Trade Reform and Household Welfare: The Case of Mexico. August Abstract

Transcripción

1 Trade Reform and Household Welfare: The Case of Mexco Elena Ianchovchna, Alessandro Ncta and Isdro Soloaga World Bank, DECRG-Trade August 2001 Abstract We use a two step computatonally smple procedure to analyze the effects of Mexco s potental unlateral tarff lberalzaton. Frst, we use an already avalable CGE model provded by the Global Trade Analyss Project (GTAP) as the new prce generator. Second, we apply the prce changes to Mexcan household data n order to assess the effects of the polcy smulaton on poverty and ncome dstrbuton. Although Mexco already wdely lberalzed most of ts mports by the md 90 s, one salent feature s ts membershp n the North Amercan Free Trade Agreement (NAFTA) wth Canada and Unted States. By choosng GTAP as the prce generator, we are able to model the dfferental tarff structure qute approprately (almost zero for NAFTA members and hgher tarffs for non-members). Even startng wth a low level of tarff protecton, smulaton results show that the mpact of tarff reform on welfare wll be postve n general for all expendture decles. We fnd that, when we assume non-homothetc ndvdual preferences, trade lberalzaton benefts people n the poorer decles more than those n the rcher ones. The fndngs, nterpretatons, and conclusons expressed n ths paper are entrely those of the authors. They do not necessarly represent the vew of the World Bank, ts Executve Drectors, or the countres they represent. The authors wsh to thank Emko Fukase, Marcelo Gugale, Thomas Hertel, Wllam Martn, and Domnque Van der Mensbrugghe for ther useful comments, although they are not responsble for any errors remanng. Specfc fgures and calculatons of poverty and nequalty measures are the authors' own and do not necessarly represent or concde wth the vews of the World Bank on the matter.

2 1. Introducton 1 The analyss of the dstrbutonal mpact of trade reforms plays an mportant role n the assessment of who s payng the welfare costs of adjustment, what are the nstruments that could be used to eventually allevate these burdens, and at what aggregate economc costs. The analyss s dffcult because trade reforms have macroeconomc lnkages, whle the effects on ncome and poverty are nherently mcroeconomc ssues. Researchers have tackled the analyss n many dfferent ways. Some have used aggregate ndcators such as the levels of wages and employment, or the value added n dfferent sectors, n order to assess the effects of dfferent trade regmes on the dstrbuton of ncome (Beyer et al., 1999; Harrson and Hansen, 1999; Pssardes, 1997). As these ndcators fal to capture the mx of effects on specfc households and these households responses to prces, other researchers have tred more elaborate models that account for the nterrelatonshp between labor markets (rural and urban) and prces of staple agrcultural goods. For nstance, Ravallon (1989) used a partal equlbrum model to examne the rural welfare dstrbutonal effects of changes n food prces under nduced wage responses for rural Bangladesh. Levy and van Wjnbergen (1992) also followed ths partal equlbrum approach when analyzng ncome effects on dfferent economc groups after changng producton and consumpton subsdes on agrcultural goods. Computable general equlbrum (CGE) models offer a more comprehensve way of modelng the overall mpact of polcy changes on the economy. These models ncorporate many mportant economc lnkages and are well-suted to explan medumto long-term trends and structural responses to changes n development polcy. An effort to adapt CGE models to the analyss of dfferent adjustment programs and to estmate the costs of other strateges was made n the late 80 s by the Organzaton for Economc Cooperaton and Development (OECD), through the work of Bourgugnon, Branson and 1 Specfc fgures and calculatons of poverty and nequalty measures used n ths paper are the authors' own and do not necessarly represent or concde wth the vews of the World Bank on the matter. 2

3 de Melo (1991). 2 Ther macro-mcro model lnks the short-run mpacts of macroeconomc polces that affect the dstrbuton of ncome through nflaton, nterest rate and other asset prce changes wth the medum-run mpacts of structural adjustment polces (.e. ncentve reforms) that affect the dstrbuton of ncome through relatve commodty and factor prce changes. To measure dstrbutve mpacts, these extended CGE models map factor ncome (land, labor and captal) to dfferent types of households (captalsts, bg farmers, small farmers, landless workers, modern workers, and workers n the nformal sector). The models were appled to analyze dfferent polcy changes n several developng countres. 3 Comprehensve as they are, these modfed CGE models requre an mportant amount of work and resources. However, sometmes the analyss must be carred out n a tme frame or under budget restrctons that forbd the development of comprehensve models as those mentoned above, and researchers have to resort to computatonally smple ways to evaluate the dstrbutonal mpact of trade and prce polcy reforms. Research done at the World Bank for Panama (World Bank, 2001a) and, and by Levnsohn et al. for Indonesa, are examples of such approach. 4 The procedure used n these cases s a straghtforward combnaton of household surveys, whch provded the structure of households consumpton at the moment of the smulaton, and of smulated (World Bank studes) or actual (Levnsohn et al.) prce changes. The change n the cost of lvng by segments of the populaton was then used to assess the mpact on ncome dstrbuton of the varous smulatons. These ndexes, whch are Laspeyres cost of lvng ndexes by household, provde an upper bound measurement of the ncrease n expendture that would be requred for each group to purchase the same quanttes of goods as n the base stuaton. In the World Bank study of Panama, the re-dstrbutve mpact of complete trade and prce lberalzaton for basc food tems was smulated usng household data from the Lvng Standard Measurement Study (LSMS). The study adopts a zero elastcty of 2 See Chapter 12 n Dervs, de Melo and Robnson (1982) for a bref descrpton of CGE models that ncorporate ncome dstrbuton. 3 Results from the applcaton of the so called maquette can be found n the specal ssue of World Development, 1991, Vol 19, No. 11. See also research done at IFPRI, for nstance by Bautsta and Thomas (1997), Mnot and Golet (1998), and Lee-Harrs (1999). 4 See also the paper by Agénor et al. (2000). 3

4 substtuton assumpton for producers and consumers of basc agrcultural goods, and apples the change n prce to quanttes of the base perod to get the net mpact of the prce change by household. The new prces are obtaned by estmatng the border prces of the staple goods n a tarff free scenaro. The World Bank paper on energy prce reform n Iran (World Bank, 1998) combnes an nput-output table, whch shows the nput structure n the producton of all fnal goods, and a consumer expendture survey, whch shows the amount of each fnal good purchased by consumers. The overall cost of lvng effect after a prce change on the dfferent household decles s then calculated. The new prces are also computed as the border prces. The Indonesan study done by Levnshon et al. (1998) adopts a dfferent approach to get the new prces by usng actual prce changes, and then predctng how these prce changes would have mpacted on households cost of lvng, by per-capta ncome decle. The common denomnator n these last three studes descrbed s ther two-step structure: they use frst a process that generates the new prces (ether smulated or actual changes), and second a household survey (HH) to assess the effects on poverty and ncome dstrbuton. Ths paper follows a smlar approach. However, n order to get a computatonally smple way of assessng the re-dstrbutonal mpact of trade on poverty and nequalty, we propose the use of a partcular CGE model, the one comng from the Global Trade Analyss Project (GTAP), as the prce generator. There are a number of reasons for our choce of methodology for the prce generator. Frst, GTAP s specfcally talored to smulate trade polcy changes, and s well suted to take nto account the new wave of Preferental Trade Agreements (PTA), such as NAFTA and MERCOSUR. Second, the GTAP database has consderable sectoral and regonal detal. It contans nput-output nformaton on 24 countres or regons (13 of them developng countres) and 50 sectors and captures dfferences n ntermedate nput ntenstes, as well as mport ntenstes, by use. It s publcly avalable and regularly updated. Thrd, f not already n the data set, some countres could be proxed to those n GTAP. Fourth, there are HH surveys avalable for many of the developng countres already ncluded n GTAP. In addton, we 4

5 assess the mpact of trade reform not only on ncome, but also ndvdual welfare assumng non-homothetc preferences. Secton 2 outlnes the methodology to be used n the measurements of poverty and nequalty. Secton 3 provdes a bref presentaton of the GTAP model, the HH data avalable for Mexco, and the correspondng matchng of categores between them. Secton 4 provdes an assessment of poverty and tarffs structure n Mexco. Secton 5 presents and dscusses the results and outlnes the senstvty of the results to varous assumptons. Fnally, secton 6 summarzes the man conclusons. 2. Methodology The analyss s conducted as follows: frst, we compute a seres of poverty measures from the exstng household data; second, we measure agan the poverty levels adjustng them for the prce effect of the smulaton; thrd, we adopt the prce ndexes to analyze the mpact that the polcy smulaton would have on the expendture sde. Fnally, we apply both the expendture and ncome sdes of the smulaton to obtan the change n welfare. 2.1 Poverty Indcators and Poverty Lnes A credble measure of poverty s a powerful nstrument for focusng the attenton of governments and cvl socety on the lvng condtons of the poor. Income and consumpton levels are usually the most common ndcators for measurng lvng standards. An ndvdual s consdered poor f hs or her consumpton falls below some mnmum consdered necessary to meet basc needs. The poverty lne represents the mnmum ncome or expendture necessary to fulfll those basc needs. The poverty lne s bundled wth the concepts of utlty, welfare and household characterstcs. Brefly, the poverty lne can be wrtten as: pv = e( p,x,u z ) 5

6 In words, the poverty lne s the cost effcent consumer s expendture functon e necessary to attan the mnmum level of utlty u z compatble wth a vector of prces p and household characterstc x. The choce of a partcular poverty lne s always debatable. The lterature adopts varous methods for ts calculaton. 5 Ths study follows the basc needs method. Consequently, the poverty lne s the mnmum level of expendture or ncome that allows the consumpton of a pre-determned basket of food goods, scaled up to nclude non-food needs 6. To quantfy the mnmum ntake n terms of products, most of the poverty assessments on Mexco refer to two studes: the frst one was conducted by the Coordnacon General del Plan Naconal de Zonas Deprmdas y Groupos Margnados (COPLAMAR) usng data from the 1977 household survey; the second one, whch uses a smlar methodology, was developed by the Comson Economca para Amerca Latna y el Carbe (CEPAL) usng data collected from the Food and Agrculture Organzaton (FAO) and the Unted Natons (UN) n In ths paper, we use the poverty lne calculated by the CEPAL and we use ts basket for updatng the poverty lne after the smulaton. The poverty lne s updated usng the prce change of the CEPAL basket from the second through fourth decles. The CEPAL basket s dfferent for urban and rural households. Therefore, we have dfferent coeffcents for changes n rural and urban areas. 8 The CEPAL study reports two levels of poverty: the poverty lne and the ndgence lne. 9 The ndgence lne represents the mnmum expendture necessary to fulfll the basc food budget, and the ndgents are defned as persons who resde n a household wth such a low ncome that even f all of t were used to buy nothng but food, 5 For an extensve dscusson on poverty lne constructon see: Ravallon (1998). 6 The mnmum daly calores ntake s set at 2165 (FAO/OMS/ONU, 1985) 7 CEPAL calculates the per capta mnmum requrement whle COPLAMAR calculates the basket at the household level. The average household of 4.9 members s comprsed of 2.7 adults, 1.66 chldren (ages 3-14) and 0.47 babes. 8 The coeffcents used n ths paper are comng from CEPAL and are slghtly dfferent to the ones used by INEGI/CEPAL. 9 The ndgence lne s also referred to as the extreme poverty lne. In almost all developng countres, the poverty lne worked out to be twce the ndgence lne for urban areas, whle n rural areas t was calculated as beng approxmately 75% hgher than the ndgence lne. 6

7 the household would stll not be able to satsfy completely the nutrtonal needs of ts members. We wll make use of ths dstncton n the calculaton of the poverty ndexes. 10 To assess poverty, we consder three measures based on the Foster-Greer- Thorbecke (henceforth FGT) class of addtvely decomposable poverty ndexes. 11 Frst, the headcount rato (a=0) s smply the share of the populaton lvng below the poverty lne. Second, the poverty gap ndex (a=1) captures the dstance separatng the poor from the poverty lne as a proporton or that lne (the noon poor havng zero dstance). The man weakness of ths ndex s that t does not ndcate the severty of poverty. The thrd measure (a=2) s senstve to the problem of measurng the severty of poverty. Therefore, t s referred to as dstrbuton-senstve FGT. The senstve FGT gves heaver weght to the poverty of the very poor than the poverty gap ndex. The drawback of ths ndex s that t s less straghtforward to nterpret. It s essentally composed of two parts: an amount due to the poverty gap and an amount due to the nequalty among the poor. To analyze nequalty ssues we compute two more ndexes for the ncome part of the data: the Gn coeffcent and the Thel ndex Prce Indexes To calculate the mpact of the polcy smulaton on the expendture of the household, we report the results of the most commonly used ndexes: the Laspeyres, the 10 The dfference between the poverty lnes of rural and urban households derves from the fact that they have dfferent consumpton baskets and face dfferent unt prces. We set dfferent poverty lnes accordng to rural and urban classfcatons n the calculaton of the FGT ndexes, but we do not report separate results for urban and rural households. 11 These ndexes are wdely used n the lterature for ther addtve propertes and ther lnkages to the stochastc domnance theory (Foster, Greer and Thornbecke, 1984). The addtve propertes makes the ndexes partcularly useful n analyzng populaton subgroups. The FGT class of poverty measures s α formally: Pα = < [( z y ) / z ] / n where y s the per capta consumpton of the th ndvdual, n y z s the sze of the populaton, z s the poverty lne and a s a parameter. The addtve property allows us to decompose the measures across populaton sub-groups. 12 The Gn coeffcent can be wrtten as: gn 2 cov(y,f(y )) µ =, where Y s the dstrbuton of per capta ncome, F(Y) s ts cumulatve dstrbuton and µ s the mean of Y. Thel ndex can be wrtten as: 1 = n Y Y ln µ µ thel, where Y s the ncome of ndvdual, µ s the average ncome, and n s the sze of the populaton. Note that the Thel ndex s addtve. 7

8 Paasche, the Fsher and the Törnqust ndexes. 13 The Laspeyres ndex does not take nto account substtutablty n consumpton. Therefore, t underestmates the decrease and overestmates the ncrease n the true prce ndex. The Paasche ndex performs vceversa: t underestmates the ncrease and overestmates the decrease n the true prce ndex The GTAP Household and welfare measures GTAP Household The GTAP model (Hertel, 1997) features a regonal superhousehold whose behavor s governed by an aggregate Cobb-Douglas utlty functon specfed over prvate household consumpton, government spendng and savngs. Thus, n GTAP, the regonal superhousehold spends a fxed share of ts ncome on prvate household consumpton, government spendng and savngs. The model computes the percentage change n per capta utlty from aggregate household expendture for a gven country (or regon) [u(r)] and a money metrc equvalent of aggregate utlty change, [EV(r)]. The utlty measure, u(r), ndcates changes n welfare of the average ndvdual n regon r. The equvalent varaton measure, EV(r), summarzes the welfare changes resultng from a polcy shock n dollar values The Laspeyres prce ndex s formally defned as: L = q p / 1 1 s gven by: P = q p / P F = P q p. The Fsher prce ndex s defned as: q q 0 0 p p 1 0 q q 1 1 p p P q p. The Paasche prce ndex, where q stands for quantty and p for prce, denotes the product group and the superscrpt represents the state. The Törnuqust prce ndex s gven 1 1 p ln T = +, where sh s the budget share. 0 2 p O 1 by: P ( sh sh )ln( ) 14 The Laspeyres and Paasche ndexes represent the worst and the best possble scenaros, respectvely

9 2.3.2 Prvate demands Per capta utlty from prvate household expendtures s modeled va a nonhomothetc Constant Dfferent of Elastctes (CDE) functon, whch s desgned to capture dfferental prce and ncome responsveness across countres (Hanoch, 1975). Its man vrtue s the ease wth whch t may be calbrated to exstng nformaton on ncome and own prce elastctes of demand. The CDE mplct expendture functon s gven by: β (, r) γ (, r) β (, r) (1) B(, r)* UP( r) *[ PP(, r) / E( PP( r), UP( r))] 1, TRAD where E(.) represents the mnmum expendture requred to attan a prespecfed level of prvate household utlty, UP(r), gven the vector of prvate household prces, PP(r) and traded goods. Mnmum expendture s used to normalze ndvdual prces, and these normalzed prces are then rased to the power ß(,r) and combned n an addtve form. Under ths formulaton, as the mnmum expendture can not be factored out of the lefthand sde expresson, the CDE s an mplctly addtve functon. Besdes capturng nonhomothetcty, a useful feature of the CDE s that t smplfes nto a CES when ß(,r)= ß for all and nto a Cobb-Douglas when ß= The government and savngs GTAP uses an ndex of current government expendtures to proxy the welfare derved from the government s provson of publc goods and servces to prvate households n the regon. Ths ndex s aggregated wth prvate utlty n order to make nferences about regonal welfare. Regardng savngs, ts ncluson n ths statc model comes from work done by Howe (1975), who showed that the ntertemporal, extended lnear expendture system (ELES) could be derved from an equvalent, atemporal maxmzaton problem, n whch savngs enters the utlty functon Changes n prvate ncome and n prvate utlty Changes n prvate utlty are calculated n GTAP as: 9

10 (2) up( r) = { yp( r) [ CONSHR(, r)* pp(, r)]}/ CONSHR(, r)* INCPAR(, r), 15 TRAD TRAD where up(r) s the percentage change n prvate utlty n regon r, yp(r) s the percentage change n prvate household ncome n regon r, CONSHR(,r) s the share n total consumpton of good, pp(,r) s the change n the demand prce of commodty, INCPAR(,r) s an ncome expanson parameter, and sums over the set of traded commodtes TRAD consumed by the households. The INCPAR(,r) comes from the CDE mnmum expendture functon that s used to represent prvate household preferences n the model and s related to the ncome elastcty of demand for good. If preferences are homothetc, the INCPAR(,r) equals one for all. If preferences are not homothetc, the INCPAR(,r) are constraned to be strctly postve and are greater than one for superor goods. When preferences are homothetc, (2) collapses nto the dfference between a Laspeyres prce ndex for ncome and a Laspeyres ndex of expendtures: (3) up ( r) = yp( r) [ CONSHR(, r)* pp(, r)]. 16 TRAD We use the Cobb-Douglas form of preferences to check the robustness of our smulaton results. In turn, household s ncome s defned as the sum of the household s endowments (agrcultural land, labor, and captal) tmes the prce of these endowments actually faced by the households: (4) INCOME = QO(, r)* PS(, r). ENDOWMENT The change n household ncome yp(r) s then defned as: (5) yp( r) = INCOMESHR(, r) * ps( r). ENDOWMENT Our Approach The key purpose of ths paper s to apply formula (2) to the household data n order to derve nformaton on the mpact of trade reform on ndvdual welfare. Due to lack of better nformaton, we can not consder varatons n pp(,r) comng from spatal 15 We follow GTAP s notaton. Upper case letters denote levels and lower case denotes changes n percentage. 16 Ths s the smplest of all commonly used ndcators of welfare and real ncome. See: Sadoulet and de Janvry (1995). 10

11 locaton or from a poor-rch classfcaton of households. Thus, we assume that pp(,r) s the same for all households. Equaton (2) takes nto account the fact that poor ndvduals spend a larger proporton of ther ncome on tems wth lower ncome elastctes than rch ones to determne the effect of a margnal ncrease n real ncome on ndvdual welfare. In effect, formula (2) says that a dollar ncrease n real ncome s worth more to the poor ndvdual than to the rch one. 3 Data We use GTAP to smulate the effects of trade lberalzaton on Mexco s economy. The smulatons results nclude prce changes for products and endowments and changes n domestc demand for products. The model assumes full employment, and therefore endowment supply s fxed. The GTAP system counts 50 expendture groups. These groups can be further aggregated accordng to food, manufacturng, servces and other prmary products. On the ncome sde GTAP dstngushes between fve dfferent sources of ncome: land, captal, natural resources, sklled and unsklled labor. A more detaled explanaton of the GTAP model and a descrpton of GTAP sectors can be found n the GTAP appendx. Ths study utlzes the 1996 Mexcan Natonal Household Income and Expendture Survey (ENIGH), whch s collected by the Insttuto Naconal de Estadstca, Geografa e Informatca (INEGI). The survey collects a wde range of data. The survey contans detaled expendture data on a wde set of consumpton goods at the household level and detaled nformaton on ncome at the ndvdual level. Moreover, the survey collects a large array of household characterstcs and household members characterstcs. The survey s representatve at the natonal level, and t was drawn usng a stratfed, multstage and clustered method. To obtan sutable estmators, we make use of the survey weghts, and adopt the estmatng procedures developed specfcally for survey data. 17 In our study, the welfare s measured at the ndvdual level, therefore we make 17 For a revew of statstcal methods and ssues n the analyss of survey data see Deaton (1997). 11

12 use of equvalence scales to adjust the data accordngly. The data appendx further dscusses the Mexcan household survey. The matchng of GTAP and the household survey represents a challenge. In ths type of exercses compromses are the norm more than the excepton. In ths case, the extremely detaled nformaton that household surveys ncorporate and the condensed categores of GTAP requre a degree of arbtrarness. On the expendture sde, the GTAP system counts 50 commodty categores whle the Mexcan household data has about 600 dfferent categores. On the ncome sde, GTAP dentfes 5 dfferent ncome sources, and the household data has 47 categores. In the data appendx, we descrbe n detal how we aggregated the household data to ft GTAP aggregatons. For the most dffcult cases, we had to use a certan degree of arbtrarness. Nevertheless, the fnal results gve us a reassurng pcture. On the expendture sde, the GTAP domestc consumpton shares and the household expendture shares look very smlar at the aggregate level. 18 Fgure 1 shows the results of the aggregaton. The matchng of the servce sectors wth GTAP categores had problematc results wth large dfferences across sub-sectors. To solve ths mpasse, we decded to aggregate GTAP servce sectors nto a sngle category. 19 GTAP and the household survey use dfferent ncome categorzatons. Therefore, the matchng s not as lnear as n the expendture case. The GTAP ncome composton s calculated accordng to the natonal accounts and dstngushes fve ncome categores: land, captal, natural resources, sklled and unsklled wages. The household survey dfferentates ncome accordng to sources, and n many cases these can be attrbuted to more than one GTAP category. 20 Fgure 2 shows the results of the ncome matchng. Dfferences are large, especally n the share of captal. In GTAP, captal represents more than 60% of total ncome, whle n the case of household data, ths share s less than 18 At a more dsaggregate level, the data show some dscrepances. These, however, are restrcted to the manufacturng sector n most cases. 19 In ths partcular case, the procedure s justfable by the fact that the prce varatons wthn the servce sectors are extremely small. Because t may not always be the case, n the aggregaton tables at the end of the appendx, we dsaggregate across servces. For a complete descrpton of the servces sector aggregaton of GTAP see Huff, McDougall and Walmsley (1999). 20 For example, ncome from cooperatves should be correctly subdvded nto ncome from wages, captal and land. 12

13 20%. 21 The dffculty of ncome matchng s probably only one of the causes of ths dscrepancy. Other lkely sources of ths dfference s the ncome ms-reportng ssues that afflct household surveys. 22 Ths problem necesstates a robustness check. To adjust for the underreportng ssues, ths paper follows the practce of equalzng total ncome to total expendture by household. To adjust for the dscrepances between the survey and the GTAP data, we adopt a procedure wth whch we use the ncome composton comng from GTAP, whle mantanng the dstrbuton of each endowment across households from the household survey. Fgure 2 shows the ncome shares adjusted wth ths procedure. The matchng process ensures that the ncome categores n GTAP are closely algned wth the aggregate ncome categores of the household survey. The data aggregaton appendx provdes a detaled explanaton of ths procedure. Table 1 reports the tarff structure for Mexco n 1997 (Estevadeordal, 1999). We updated the GTAP model wth the new tarffs takng nto account the dfferent tarff structure of NAFTA. The tarff structure s qute detaled. For smplcty, tarffs for food products are set to two levels accordng to the averages for agrculture products and food products. 4 Poverty and Trade Polcy n Mexco Despte Mexco s status as a mddle-ncome country and member of the OECD, poverty s wdespread. Poverty ssues n Mexco have been the focus of recent studes at the World Bank. 23 In accordance wth the results of those studes, we brefly summarze the basc fndngs and gve a pcture of the Mexcan socety emergng from the 1996 household survey. The household survey data collected n 1996 shows that poverty s wdespread across both the urban and the rural areas and ncludes slghtly less than half of the total populaton. Moreover, one out of seven ndvduals s consdered ndgent. Inequalty s 21 Even f we attrbute all the resdual categores- negatve savngs, transfers and mputed rent, to the captal share, ths share wll not reach 50%. Also, wages are very well defned n both GTAP and the household survey, but whle n GTAP they account for about 30% of ncome, n the household survey they account for about 50%. 22 For a more detaled dscusson see: Rendtel, Langehene and Berntsen (1998) 23 For example, studes by the World Bank nclude Wodon (2000), World Bank (1996) and (1999). Other studes have been conducted by the Inter-Amercan Development Bank (see Lustg and Szekely (1998)). 13

14 hgh, wth the poorest 40% of the populaton collectng about half of the ncome receved by the rchest 10%. For the purpose of the analyss, t s useful to know the ncome and expendture dstrbuton across the varous ncome decles. The household survey s very detaled and consumpton baskets and ncome composton can be precsely dentfed for each populaton stratum. As we dscussed above, we have aggregated the expendture and ncome categores to ft the GTAP aggregaton. Although, ths reduces the precson of the overall pcture t makes the data much more tractable. To brefly llustrate the Mexcan stuaton, we report here some descrptve statstcs on ncome and expendture patterns from the household survey. Also, we report the basc poverty and nequalty ndcators. 4.1 Consumpton In table 2 we report the consumpton shares for the average Mexcan household and for each ncome decle. The average Mexcan household consumes, on per capta bass, about 1060 pesos per month, of whch a quarter goes for food, a quarter goes for manufactures, and about half s spent on servces. 24 As expected, the analyss by decles shows the sharp decrease n the food consumpton share as ncome ncreases and a parallel rse n the consumpton of servces. 25 The share of expendtures n manufacturng s almost constant across all decles. At the more dsaggregated level, t s possble to observe the dfferent ncome elastcty across products. The food basket s qute dfferent across decles. Accordng to the household survey, the poor obtan most of ther calores from Cereals and Vegetables. Meanwhle, the rchest rely on more expensve foods such as meat and dary products. Table 3 dsplays the composton of the food basket across decles. Fgure 3 llustrates graphcally the expendture levels across decles. It s strkng how most of the wealth s concentrated n the hghest decles. Across decles, the level of expendture on servces and manufacturng grows much faster than the one for food. 26 In partcular, the expendture on servces, whch s almost non-exstent n absolute values 24 The total expendture corresponds to about $140US. 25 The category labeled Resdual contans expendtures whch are attrbutable mostly to nvestments or transfers. Those categores cannot be matched to any GTAP category. 14

15 for the poorest households, grows quckly across the decles to reach more than 2000 pesos per month for the wealther decles. Total expendture n manufacturng products shows a smlar pattern on a smaller scale. 4.2 Income The composton of ncome reflected n the survey data s dfferent from the Mexcan Natonal Accounts. As explaned before, the reason can be attrbuted partly to the ncome ms-reportng ssue and partly to the problematc matchng of ncome categores due to the dfferent classfcatons n GTAP and the survey. The household data show that the average Mexcan household receves more than half of ts ncome from wages; ncome from captal s around 20%; ncome from resdual categores such as mputed rent, auto-consumpton, transfers and negatve savngs represents more than 30%. Table 4 presents the ncome decomposton across decles. The ncome composton s very smlar across the entre populaton spectrum, wth the only substantal dfferences beng the wage composton and the composton across the resdual categores. Analyzng the ncome composton of the poorest decles we see that auto-consumpton, mostly attrbutable to producton of food for own use, s an mportant source of ncome representng more than 15% of ncome for the poorest 10% of the populaton. Auto-consumpton rapdly declnes along the ncome classes. Income from land represents more than 5% of total ncome of the poorest decles. The poor also obtan a large part of ther ncome through unsklled wages and transfers. Interestngly, mputed rent, the opportunty cost of the rent of the own house, s slghtly more than 10% for all the classes. Ths percentage ncreases slowly across ncome classes, suggestng that mputed rent ndcates well the level of ncome. Accordng to the classfcaton of the household survey, wages are the prmary source of ncome for all decles. A sgnfcant part of the ncome of the poorest decles comes from unsklled labor, whle the rchest obtan almost half of ther ncome from sklled labor. The ncome of the rchest decles s about 4000 pesos per month, 26 Note that manufacturng products and servces nclude tems whch are necessary to be able to fulfll the basc needs- tems or servces such as basc tools and transportaton. 15

16 meanwhle the ncome of the poorest decles s 210 pesos per month, defntely below the ndgence lne Poverty The poverty lne was set accordng to the CEPAL study at and pesos per capta per month for the urban and for the rural populaton, respectvely. The ndgence lne was set at and pesos per capta per month, respectvely, for the urban and the rural resdents. 28 Table 5 reports the FGT estmates along wth ther standard errors. In 1996, about 41% of the Mexcan populaton lved below the poverty lne, meanwhle about 13% lved below the ndgence lne. 4.4 Inequalty The household survey presents a stuaton where the poorest 20% of the populaton collect less than 5% of total ncome. Meanwhle, the rchest 10% collect about 40% of total ncome. Table 6 reports the Thel ndexes and the Gn coeffcent. The Gn coeffcent s 0.465, whle the Thel ndex, whch gves more weght to the upper and lower tals, s We wll analyze the change, f any, of those ndexes after the smulaton. 5 Fndngs We set all tarffs to zero. Thus the smulaton s closer to a theoretcal exercse than a polcy study. Nevertheless, settng all tarffs to zero represents a good testng pont for checkng the outcomes of the model. 27 In US dollars ths s $526 and $28, respectvely. 28 In US dollars, those fgures correspond to about 83 (urban) and 72 (rural) dollars a month for the poverty lne and to about 41 and 40 dollars a month respectvely for the ndgence lne. 29 It s lkely that those numbers are smaller than the actual ones. The fact that we use total expendture as a proxy for total ncome wll lkely reduce the nequalty ndexes. Compared wth other studes, for example Wodon (2000), our numbers are effectvely smaller. Wodon (2000), usng total ncome, fnds that for Mexco the Gn coeffcent s 0.55 and the Thel s World Bank poverty assessment 2001 gves an esmate of the Gn coeffcent of Nonetheless, what matters for the purpose of ths paper are the changes n these levels rather than the levels themselves. 16

17 5.1 Prce and Quanttes Gven the relatvely small rates of protecton n Mexco, especally wthn NAFTA, we do not expect large effects resultng from the complete abatement of tarffs. Table 7 reports the prce and quantty changes produced by the smulaton. As expected, most of the prces show a declne, the excepton beng meat and servces. Quanttes domestcally consumed move accordngly, wth larger surges n sectors where prces dropped more. The effect of the smulaton on the ncome part results n a decrease of approxmately 3 percentage ponts n factor returns for land and natural resources. Returns to captal and labor ncrease by about one to one and a half percentage ponts, n both cases. 30 Income parameters are bult nto GTAP and are related to the ncome elastcty of each product group. As expected, they are hgher for manufacturng and servces than for food Income and Consumpton Table 8 reports the prce ndexes for consumpton and ncome by decles. The overall prce ndexes show that, as a consequence of the lberalzaton, the average expendture basket slghtly decreased, whle average ncome ncreased by about 1%. On the ncome sde, endowment returns to sklled labor ncreased more than returns to unsklled labor, and land returns declned. Therefore, rch households, whch obtan a large share of ncome from sklled labor and captal, gan more than the poor ones, n percentage terms. On the expendture sde, the stuaton reverses. Because of dfferent consumpton baskets, the poorer households gan, n percentage terms, more than the rcher ones. Ths effect s due to the overall decrease n the prce of food products, whch consttute a large proporton of the consumpton basket of the poor. For the rch households the dscount for food and manufacturng products s compensated by the rse n the prce of servces, makng the prce of ther consumpton basket almost unchanged. 30 The smlar ncrease of the return of those endowments s probably the cause for whch the ncome effect on household s not much dfferent when we check for robustness of ncome composton. 17

18 In the same table we also report the decomposton across sectors of the Laspayres ndex. 32 The results are strongly drven by the consumpton shares. Poor households, whch consume half of total ncome n food products, gan mostly due to the declne n food prces.. Meanwhle, the rch households obtan most of ther gan from reducton n the prces of manufacturng. Nevertheless, ths gan s compensated by the loss of purchasng power n servces. On the ncome sde, as expected, the decomposton shows that poor households gan mostly from unsklled labor, and smultaneously lose from the reduced returns to land. The rcher households gan mostly from the ncreased returns to sklled labor. 5.3 Poverty Table 9 compares the values of the FGT and nequalty ndexes obtaned straght from the survey wth the ones obtaned after the smulaton. The results are n lne wth what emerged from the prce ndex analyss. The poverty lnes have been updated accordng to the new prces of the mnmum expendture baskets, pad by the household from the second through fourth decle. 33 As expected, poverty measures show a slght reducton n the ncdence of poverty. The new level of the headcount ndex s only half a percentage pont lower than the one computed based on the survey. The Gn coeffcent and the Thel ndex show, f any, a mnmal ncrease n nequalty. 5.4 Utlty The change n utlty s postve across all household centles. Applyng the GTAP output to the household survey produced an average utlty ncrease of about 0.12%. Ths 31 Future work could am at estmatng ths parameter for n Mexco. 32 Ths s possble due to the addtve property of those ndexes. The Laspeyres ndex can be decomposed nto groups accordng to: p xg p q p w ( ) = ( ) p G x G xg p and x s total expendture for group G. The effect of each group G n the change s: 1 0 p w ( 0 p ) 1 = G x x 0 G 0 G 0 p q 0 xg 0 1 p ( 0 p ) 1 Pollak (1975). 33 Poverty lnes were reduced by 0.57% and 0.62% for urban and rural households., where w s the budget share for good 18

19 s the same value calculated wth GTAP. Ths s ndcatve that the GTAP data have been matched suffcently well wth the household survey data. As t turns out from the data, sortng the observatons by expendture s very smlar to sortng the observatons by food expendture shares. Because GTAP s ncome parameters for necesstes are smaller than the ncome parameters for superor goods, the denomnator n equaton (2) ncreases monotoncally wth the level of expendtures. Ths mples that smlar ncreases n real ncome (Table 8) translate nto larger ncreases n welfare for the poor ndvduals than the rch ones. The households that gan the most, n percentage terms, are the ones at the bottom of the ncome scale. Meanwhle, the rcher households gan less. 6 Summary We use a two step computatonally smple procedure to analyze the effects of trade lberalzaton usng household survey data for Mexco. Frst, we use an already avalable CGE model provded by the Global Trade Analyss Project (GTAP) as the prce generator. Second, we apply the changes n prces to the household survey data n order to assess the effects of the polcy smulaton on poverty and ncome dstrbuton. By choosng GTAP as the prce generator, we are able to model the dfferental tarff structure qute approprately (almost zero for NAFTA members and hgher tarffs for non-members). Even startng wth a low level of tarff protecton, smulaton results show that the mpact of tarff reform on welfare wll be postve n general for all expendture decles wth the poor ndvduals beneftng proportonately more than the rch ones. Whle the proposed methodology offers a smple way to estmate the frst-round effects of trade reform, t has a number of lmtatons. Frst, the analyss abstracts from changes n the ndvdual s occupatonal choces n response to changes n prces. These prove to be partcularly mportant n countres where a large number of people make a choce between self-employment n rural areas and employment for wages n urban areas. Second, we assume that prce changes are unform across all ncome groups. Thrd, the results reflect prce changes that are lkely to occur over the medum- to long-run, and therefore could not be ndcatve of what would happen n the short-run. Fourth, GTAP 19

20 does not account explctly for the adjustment costs n labor markets. Therefore, the results mght underestmate the ncrease n wages as a result of the trade reform. Ffth, the methodology employs a statc CGE model and therefore gnores any dynamc consderatons. Thus, our result mght underestmate economc growth and the boost to prces n response to trade reform. Sxth, the verson of GTAP used n ths study does not have a detaled treatment of the publc sector. Therefore, we do not consder alternatve fscal polces and nstead let the model determne the effect of changes n taxes on ncome and spendng. Fnally, n ths paper we employ the ncome elastcty nformaton from GTAP and we assume that the ncome elastctes of the average consumer are the same across countres. Future work should am to estmate these elastctes for Mexco and employ them n the analyss of welfare. 20