are insufficient,
drought and flood often hurt poor people, and the natural conditions are much worse.
From the degree of poverty, the gaps of income between different countries are
becoming wider due to the uneven economic development. The Sub-Saharan African
region is the area with the largest poverty and slow economic growth due to natural
disasters, slow economic development, rapid population growth, war and so on. The
poor with average daily expenditure less than 1.25 U.S. per day accounts for 50.9% of
the total population, which is higher than the 40.3% of that in the South Asian
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countries. With rapid economic growth, East Asia's per capita income has increased
substantially. The South Asian economy grows rapidly, but compared to the high
population growth rate, per capita income is stagnant.
Regardless of the nature, scale and extent of poverty, the characteristics in
developing countries are different from developed countries. The reasons for poverty
in developed countries are mainly structural factors, such as the unfair distribution of
wealth and opportunities. While in developing countries, there are two types, one is
structural poverty, the other is resource poverty, which is due to lack of resources. In
developed countries, the poor people generally do not face the subsistence problem,
but in the developing countries, the poor people live in absolute poverty, and have to
fight for survival.
From the perspective of trade liberalization, especially in this century, poverty
shows new features, including:
Firstly, globalization. Although the problem of poverty is still regional, the
integration and globalization of economies makes the economies of different countries
interact with each other, and their economic growth and poverty issues also
increasingly interact. In theory, poverty interacts between countries by two major
channels: one is goods (services) trade under current account; the other is the capital
flow under capital account. Goods (services) trade affects employment, economic
growth and income; capital flow (especially foreign direct investment, FDI) increases
the employment in inflow countries which results in economic and income growth.
Secondly, complicated reasons of poverty and integration of poverty reduction.
Trade liberalization and domestic marketization often occur simultaneously, that is
with the process of trade liberalization the relations between urban and rural areas,
regions, and nations are increasingly strengthened . The traditional understanding of
the causes of poverty is a lack of resources, but with the trade opening between
countries, resource development and economic growth, poverty is mainly due to lack
of ability and opportunity. Governments of each country pay more attention to
education and social security, and it can be described in these aspects: (1) urban
poverty and relative poverty are increasingly placed in an important position; (2) in
addition to the government help, enterprises, cooperatives and other farmer‘s
organizations are also playing a role in reducing poverty. Corporate social
responsibility is also included the effort for reducing poverty; and ( 3) the impacts of
trade on poverty also attract more and more attention, which is the focus of this
research project.
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Thirdly, uncertainty of poverty. Under the new situation, especially considering
economic globalization and trade liberalization, the poverty problem faces not only
the domestic factors, but also the direct international influences. In particular, during
the global economic crisis, the number of global poor people increased by 100 million;
this makes the government of each country realize the uncertainty of poverty. In
addition to these external economic shocks, they include natural disasters (such as
environment, tsunami, climate, earthquake, etc.), which are related to trade and
human activities. For example, the impact of trade on the environment and impacts of
human activities on climate have been accepted as common factors. Compared with
the past, these economic and natural shocks show greater uncertainty and more
frequency.
3. The Mechanism of Trade Liberalization Impact on Poverty Reduction
3.1 Empirical Research Review on Trade Liberalization on Poverty Reduction
There are debates on the impacts of trade liberalization on poverty reduction,
with some arguing that based on the static and dynamic effects of international trade
on economic growth, poor people in developing countries can benefit from trade
liberalization. Traditional trade theory focuses on the static effect of international
trade, which can improve optimal resource allocation and economic growth.
Endogenous growth theory focuses on positive dynamic effects of international trade,
which can make importing countries get new inputs and advanced technology so as to
raise its productivity and improve economic growth.
However, others argue that trade benefits are mainly controlled by the richer
countries/people; trade liberalization can not benefit the poor. Their points of view
include: (1) in the short run the static effect of trade is uncertain; (2) economies of
scale and learning by doing can not be realized in developing countries in short run;
(3) trade liberalization would enlarge the wage disparity and worsen unemployment
and poverty, due to the impacts of imports on unskilled labor; and (4) trade
liberalization is not conducive to human capital accumulation, thereby limiting the
income increase of poor people. Table 2 lists the major empirical research on the
effects of trade liberalization on poverty reduction, which shows for most countries
trade liberalization can improve poverty reduction. The case studies on China also
show the positive impacts.
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Table 2 major research on the impacts of trade liberalization on poverty reduction
Postive impacts Negative impacts
Authors time Case countries/regions Authors time Case countries/regions
Dollar & Kraay 2000 Major developing countries Findlay & Kierzkowski 1983 Major developing countries
World Bank 2002 Highly open and developing countries Agenor &Aizenman 1996 Major countries
Irwin &Tervio 2002 Higher open countries Beyer, Rohas & Vergara 1999 Chile
Hanson 2004 Mexico Kakwani 2004 Korea and Vienam
Topalova 2004 India Nabil Annabi et al 2005 Bangladesh
Sabine Daude 2004 Vietnam (South Area) Pinelopi Koujianou Goldberg &
Nina Pavcnik
2007 Colombia
Cao Xuan Dung 2004 Vietnam Adelman & Morris 2008 Low-income countries
Balat & Porto 2004 Zambia Ramos mabugu &Margaret chitiga 2009 South Africa
Porto 2004 Argentina
Ariel Barraud 2005 Argentina
Jikun Huang 2005 China
Yin Zhang and Guanghua Wang 2006 China
Yun Li 2006 60 developing countries
Mohamed Abdelbasset Chemingui
& Chokri Thabet
2008 Tunisia
Basanta K. Pradhan & Amarendra
Sahoo
2008 India
John Cockburn, Bernard Decaluwé
& Véronique Robichaud
2008 Bangladesh, Benin and India, Nepal
and Pakistan, the Philippines, Senegal
Akarapon Houbcharaun 2009 10 countries in Southeast Asia
13
3.2 Mechanism of Trade Liberalization Impact on Poverty Reduction
From a macro point of view, trade liberalization affects economic growth
mainly through good/service trade and capital flow and then further influences
poverty reduction. This transmission mechanism includes: (1) impacts on economic
growth through price changes, factor mobility, technological change; (2) impacts on
economic growth through the capital flow (especially foreign direct investment)
which affects technological progress, employment and factor allocation; (3) the
impact of economic growth on poverty. The impacts of economic growth on poverty
depend on the characteristics of the economic growth. If economic growth occurs
mainly in poor areas then it will contribute to poverty reduction, or if economic
growth is based on the increase in employment, it is also usually helpful to poverty
reduction.
This macro level transmission is based mainly on the theories of economies of
scale, endogenous growth theory and the international transmission of price
fluctuations of monetarism. (1) The theory of economies of scale focuses on
production expansion which is caused by an export increase, and this raises
production efficiency, and thus benefit. The expansion of export industries and
shrinking of import industries cause resources to be reallocated optimally, which
affects factor income and the poor; (2) endogenous growth theory focuses on the
shock of technology and economic system on economic growth, which means the
growth of national income and personal income, and of course this includes the poor
people; (3) open economy model of the monetarist model studies the effects of
international commodity price transmission and capital flows, and through these two
kinds of effects two countries influence each other.
From a micro point of view, trade liberalization affects poverty reduction
mainly through employment, factor income and consumption etc., this includes: （1）
impacts on poor people through employment; (2) impacts on poor people through
government‘s transfer payment to poor people; （3）impacts on poor people through
consumption especially food consumption.
This micro level transmission is based mainly on the theories of H-O-S and
Stolper-Samuelson theorem. H-O-S theory shows that the factor prices will tend to be
the same in different countries though trade; this means that the labor wage will be
affected by trade, which will influence the poor labors. Stolper-Samuelson theorem
argues that the factors in export industries (the abundant resource endowment) will
14
benefit from trade, however, the factors in import industries (the scarce resource
endowment) will suffer. The factor movement from low return import industries to
high return export industries will cause factor income redistribution and poor labor
will be affected.
Figure 2 is the schematic diagram of trade liberalization mechanism and its
impacts on poverty. It relates to international markets (trade), government, firms and
residents (poor people), and the specific transmission process includes the following:
Figure 2 Diagram of trade liberalization mechanism and its impacts on poverty
(solid line is vale flow, showing the important impacts; dotted line shows the indirect impacts）
Theoretically, the impacts of trade liberalization are mainly based on economic growth and income
distribution and transmitted through current account and capital account. The economic growth is
reflected by firm and farmer‘s production, income distribution includes factor returen in markets and
transfer payment by government.
Firstly, from international macroeconomics, trade liberalization starts from
Producer
Consumer
Shocks
tax
Transfer
payment
Poverty：Poor labor‘s wage + transfer payment
Poverty
reductio
n p
olicy
Govern
men
t
transferp
aym
ent
tax
Factor
return
Residents
(Poor people)
Firms
Government
Interest rate
Retail prices
Wholesale prices
Export competition
Border prices
Exchange rate
Capital flow
Tariff & non-tariff
barrier
Direct & indirect
investment Good/service trade
Trade liberalization: current & capital account
15
good/service trade (under current account) and capital flow (under capital account),
and exchange rates affect these two channels. The direct manifestation of trade
liberalization is: (1) tariff and non-tariff barriers are gradually reduced or removed
and the distorted subsidies on exports are also reduced or removed; (2) from the direct
and indirect investment, capital should be allowed in or out more freely. Capital flow
between countries is mainly determined by interest rate and affected by exchange rate.
A Free Trade Agreement (FTA) is a direct and comprehensive type of trade
liberalization.
Secondly, the ending point of this mechanism is poverty change. This ending
point is mainly affected by three aspects: (1) as producer/labor, the poor people get
payment from selling factors to firms; (2) for those poor who have nothing, they still
can get transfer payment from governments; (3) as agricultural producers, they can
get income from selling their products, but as consumers, they need to pay for food
and other consumption goods, therefore they will be affected by markets and prices.
Thirdly, between the above starting and ending points there are different
transmission channels, in which goods and service trade is the most important, but the
impacts of direct and indirect investment mainly occur through enterprise production.
For the poor, indirect investment, which mainly refers to buying stock and bonds etc.,
will not affect them greatly since they have not much money to buy these assets.
Foreign direct investment (FDI), which refers to setting up a company, affects the
poor mainly through employment.
Fourthly, through the channel of goods and service trade the world price is
transmitted to one country‘s border (border price), then it is further transmitted to
domestic wholesale and retail markets, finally affecting production (growth effects)
and factor return (distribution effects).
Fifthly, the inseparability of production and consumption for the farm
household makes farmers face two markets when they make a production decision: as
a consumer, price change will directly affect their purchasing power and living
standard negatively; as a producer, their income/consumption is positively affected by
agricultural product prices. The net effect will depend on the balance of these forces.
Sixthly, the relationship between government and poor people is through the
transfer payment by poverty alleviation policies; the transfer payment can be in the
form of cash or providing food or other goods or services, including training or
education.
Finally, the transmission mechanism may be shocked be exogenous changes,
16
for example, economic crisis, natural disasters etc. This round of economic crisis
caused the number of poor people to increase by 100 million in the world. Each
earthquake, flood or typhoon also will increase poverty.
4．Trade Liberalization versus Poverty: From Provincial Perspectives
Based on the methods of Shenggen Fan (2002), this part incorporates trade into
a model to build a system and study the contribution of trade to poverty reduction by
using provincial panel-data in China from 2000 to 2008. The other factors affecting
rural poverty reduction are also analyzed in the models. The variables contain: the
productivity of agricultural labor, non-agricultural employment, wage rates, price
ratio of agricultural and non-agricultural price, government expenditure on poverty
alleviation loans, the inflation rate in rural areas, within rural income distribution gap
and income gap between urban and rural and so on.
The data come from Statistical Yearbook of China, China's provincial Statistical
Yearbook, China Rural Statistical Yearbook, Agricultural Yearbook, bulletins of
labor and the development of social security and World Bank statistics.
4.1 The overall results
The results show that: (1) the rapid growth of the rural economy has played a
positive role in rural poverty reduction. The rapid growth of agriculture has greatly
improved the income of rural residents, so as to help reduce poverty. But, while per
capita agricultural GDP reaches to a certain extent, the poverty index would decrease
but diminishingly. Since 2003, the poverty index declined gradually in China,
indicating that income distribution would be more significant in rural poverty
reduction; (2) the rural CPI is not significant in the model. The reasons may be that
the market participation rate of poor rural residents is not high, so price fluctuations
have less impact on their income and expenditure; (3) the non-farm income of rural
residents and non-agricultural employment plays an important role in reducing rural
poverty; (4) the urban-rural income gap would negatively affect poverty reduction in
rural areas. If rural areas would be given higher priority in income distribution, it will
further reduce the poverty index even if the other conditions are the same; (5) the
relative price of agricultural to non agricultural products reflects farmer‘s benefit from
the market, as the relative price could reduce rural poverty to a great extent. It is
noteworthy that the research period is between 2000 and 2008, and during this period
China increased the support prices of grain products. Therefore, the results show that
relative price can benefit rural poverty reduction significantly.
17
Trade is a key factor in this research. The results show that trade reform has
significant impacts on rural poverty reduction.
Firstly, the linkages between trade and poverty is inverted J-type. It means that
at the beginning of trade expansion the poor people were hurt but this was improved
gradually with the trade development. This is mainly due to the restrictions on labor
and capital movement. As we know that due to the residence registration system, at
the beginning of China‘s reform and opening, rural labor could not move to urban
areas to find a job, capital flows were also restricted, higher protection distorted the
domestic price, and the import of foreign equipment replaced unskilled labor, so the
poor could not benefit from trade liberalization at the early stages. As the deepening
of trade reform occurred these restrictions have been gradually removed and the
market in playing a key role in the allocation of resources, so the poor can share the
benefits from trade.
Secondly, the agricultural product exports contribute much to agriculture GDP,
but the agricultural export is not significant. On the whole, trade liberalization
significantly affects rural poverty reduction. Agricultural exports have significant
positive effects on non-agricultural wages, but the effects of imports are negative.
From the perspective of employment, the agricultural trade liberalization has
significantly contributed to non-agricultural employment. Generally, imports usually
cause unemployment, however, because of the free movement of labor the
employment in import sectors increased. From the export point of view, as China
mainly exports processed agricultural products, export-led agricultural trade improved
agricultural processing industry development and promoted the employment of rural
labor force. In addition, there is a trend of equalization of factor prices between
countries through trade liberalization. China's labor wage is low compared to the
world average, so it will be gradually raised with the deepening of trade liberalization,
thereby affecting the rural non-farm labor wages.
Thirdly, agricultural trade liberalization significantly reduces the income gap
between urban and rural areas, and this benefits rural poverty reduction.
4.2 The comparative analysis across regions
The study divides China into the east, central and west, and compares the rural
poverty reduction and its influencing factors at different regions respectively. The
main conclusions are as follows:
Economic growth affects poverty reduction significantly in all provinces, but
18
the extent is different in different regions. In the western area, agricultural output
growth has the highest poverty reduction effects. This is consistent with farmers‘
income structure in western provinces; the share of farmer‘s income from agriculture
is still high. The agricultural growth elasticity to poverty reduction in central
provinces is -0.00123 which is between that of the east and west regions. The
elasticity of eastern provinces is -0.00026, which are in line with China's economic
performance. This shows that with economic growth, agriculture contributes less to
rural poverty reduction.
The income distribution effect becomes more significant, especially income
distribution within rural area and between rural and urban areas; the inflation is not
significant for poverty reduction, indicating that average price increase can not affect
rural poverty reduction greatly; the rural non-farm income and non-agricultural
employment play a significant role for rural poverty reduction in all regions, with the
biggest elasticity of western provinces, the smallest elasticity in eastern area.
As for income disparity between urban and rural areas, the income disparity
elasticity to poverty reduction in eastern provinces is -2.437, but the elasticities of
central and west provinces are respectively 1.992 and 1.4341, indicating that income
disparity in western and central provinces must be given higher priority in alleviating
rural poverty.
From regional perspectives, trade still has significant effects on poverty
reduction. The relationship between trade and poverty also shows inverted J-type style;
the detailed characteristics are as following.
Firstly, agricultural trade affects agricultural GDP significantly in the central
region, while the results were not significant in the eastern or western areas. The
reason is mainly due to the fact that agricultural trade in the eastern and western
provinces is less; the eastern regions are more closely linked to international markets,
but their trade is mainly non agricultural trade, and the western region is not very
closely linked to the international market and its domestic markets are not so
developed as in the central or eastern provinces.
Secondly, agricultural exports significantly contribute to the non-agricultural
wages in the eastern and central regions, while imports show negative effects. The
elasticities of its exports and imports are respectively: 0.1492 and -0.1849, the
elasticities of central regions are respectively 0.1250 and -0.0316. In the western
regions only exports have positive effects, with elasticity 0.1108, the import is not
significant.
19
Thirdly, in terms of non-agricultural employment, agricultural trade was not
significant in the eastern and western regions; this is mainly due to the small
proportion of agricultural trade in the eastern and western regions. Only the trade of
central provinces significantly affects non-farm employment.
Fourthly, in all regions the urban and rural income gap was significantly
improved. Meanwhile, because farm income is still an important source for the
western farmers, agricultural exports can significantly promote their production and
increase farmer‘s income. Imports in the eastern region will help narrow the
urban-rural income gap, but imports in the western region has enlarged urban-rural
income gap. The case of central provinces is not significant.
4.3 The impact of trade on poverty
Based on the system model results, we can calculate the marginal effect of
agricultural trade, agricultural GDP and various types of public investment on poverty
reduction.
The effects of agricultural imports. From the national perspective, poverty
reduction elasticity of agricultural imports is negative, which indicates that an
increase in agricultural imports would worsen rural poverty in China. The poverty
reduction elasticity of agricultural imports is -0.05, that is, if the amount of
agricultural imports increases by 1%, the rural poverty index in China will increase by
0.05%.
From the regional perspective, the marginal effects of agricultural imports on
rural poverty from high to low are: central, east and west. A large part of rural
incomes in the central regions are from agriculture, therefore the farmers in the central
regions are affected by agricultural imports greatly. Agricultural trade also has great
impacts on the wages of non-agricultural labors in the eastern areas and there is a
larger income gap between urban and rural areas in the eastern region.
The effects of agricultural exports. Nationally the poverty reduction elasticity of
agricultural exports is 1.03, which indicates that the increase in agricultural exports
has a positive effect on the alleviation of rural poverty in China, that is, if agricultural
exports increase by 1%, then China's rural poverty index will decrease by 1.03%;
agricultural output elasticity of agricultural exports is also positive, the increase of
agricultural exports also raises farmer‘s income, so that farmers increase their
agricultural production.
From the regional perspective, the marginal effects of agricultural exports on
20
rural poverty from high to low are: central, west and east. Agricultural exports have
the greatest impacts on rural poverty reduction in the central region. The main reason
is that a large part of rural income in the central region is from agriculture.
When putting agricultural imports and exports together, rural poverty reduction
elasticity of net agricultural exports is still positive, which indicates agricultural trade
can help to reduce rural poverty in China; trade liberalization has positive effects on
rural poverty reduction in China.
The comparison of effects of different factors. Based on the national and
regional system model, we calculate the marginal contribution of the major factors in
all regions to economic growth of agriculture, non-agricultural employment, income
gap between urban and rural areas and rural poverty reduction (Table 3).
Table 3 2000-2008 elasticity of the main factors to poverty reduction
Observed variables Nationa
l
Rank East Central West
elasticity of agricultural exports 1.03 2 0.3779 2.1160 0.5921
elasticity of agricultural imports -0.05 negative -0.0559 -0.1454 -0.0228
elasticity of relative price of agricultural product 1.4 1 2.6471 0.7085 0.6631
elasticity of rural residents agricultural assets 0.66 3 0.4855 0.5227 0.7398
elasticity of rural education inputs 0.64 4 0.8090 0.4413 0.5314
elasticity of the urban income growth 0.25 5 0.3105 0.3362 0.3790
elasticity of rural inflation 0.14 6 * * *
elasticity of non-agricultural wage & employment 0.1 7 0.0653 0.0550 0.0606
elasticity of rural water inputs 0.09 8 0.0018 0.0022 0.2065
elasticity of rural non-agricultural capital 0.03 9 0.0118 0.0728 0.0273
elasticity of rural environment management 0.02 10 0.0414 0.0780 0.0619
elasticity of agricultural research 0.01 11 0.0210 0.0137 0.0001
elasticity of rural electricity inputs 0.01 11 0.0062 0.0087 0.0201
elasticity of natural disaster -0.05 negative -0.0394 -0.1743 -0.0524
elasticity of urban-rural income gap -0.24 negative -0.2511 -0.1190 -0.5064
elasticity of urban-rural capital gap -0.02 negative -0.0157 -0.0705 -0.0697
Note: This table was calculated under the Econometrics test results, where * refers to not significant.
From the national perspective, the elasticity of relative price is about 1.4, this
means that the higher relative price of agricultural products to non-agricultural price,
21
the more benefits rural residents get, so as to improve agricultural income and reduce
poverty. Therefore, if the price of agricultural products, relative to industrial products,
increases by 1% , then the index of rural poverty will decrease by 1.4%. The second
factor for rural poverty reduction is agricultural exports. Its elasticity is 1.03, both in
the domestic and foreign markets, so we can see from the estimated elasticity that the
rural households in the market have a significant role in alleviation of rural poverty,
which indicates that the poverty reduction effect of the market is very obvious. The
marginal effect of rural residents‘ assets on poverty reduction is also higher. Other
research also shows that the market openness is more favorable to such households
who own higher assets, that is, this kind of household can enjoy more economic
benefits of opening up and development. There is also higher marginal effect of rural
education (human capital) inputs on rural poverty reduction, while there is lower
marginal elasticity of other financial inputs in agriculture. The expansion of the
urban-rural income gap is extremely harmful to rural poverty reduction; the elasticity
is -0.24, which indicates that China's current income gap between urban and rural
areas is in a negative phase and this should be given higher attention in the alleviation
of rural poverty in China.
From the regional level, we can see that the east, central and west have the
same trend with the national whole, but due to the significant differences in regions,
there are some differences among the effects of each specific factor. The eastern rural
poverty reduction elasticity is the largest, and central and western are smaller, which
reflects the low participation in the market in the central and western region; the
poverty reduction elasticity of rural education in eastern provinces is higher than the
national level, while the central and western poverty reduction elasticity of education
are below this level; the poverty reduction elasticity of agricultural research inputs is
very low, especially in the western region, its elasticity is only 0.0001, which shows
that agricultural research inputs have little impact on the western agricultural
development; but water inputs have an obvious role in the western rural poverty
reduction as the western region faces shortage of water, the inputs on water resources
can accelerate the rapid growth of agricultural output; the western poverty reduction
elasticity of electricity inputs is also higher than the eastern; the high western poverty
reduction elasticity of financial inputs on agriculture reflects the weak infrastructure
in the western region and the importance of reducing rural poverty by strengthening
infrastructure construction; the central poverty reduction elasticity of the rural
environmental management is higher, which shows the rural poverty in the central
22
region is more influenced by the ecological environment and natural disasters;
currently, non-agricultural labor and non-agricultural wage have become an important
approach to alleviate rural poverty, and from regression results we can see that the
poverty reduction elasticity of non-agricultural wage and non-agricultural
employment are higher; the expansion of income gap between urban and rural areas is
more evident in the western region, and the expanding gap also increases the absolute
and relative western rural poverty.
5. Trade Liberalization versus Poverty: From Household Perspective
The aforementioned results show, in general, that the rural CPI does not have a
significant effect on the reduction of poverty. However, considering the fact that
household incomes in rural China have a close relationship to changes in commodity
prices and returns of factors such as wage rate, a further examination of the impact of
changes in prices of agricultural products on welfare of rural households in poverty is
needed using household survey data in China.
5.1 Rural households in poverty and their characteristics
As is the case with farmers in other developing counties, a majority of Chinese
farmers is both producers and consumers for most of agricultural products. It is
therefore important to account for this property—inseparability of production and
consumption in an agricultural household when determining the impacts of changes in
prices of agricultural products on welfare of the rural households in poverty in China.
Using the econometric approach employed by Deaton (1989, 1997), this part is
focused on the examination of the impacts of changes in prices of agricultural
products that might result from adjustments of a public policy (such as trade policy)
on behaviors of a farmer‘s production and consumption.
The rural households in poverty in China are mostly located in the central and
western regions in China. The number of rural population in poverty is 2.23 million in
the eastern region, 10.04 million in the central region, and 26.49 million in the
western region, in 2008. Relative to the national average in rural China, an average
household in poverty has a larger family size and more aged members and children.
Additionally, the heads of the households in poverty usually have lower education
attainments as compared to the national average.
While incomes from crop-planting and wage jobs are the main source of
income for the households in poverty, income from crop-planting is much higher and
23
income from wage jobs is much lower as compared to those of non-poverty
households. In 2008, incomes from crop-planting for the households in poverty
accounted for 49.8% of their per capita net incomes, 20 percentage points lower than
the national average; whereas incomes from wage-jobs for the households in poverty
take up 28.4% of their per capita net incomes, 10 percentage points lower than the
national average. From the consumption point of view, living standards of the
households in poverty is considerably low. Per capita expenditure for the households
in poverty accounts for less than 1/3 of the national average; about half of the
households in poverty are unable to make ends meet, hence their needs for
expenditures are met by family saving and borrowing from others. Additionally, the
share of self-sufficiency to total consumption is much higher, reaching 37.9% in 2008;
family expenditures are mostly used for subsistence needs. For example, expenditures
for food, clothing, and housing for a household in poverty account for 82.9% of per
capita total expenditures, while the ratio of food expenditures to total expenditures is
68.9%.
The share of off-farm labor forces in the total laborers is lower for the
households in poverty than the national average. Off-farm laborers account for 19.2%
of total laborers for the households in poverty, 2 percentage points lower than the
national average; off-farm laborers who have worked for more than 6 months account
for 70.4% of total off-farm laborers for the households in poverty, 14 percentage
points lower than the national average. Moreover, the commercialization rate of major
agricultural products for the households in poverty is significantly lower than the
national average (see table 4), indicating that the productivity for the households in
poverty is low, and that agricultural products are mainly used for self-consumption.
Table 4, Comparison of commercialization rate of major products between
households in poverty and the national average, 2008
National Average Households in Poverty
Grain 55.5 29.8
Oils-bearing crops 45.8 35.1
Vegetables 67.6 40.6
Fruits 85.0 67.8
Livestock and poultry 84.7 61.2
Source: Monitoring Report for Rural Poverty in China in 2009, NBS, pp. 18-19.
24
5.2 An empirical analysis of the impacts of changes in prices of agricultural
products on the welfare of rural households in poverty
This study employs an econometric approach used by Deaton (1989, 1997)
using 2007 National Bureau of Statistics (NBS) data for the income groups which are
determined on the basis of per capita income of rural households.1The ‗net benefit
ratio‘2 for income groups is estimated for each income group first, and then the
impact of changes in prices of agricultural products on welfare of the households in
poverty is then simulated based on those estimates of net benefit ratios.
Because this study focuses on welfare of the households in poverty, for
convenience of description estimation results are presented in terms of households in
poverty, low-income households, medium-low-income households,
medium-high-income households, and high-income households. The poverty group
consists of households in the 1st, 2nd, and 3rd groups, which is consistent with the
official classification standard for households in poverty in China; the low-income
group households in the 4th, 5th, and 6th groups; the medium-low-income group
households in the 7th and 8th groups; the medium-high-income group households in
the 9th group; and the high-income group households in the 10th group.
Due to differential in agricultural production, food consumption, and living
standards among regions in China, the impacts of changes in prices of agricultural
products for a northern province might differ from those for a southern province. Thus,
this study also adds data sets for the sample households from Hebei, a province in the
north, and Guangxi, an autonomous region in the south. The main results found are as
follows:
1. Impacts of changes in prices of major grain products on the welfare of
rural households
For households all over China, a rise of wheat prices would be beneficial to all
households at different income levels; while the benefits are differential. Households
in the medium-income groups are benefited the most from the rise of wheat prices,
low- and high-income groups are the second, and the households in poverty are the
1According to classification standards used in ―2008 rural household survey yearbook in China‖ by NBS, the
nationwide sample of rural households (68,000 households) in 2007 is divided into 10 subgroups based on per
capita incomes. The 10 subgroups are: the 1st group-400 Yuan and under, the 2nd group- 400-800 Yuan, the 3rd
group-800-1200 Yuan, the 4th group-1200-1600 Yuan, the 5th group – 1600-2000 Yuan, the 6th group- 2000-2400
Yuan, the 7th group-2400-2800 Yuan, the 8th group-2800-3500 Yuan, the 9th group-3500-5000 Yuan, and the 10th
group-5000 Yuan and above. The number of households within subgroups accounts for 0.9%, 1.8%, 3.6%, 3.8%,
8.4%, 9.7%, 9.9%, 9.2%, 21.7%, and 31%, respectively, of total sample size. 2 Net benefit ratio refers to xqpyp iiii , where xyp ii /)( is the value of production of i as a
fraction of total household expenditure, and xqp ii /)( is the budget share of good i.
25
least. For households in Guangxi, because farmers consume a small amount of wheat
and plant no wheat, an increase in wheat prices would have a negative impact on the
welfare of households at different income levels; but the impact is minimal.
Similarly, a rise in rice prices would benefit all households at different level;
the medium-high-income groups are benefited the most from the price increase, the
high- and medium-low-income groups the second, the low-income group the third,
and the poverty group the least. Households in Hebei province consume more rice
than what they produce; consequently, a rise of rice price would have a negative
impact on the welfare of households in Hebei province. Moreover, the negative
impact would decrease as incomes grow. Thus, a rise of rice price would hurt the
households in poverty the most .
Different from the cases of wheat and rice, the medium- and low-income
groups in both entire China and Hebei province would benefit the most from a rise in
prices of corn, whereas the poverty and high-income groups would be second. For
households in Guangxi, a rise in corn prices would have a relatively smaller impact as
compared to entire China and Hebei province. Moreover, the net benefit ratios are
similar among income groups in Guangxi; while the households in poverty would
benefit slightly more as compared to other groups in Guangxi. Additionally, relative
to wheat and rice, changes in corn prices would have a larger impact on the welfare of
households than do changes in wheat and rice prices. This might be contributed to
higher commercialization rate of corn compared to wheat and rice because large
amounts of corn are used for animal feed use. The second explanation may be due to
higher yield of corn as compared to wheat and rice.
2. Impacts of changes in prices of vegetables and fruits on rural households
In general, impacts of changes in prices of vegetables and fruits on the welfare
of rural households are relatively smaller as comparing to changes in prices of grain
products. For households all over China, with an exception of the 2nd subgroup (i.e.,
per capita net income range of 400-800 Yuan) that would be hurt as prices of
vegetables increase, a rise of prices of vegetables would have a positive impact on
welfare of households of all other groups. Moreover, the benefits would increase as
incomes grow. As a result, a rise of the price of vegetables would have the highest
benefits to the high-income group while it would have the lowest benefit to the
poverty group. For households in Hebei, a rise of vegetables would have the highest
benefits to the high-income households, indicating the increase in prices of vegetables
would be important for the high-income households to increase their incomes. While
26
the households in poverty would benefit from a rise of the prices of vegetables more
than other groups, they are less than the high-income group. For households in
Guangxi, a rise of the price of vegetables would hurt the poverty and low-income
groups, whereas other groups would benefit from a rise of the price of vegetables.
Furthermore, the high-income group would be the highest beneficiary as prices of
vegetables increase.
In sum, changes in prices of vegetables would have the largest impact on the
welfare of the high-income households, which is consistent with situation in rural
China. In general, incomes from agricultural activities for a rural household have a
positive relationship to acreage of vegetables. According to household survey data,
high-income households have larger acreages of vegetables. While changes in prices
of vegetables would have a higher impact on the poverty group than on the
low-income group, they have smaller impacts as compared to changes in prices of
grain products.
Similar to vegetables, an increase in prices of fruits would have an impact on
households at all income categories, while the impacts are smaller in magnitude as
compared to those of grain products. An increase in fruit prices would have a negative
impact on welfare of the poverty group for both Hebei and Guangxi households
although the impacts are relatively smaller. A rise of fruit prices would have a larger
positive impact on welfare of the high-income group, in particular, for the
high-income households in Hebei province.
3. Impact of changes of pork prices on welfare of rural households
Pork is a major meat product consumed by both urban and rural consumers,
accounting for 60% of meat consumption. Consequently, changes in pork prices
would have a considerable impact on living standards of all Chinese residents.
Therefore, an increase in pork prices would have an impact on the welfare of rural
households at different level. For households all over China, an increase in pork
prices would have a positive impact on the welfare of households at different level,
while the impacts would increase as incomes grow. Thus, a rise of pork price would
be the most benefit to the high-income group while the households in poverty the least.
For households in Hebei, a rise of pork price would have a larger positive impact on
high-income and poverty groups, while it would have a smaller positive impact on
low- and medium-income group. As a result, a rise of pork price would have a largest
impact on welfare of the high-income group. For households in Guangxi, a rise of
pork price would have a negative impact on the lowest-income group (the 1st group),
27
while it would have a positive impact on welfare of all other groups. Moreover, the
impact would increase as incomes grow and, consequently, a rise of pork price would
have a largest impact on welfare of the high-income group. Notice that the increase in
pork price would have a larger impact on welfare of the households in Guangxi than
on welfare of the households in China and Hebei province. The results might be
attributable to high level of production and low level of consumption of pork as
compared to the national average and the average in Hebei province.
Conclusions are therefore made as follows. First, changes in the prices of
agricultural products would have an impact on the welfare of households at different
levels, while the impact on the households in poverty is smaller than other households.
Second, relative to wheat, vegetables, fruits, and pork, changes in prices of rice and
corn would have a larger impact on the households in poverty. If the corn price
increases by 10% and other prices remain constant, the net benefit ratio for the
households in poverty in Hebei province will be 1.5%; if rice price increases by 10%
and other prices remain constant, the net benefit ratio for the households in poverty in
Guangxi will be 0.8%. Finally, changes in prices of grain products would have the
largest impact on welfare of the middle-income households, while changes in prices
of vegetables, fruits, and pork would have the highest impact on welfare of the
high-income households.
In all, all groups would benefit from a rise in prices of agricultural products,
while the welfare of the poor group would be the least. Furthermore, since the
changes of grain prices would have a relatively large impact on the welfare of the
poor group, attention should be given to the price changes of major grain products
which is caused by trade liberalization.
6. The Impacts of CAFTA on Bilateral Poverty Reduction
ASEAN Free Trade Area (AFTA) was proposed in 1992 and composed of 10
countries, including 6 old members (Indonesia, Malaysia, Philippine, Singapore,
Thailand and Brunei Darussalam) and 4 new members (Viet Nam, Lao PDR,
Myanmar and Cambodia). The total population in the region is 530 million . The main
trade partners of ASEAN include USA, Japan, China, South Korea and inside
ASEAN. Major exports of ASEAN include labor intensive products, such as textile
and wearing apparel, and natural resource products such as agricultural products,
fishery products and mineral products; Major import products of ASEAN include
machinery, equipment, raw material and parts for industry inputs. GDP and GDP per
28
capita in ASEAN have both increased to a great extent. Per capita income of
Singapore and Brunei Darussalam is relatively high with low poverty incidence, while
income of Myanmar and Lao PDR is relatively low but short of statistical data for
poverty. According to the poverty data of Indonesia, Thailand and Viet Nam, the
poverty incidences are decreasing step by step in recent years, which is due to the
relatively high economic growth rate. The China – ASEAN Free Trade Area (CAFTA)
is the biggest Free Trade Area all over the world and also the first FTA between
China and other countries or regions, which is established in 2010.
CAFTA will benefit member countries by various ways. Tariff reduction of
CAFTA will increase bilateral trade to stimulate members‘ related industries and
endowments price, including labor, and, at last, affects poverty incidence. In this part
GTAP model (version 7 database) is used to analyze the poverty reduction effects of
CAFTA. The database includes 113 countries or regions and 57 commodities. The
simulation adopts a recursive dynamic method to update the database. The forecast
data of macro variables, such as growth rates of population, GDP and labor are based
on Walmsley (2000) and updated in 2006, while those of China and ASEAN are from
the World Bank and related website and computation.
6.1 Baseline and Scenarios
To analyze the detailed impacts of CAFTA on its members, all its members are
treated separately except for Cambodia, Lao PDR and Myanmar, which have
relatively small trade respectively with China; therefore they are aggregated to one
group (CLM). Thus, the aggregated regions include China, Indonesia, Malaysia,
Philippine, Singapore, Thailand, and Brunei Darussalam, Viet Nam, CLM, Japan,
South Korea, Hong Kong and Taiwan, India, other South Asian countries, other Asian
countries, EU 27 countries, other European countries, Australia and New Zealand,
North America, South America, Africa, Rest of the world.
Commodity aggregation focuses on agricultural products. Major agricultural
products includes rice, wheat, coarse grain, vegetables and fruits, oilseeds, sugar,
plant fiber (mainly cotton), other crop group, milk and milk products, beef, sheep,
goats, horse and related products, other meat and eggs and honey, wool and silk,
forestry related products, fishery products, vegetable oil and fats. For non agricultural
products, the aggregation is based on trade between China and ASEAN, which
includes energy, mineral products, textile, wearing apparel products, chemical
products, other mineral products, metal products, machinery and equipment,
electronic equipment, and service. The analysis will focus on the major traded
29
products between China and ASEAN, including textile, wearing apparel products and
electronic equipment. Other products will also be considered to see whether they have
the potential to increase in the future.
Baseline and scenario setup is based on the implementation process of CAFTA.
The implementation of CAFTA includes four steps: early harvesting program, normal
products tariff reduction of old ASEAN members in 2010, normal products tariff
reduction of new ASEAN members in 2015, and tariff reduction of sensitive products.
According to the four step implementation process, the baseline and scenario are set
as followings.
Baseline: No CAFTA agreement.
2012 Scenario: Tariff reduction according to the second and third steps of the
implantation process. The old members of ASEAN and China will remove all tariffs
of normal products excluding sensitive products, which only reduce to 20% or below.
The new members of ASEAN and China will remove tariff according to Early
Harvesting Program; reduce normal products‘ tariff according to agreement; and no
reduction for sensitive products.
2020 scenario: Full establishment of CAFTA. All tariffs will be removed except
for parts of sensitive products. The tariff reduction of sensitive products is based on
the agreed timetable. To be more specific, the tariff of sensitive products will reduce
to 5% or less in 2018 for old ASEAN members and in 2020 for new members. Thus
the tariff will be reduced to 5% or less for all members for sensitive products. For
highly sensitive products, the tariff will be reduced to 50% in 2015 for old members
and in 2018 for new members. Thus the tariff will be reduced to 50% or less for all
members for highly sensitive products.
6.2 Simulation Result
6.2.1 The Overall Impact Analysis
In terms of the overall macroeconomic impact of the CAFTA on the world, the
world trade volume would increase 0.12% by 2012, and 0.36% by 2020 (table 5). The
impact on world prices is quite small, which can be neglected. It shows that the
CAFTA promotes world trade on the whole, while exerts little impacts on world
prices, mainly caused by the trade creation and trade diversion effect of the free trade
area. The bilateral tariff will be reduced according to the CAFTA agreement, while
the tariff between CAFTA and non-CAFTA members would remain at the existing
levels. The intra-regional trade would increase known as the trade creation effect and
the trade with non- CAFTA members would reduce known as the trade diversion
30
effect. As a result, the volume of trade would increase slightly, and the price would
change little. Meanwhile, the world average price of capital goods would also
increase.
Table 5 Overall Macroeconomic Impact of China-ASEAN Free Trade Area on the World
2012 2020
Change of World Trade Price Index （%） 0.0004% -0.0063%
Change of Total Value of World Trade （%） 0.12% 0.36%
Change of World Welfare （%） 0.004% 0.012%
Change of Price of Capital（%） -0.01% -0.05%
Source: GTAP simulation results.
As for CAFTA members, GDP would change slightly by 2012, but by 2020 it
would increase by about 0.28%. However, GDP of non-members would shrink by
about 0.04%.
As for different trade products, changes of world trade volume and prices vary
by 2012 and 2020. For agricultural products, the trade volume of rice would decrease
by 2012 and 2020, and the rice price would rise relative to the basic scenario. Besides
rice, wheat and other grains are not the major trade products in the China-ASEAN
free trade area, which would be little affected. Trade volumes of fruits and vegetables
would rise by 1.13% by 2020 since the trade creation effect is greater than the trade
diversion effect, while prices would increase slightly. Though oilseeds and vegetable
oil are sensitive products for several ASEAN countries, of which tariff reductions are
little, vegetable oil as important trade products, particularly palm oil, is one of the
main export products in ASEAN, and world trade volume would increase 1.25 percent
by 2020. As sugar is in the list of sensitive products in a few countries and the tariff
declines little, the trade volume and price would change insignificantly. Trade
volumes of plant fibers, mainly cotton, would jump while prices remain relatively
stable. For other crops, milk and its products, cattle and horses and mutton products,
pork and poultry products, eggs, honey, forest products, and aquatic products, trade
volumes would increase to some extent, and prices would change slightly. As the
main trade products between China and ASEAN countries, trade of wool, silk, textiles
and clothing would increase considerably, and prices of wool and silk would rise as
raw materials, while prices of textiles and clothing would drop. Trade of other
non-agricultural products would increase to some extent, but changes of price are also
31
relatively small.
6.2.2 Impacts on CAFTA Members
In all, although member countries are affected positively, the impacts on
different industries would be positive or negative as there are differences in areas of
comparative advantages. Compared to the baseline scenario, which assumes no free
trade area established, the impact of the free trade area on the welfare would be
positive in most countries by 2012, and the impact would be more obvious by 2020.
In addition, while input prices would increase, the rise of wages of unskilled labor
would be similar to that of skilled labor. As the poor labors are mainly the unskilled,
the CAFTA would not enlarge the differences of labor wages, which means no
aggravation of poverty, and poverty would even be reduced in some areas. The
following will analyze the impacts on member countries except Singapore and Brunei,
in which the share of agriculture is small, and poverty is not a big problem with their
developed economies.
(1) Impacts on China
The economic impacts on China are positive on the whole. As Table 6 shows,
overall welfare by 2020 will rise by 0.12% more than that by 2012. As a result, labor
prices would also increase with little difference between the skilled and the
non-skilled, indicating that the wage increase of the poor is close to the average level,
and poverty would not worsen. Prices of land and capital rise slightly, and the rise by
2020 is more than that by 2012, implying that the increase in trade would promote
production, and stimulate the prices of factors to rise, which has a positive effect on
the income of the poor laborers.
The agricultural trade and production in China would be affected positively. In
2012, except vegetable oil, milk and its products, exports of other products would
increase to different degrees. Particularly, for rice, wheat, fruits and vegetables, beef
and mutton and products, pigs and poultry, eggs and honey products, and textiles,
exports would rise slightly, while exports of wool and silk would increase
considerably. It indicates that the Chinese rice is still competitive in ASEAN
countries. Though generally rice in China is not as good in quality as in Thailand or
Vietnam, the price is relatively low, and China would benefit from the free trade
agreement. Meanwhile, export prices would not change much, basically within 0.5%.
As for imports, rice import would decrease due to the increase in rice price. Imports
of fruit and vegetables, and textile would significantly increase, indicating great
increase in bilateral trade as a mutually beneficial result. Prices of vegetables and fruit
32
would drop dramatically, which shows that Chinese consumers‘ welfare would be
enhanced greatly.
Table 6 Impacts of the CAFTA on its Members
China Indonesia Malaysia Philippines
2012 2020 2012 2020 2012 2020 2012 2020
GDP 0.01% 0.13% 0.00% 0.65% 0.00% 0.79% 0.00% -0.07%
Unskilled Labor 0.00% 0.13% 0.28% 0.28% 0.94% 1.29% 0.21% 0.32%
Skilled Labor 0.17% 0.26% 0.33% 0.32% 0.91% 1.10% 0.17% 0.26%
Price of Land 0.18% 0.27% -0.08% 0.39% 3.28% 6.85% 0.05% -0.51%
Price of Capital 0.23% 0.20% 0.22% 0.26% 1.06% 1.41% 0.21% 0.35%
Change of Welfare 0.18% 0.28% 0.28% 1.01% 1.60% 2.32% -0.15% -0.24%
（Table 6 Continued）
Thailand Vietnam Myanmar, Laos and Cambodia
2012 2020 2012 2020 2012 2020
GDP 0.00% 1.32% 0.00% 0.30% 0.00% -0.10%
Unskilled Labor 1.01% 2.32% 2.69% 10.88% -0.07% 0.47%
Skilled Labor 1.05% 2.49% 3.19% 12.27% -0.05% 0.51%
Price of Land 4.52% 8.40% 1.16% 2.27% 0.27% 0.42%
Price of Capital 0.92% 2.30% 2.79% 11.99% -0.14% 0.43%
Change of Welfare 1.76% 5.59% -0.16% -0.67% -0.32% -0.88%
Source: GTAP simulation results.
As the analysis above indicates, China should expand exports of competitive
industries moderately, and be concerned about the less competitive products. First of
all, fruits and vegetables and vegetable oils should be paid attention to. Bilateral trade
of fruits and vegetables would increase, since China mainly produces temperate fruits
and vegetables, while the ASEAN countries produce tropical products. China's
exports have little impacts on prices, and bring no shock to ASEAN countries.
However, the exports from the ASEAN countries to China would result in a more
substantial price decline, and a negative impact on rural income in Guangxi as a
tropical fruits and vegetables production area. Secondly, for vegetable oils, mainly
palm oil, as a sensitive product, tariff cuts is postponed. Even though the simulation
results show little impact on vegetable oils, the industry is still fragile under the
protection of high tariffs, requiring constant attention. Besides, as sensitive products,
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sugar, wool, vegetable fiber and forest products including rubber, are under the
protection of tariffs, causing few imports and slightly increasing exports. It shows that
China is kind of competitive in those industries, and tariffs can be gradually reduced
in order to increase competitiveness in international market.
（2）The impacts on Indonesia.
Generally, Indonesia has a positive effect after the full implementation of
CAFTA. Welfare and GDP would increase annually, and the change of welfare in
2020 is 0.73% more than that in 2012. The labor prices would rise, similarly, the
differences between wages of non-skilled labor and skilled labor are small, and it will
not worsen the poverty situation. Land prices would decline slightly in 2012, and then
increase in 2020, but the changes are small. The price of capital would increase
slightly. The increases in factor prices contribute to the increases in labor income;
meanwhile, there is no enlargement of the income gap between the rich and poor,
which has positive significance for the poor. The exports of wheat, vegetable oil,
sugar, plant fibers (mainly cotton) and other crops, wool and silk, forest products and
clothing would decrease in 2012, and vegetables, fruits, wool and silk would have a
greater increase in imports. The exports of other products have increased in varying
degrees, especially rice, oilseeds, pork and poultry products, eggs and honey. This
shows that Indonesia's rice industry is still receiving protection and growing rapidly
after the rice was included in the highly sensitive products list. There will be
substantial increase in bilateral trade of textile and clothing, and large price decline,
which may be caused by much more intra-industry trade. Although sugar receives
tariff protection as a sensitive product, its exports are still down, and the price
increases, which indicates that sugar industry is still weak. The changes in domestic
production of various products are very small, basically within 1%. The changes in
trade volume, price and production in 2020 would be the same trend as in 2012 but
with a greater degree.
(3) The impacts on Malaysia.
Generally, Malaysia benefits from CAFTA. Welfare and GDP would increase
annually with a higher growth rate. The change of welfare in 2020 is 0.72% more than
that in 2012.The labor prices would increase; similarly, the differences of non-skilled
and skilled labor wages are small. The land prices would increase greatly; the prices
of capital would increase slightly, which indicates that Malaysian‘s land is scarcer to
some extent. The increases of the trade volume, the adjustment of the industrial
structure, and the increases of exports and production, resulting in domestic land,
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capital and other production factor flows to industrial products, and leading to factor
price increase. The increase in factor prices contributes to the increase in labor income,
meanwhile, there is no increase in gap between rich and poor, which has positive
significance for the poor. As to the adjustment of the production structure, Malaysia‘s
agriculture industry is affected because of increasing prices, and agricultural products
exports decreased and imports increased. The trade volume of food crops (except the
rice and wheat crops), vegetable oil, milk and its products and textiles increase to
some extent and have small changes in price. Other products either have little change,
or its exports decreased and imports increased because of increasing prices. Particular
attention should be paid to rice, oilseeds, and vegetable fiber, which have a larger
decline in its exports, and a higher increase in prices, and an increase in imports. This
may cause a loss to farmers who are engaged in the production of such products. This
situation will be more apparent in 2020. Therefore, we should pay special attention to
these industries.
(4) The impacts on Philippines.
Generally, the Philippines has little effect from the full implementation of
CAFTA. Welfare and GDP would decrease slightly, and the welfare in 2020 is 0.09%
more than that in 2012, and GDP would decrease by 0.07% in 2020. The labor prices
would rise, similarly, the increase of non-skilled labor wage is larger than that of
skilled labor. Furthermore, the poor (mainly non-skilled labor) and their income
would be improved. The land prices would decrease, which may be caused by the
slow pace of readjustment of the economy and so demands for these production
factors are small. In fact, for the past few years, the export of fruits, vegetables, sugar,
forest products, and other products to China has been substantially reduced, other
CAFTA members with comparative advantage occupies Philippines‘s export market
in China because of tariff reduction, however, Philippines‘ wearing apparel industry
receives high protection as sensitive products, and its export would increase
significantly. In addition, the Philippines‘ wheat and livestock products have
comparative advantages, and exports would increase, which have positive effects on
farmers‘ income. It is worth mentioning that the Philippines lists rice as a highly
sensitive product, but actually, rice has been set an import quota for rice, and the tariff
equivalents of the quota does not decrease significantly after the CAFTA. For
Philippines‘ poor farmers of the rice industry, this protects their revenue, but it also
weakens its international competitiveness, and raises the pressure of improving
production efficiency.
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(5) The impacts on Thailand.
Generally, Thailand has a positive effect after the full implementation of CAFTA.
Welfare and GDP would increase significantly, and the welfare in 2020 is 3.83%
more than that in 2012. For Thailand‘s export-oriented economy, the more the tariffs
are cut, the greater it‘s open range, and the more benefits from CAFTA. The labor
prices would rise slightly; similarly, the increase of non-skilled labor wage is almost
the same as that of the skilled labor, and therefore the poverty situation would not
worsen. The rising of land prices is big, indicating that demand for Thailand‘s land
would be more due to restructuring. Capital price would rise with openness. The
increase in factor prices would raise labor income. Meanwhile, there is no increase in
the gap between the rich and poor, which has positive significance for the poor.
Thailand‘s related industries would conduct a rapid readjustment based on its
comparative advantages. Product trade and production changes reflect a strong
characteristic of trade-oriented economy. The exports of vegetables, fruits, vegetable
oil, milk and its products, meat and its products, textile and wearing apparel would
rise, among them, the imports of vegetable oil, textiles and wearing apparel would
also increase sharply, indicating intra-industry trade. The increase in vegetable oil and
sugar imports should be given higher attention on Thailand‘s own related industries.
In addition, rice is one of Thailand‘s traditional export products; its exports
should increase after CAFTA, but in fact exports would decline slightly. The major
reason is because other ASEAN members (mainly Philippines, Malaysia and
Indonesia) list rice as highly sensitive products, and will not fully open their rice
markets. It will also be a problem that needs more attention and to be resolved within
the ASEAN countries. In addition, other countries‘ rice prices are relatively low
compared with Thailand. Other countries may also enter the Thailand market at lower
prices when Thailand opens its rice market, but Thailand‘s rice is still more
competitive in quality, there is no significant increase in imports, and so rice farmers
would not be affected greatly.
(6) The impacts on new ASEAN members (Vietnam, Myanmar, Laos, and Cambodia).
The total welfare of ASEAN new members would not increase, but their GDP
would rise and these countries would improve a rapid economic restructure, especially
for Vietnam, and its labor prices, land prices and capital prices would all rise sharply.
This increase is helpful to the poor people. However, the increase of the non-skilled
labor wage is smaller than that of skilled labor, which may widen the gap between
rich and poor. Myanmar, Laos and Cambodia have obvious changes in trade. Their
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rice, livestock industry would develop rapidly, and exports would increase
significantly. Vietnam‘s wheat, pork and poultry products, eggs, honey, and textile
and wearing apparel industries would develop rapidly, and exports would increase
substantially. Although sugar is listed as Vietnam‘s highly sensitive product, it still
would be severely affected and face decrease in exports and a substantial increase in
imports.
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7. Conclusions and Suggestions
With the development of economic globalization, the economies of different
countries are gradually integrated to the world market and influenced by each other.
More free trade areas are set up and trade liberalization is improved. The major
objectives of this research are: to explore theoretically the impact mechanism of trade
liberalization on poverty, to analyze empirically the impacts of trade liberalization on
poverty of China, and to study systematically the influences of the full
implementation of the CAFTA on both economic growth and poverty of its members.
7.1 Conclusions and discussions
The major conclusions of this research include following:
(1) For a long time the global trade has been showing the characteristics of
alternating between liberalization and protection. Every free trade round is driven by
output surplus of major countries which is mainly caused by productivity increase.
However; every economic recession resulted in trade protectionism. All three big
global economic crises since the 20th Century (the first time is 1929-1933; the second
is the beginning of the 1970s and third one is current economic crisis) cause trade
protectionism.
(2)There are different views on the impacts of trade liberalization on poverty
reduction. Some argue that, based on the static and dynamic effects of international
trade on economic growth, poor people in developing countries can benefit from trade
liberalization. However, the others argue that trade benefits are mainly controlled by
the rich; trade liberalization can not benefit the poor. Empirical research shows for
most countries trade liberalization can improve poverty reduction. The case studies on
China also show the positive impacts.
(3) Trade liberalization directly affects economic growth and income distribution
mainly through good/service trade and capital flow, and then further influences
poverty reduction. This transmission mechanism includes: (a) impacts on economic
growth through price changes, factor mobility, technological change; (b) impacts on
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economic growth through the capital flow (especially foreign direct investment)
which affects technological progress, employment and factor allocation; (c) the
impact of economic growth on poverty; (d) the influences of income distribution
includes two channels, one is that through providing production factors poor people
(factor owners) can get factor returns, the other is for those poor people who have no
production factors, they can get transfer payments from government, enterprises or
NGOs etc. The impacts of economic growth on poverty depend on the characteristics
of the economic growth; if economic growth occurs mainly in poor areas then it will
contribute to poverty reduction, or if economic growth is in the form of an increase in
employment, it is also usually helpful to poverty reduction.
(4) Since the end 1970s China has been improving reform and opening up, with
trade liberalization is deepening gradually. The empirical research using provincial
data shows that overal national free trade has significant impacts on rural poverty
reduction. The relationship between trade and poverty shows the inverted J curve. It
means that at the beginning of trade expansion the poor people were hurt but this was
improved gradually with the trade development. After a certain period, poor people
can benefit much from trade liberalization, but generally poor people can benefit from
trade liberalization.
(5)The regional test results by eastern, central and western provinces also show
the inverted J relationship between trade and poverty. Agricultural trade significantly
affects the agricultural GDP in central provinces, but not significantly in eastern or
central areas; in eastern, central and western areas, agricultural export increases the
non- agricultural wage, but import in eastern and central provinces has a negative
effects on non-agricultural wage, and the impact of import in non-agricultural wage in
western provinces is not significant; in terms of employment, only in central
provinces trade increases employment significantly.
(6) Marginal effects of agricultural trade on poverty reduction. Generally, the
agricultural import elasticity of poverty reduction is -0.05, indicating import has
negative effects on poverty reduction. When agricultural import increases by 1
percent, the poverty index will increase by 0.05 percent. From the regional
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perspective, the marginal effects of agricultural imports on rural poverty from high to
low are: central, east and west.
From the export perspective, the poverty reduction elasticity of agricultural
exports is 1.03, which indicates that the increase in agricultural exports has a positive
effect on the alleviation of rural poverty in China, that is, if agricultural exports
increase by 1%, then China's rural poverty index will decrease by 1.03%. From the
regional perspective, the marginal effects of agricultural exports on rural poverty from
high to low are: central, west and east; agricultural exports have the greatest impacts
on rural poverty reduction in the central region.
When putting agricultural imports and exports together, rural poverty reduction
elasticity of net agricultural exports is still positive, which indicates agricultural trade
can help to reduce rural poverty in China; trade liberalization has positive effects on
rural poverty reduction.
（7）This research also analyzes the effects of price charge on different groups
of people using rural household data from Chinese Statistical Bureau. The results
show that agricultural product price change will affect all groups, but the poor group
is affected less than the non-poor group. Compared with wheat, vegetable, fruits and
pock meat, the change of corn and rice prices affects the poor group greatly; grain
price change affects middle income group greatly, but the changes of vegetable, fruits
and pork meat affects the high income group greatly.
In all, all groups would benefit from a rise in prices of agricultural products,
while the welfare of the poor group would be the least. Furthermore, since the
changes of grain prices would have a relatively large impact on the welfare of the
poor group, attention should be given to the price changes of major grain products
which is caused by trade liberalization
（8）The CAFTA would increase world trade by 0.12 and 0.36 percent in 2012 and 2020
respectively compared with baseline scenario, which is that there is no CAFTA in 2012 and 2020.
However, world price level is not affected significantly. For each CAFTA member, in 2012 their
GDP is not affected greatly, but in 2020 the CAFTA GDP would increase by 0.28%, the GDP of
other countries would decrease by 0.04%. From the perspectives of specific products, rice trade
would decrease in both 2012 and 2020 compared with baseline scenario, and price would increase.
In CAFTA member countries, the other grains are not major trade products, and not affected
greatly. Vegetables and fruits would be affected positively: in 2020 trade would increase by 1.13%
and prices would also increase but not much. As oil seeds and vegetable oil are listed as sensitive
products for several ASEAN countries, tariff reductions are little, and trade would
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increase 1.25 percent by 2020. As sugar is in the list of sensitive products in a few
countries and the tariff declines little, the trade volume and price would change
insignificantly. Trade volumes of plant fibers, mainly cotton, would jump while prices
remain relatively stable. Trade of wool, silk, textiles and clothing would increase
considerably, and prices of wool and silk would rise as raw materials, while prices of
textiles and clothing would drop. Trade of other non-agricultural products would
increase to some extent, but changes of price are also relatively small.
（9）From the perspectives of CAFTA members, generally each member benefits
from CAFTA, however, due to different comparative advantages, different sectors are
affected positively or negatively. Compared with the baseline scenario, in 2012 most
members will benefit from CAFTA in terms of social welfare, in 2020 it is even more
significant. In each member country, input prices would increase, and unskilled labor
wage would increase almost as much as skilled labor wage, since most poor laborers
are unskilled, so poor labor would not be influenced badly.
7.2 Suggestions
(1) Trade liberalization is irreversible, though at the beginning of free trade poor
may benefit not much or suffer, but after a certain period poor people could gradually
benefit from trade liberalization. Therefore, under the background of economic
globalization, each country should actively improve free trade.
(2) The impact mechanism of trade liberalization on poverty reduction shows
that goods or service trade is the major channel; the government should improve free
trade by removing or reducing tariff or non tariff measures to achieve win-win.
(3) Labor income is one of major sources of poor people; the government needs
to improve free labor market, and train poor labor so that they can find job easily even
if unemployed in trade liberalization. For those poor who haven‘t any production
factors, government should improve its social security system.
(4) Ecomomic growth is the fundmental element of the free trade and poverty
relationship. The government should try to encourage poor people to participate in the
free market so that they can benefit from the market and trade.
(5) Income distribution is another key factor. The government needs to design
appropriate income distribution policy to help poor people through transfer payments.
(6) Each member of CAFTA would benefit from it for different sectors, so each
member should try to improve its development actively and jointly.