New findings on distributional impacts of trade: a human rights response

by | Jul 30, 2021 | Human rights economics, Human Rights Impact Assessment

In May 2021 the World Bank issued a report* whose main finding is that “gains from trade are rarely distributed evenly across the economy: certain regions, industries, firms, and workers can be left worse off following trade reforms.”

“And,” the human rights community might respond, “the world is not flat.” We have long pointed out the ways in which trade and trade policies can favour those who are most privileged whilst accentuating disparities in a way contrary to basic human rights principles such as non-discrimination.

The report is nonetheless welcome as it opens up space to discuss the ways in which trade can widen inequalities and undermine human rights. In so doing it also opens up an opportunity to put forward the human rights response to a central question the report poses: how to “establish a global trade policy agenda that delivers for the poor?”

Confirming what human rights knew

The Distributional Impacts report contains several messages that resonate with Human Rights Economics’ views.

Assessment, monitoring and consultation

Amongst these are the report’s statement that maximizing the gains from trade and minimizing negative impacts require a comprehensive and economy-wide approach. This is to be done through using a range of data and tools to understand potential distributional impacts ex ante, through monitoring implementation, through coordinating responses across government, and through holding extensive consultations with the private sector and other nongovernmental stakeholders, the report says.

The human rights community has consistently called for measuring a wide range of potential impacts of trade reforms before they are adopted, and has underlined the importance of broad stakeholder consultation, intra-governmental coordination and ongoing monitoring of a trade agreements’ implementation. A 2017 human rights impact assessment of the African Continental Free Trade Agreement (AfCFTA) clearly sets out these requirements, recalling that they are not only legal obligations but good policy and good economics too. For example, the 2017 assessment noted the inadequate consultation process throughout the African continental negotiations – a finding whose importance was confirmed the following year when Nigeria delayed AfCFTA ratification in order to hold consultations with stakeholders.

The report’s emphasis on monitoring of implementation dovetails neatly with human rights obligations. This is an area in which practice falls short. The consequence is not only a gap in our knowledge of how trade agreements play out in practice, but a missed opportunity to build feedback loops into trade policy implementation, loops which would permit policy adjustments when objectives are not being met. Again, from the human rights perspective, ongoing monitoring of policies’ impacts is an obligation whose content and operationalization has been clearly spelled out by human rights bodies.

Impacts – and responses – will necessarily be context-specific

With a view to helping trade policy-makers better identify who will benefit and who may need support as the structure of the economy changes through trade, the Distributional Impacts report applies the latest economic thinking to developing countries through new models, databases and country case studies. In doing so, the report improves understanding of how changes in trade affect within-country distribution, specifically between regions, industries, and demographic groups over time.

Amongst its findings are that labour market and consumption gains tend to concentrate in some regions and worker categories and that benefits such as lower consumer prices do not fully pass through to consumers, due to barriers related to geography, market power of intermediaries, or domestic market structure. The report acknowledges that losses from trade may be deeper, more concentrated, and longer-lasting than previously appreciated, and that they will vary considerably across countries. (This is a departure from previously-articulated Bretton Woods Institutions’ attitude that trade and liberalization would quickly translate into country-wide benefits, and their shrugging off of any adverse effects as merely passing inconveniences.) The report’s case study of South Africa shows a concentration of negative impacts of trade on employment in certain regions or local labour markets and groups (black and other non-white workers).

These findings confirm two messages that the human rights community has consistently put forward. First, liberalization can further entrench existing vulnerabilities, which are often intersectional. In other words those who may lose out from trade reforms and related policies may be subject to multiple sources of disadvantage or discrimination due to factors such as their geographical location, race, educational level or gender.

Second, the impacts – positive and negative – of trade reforms will be highly context-specific. Human rights advocates have long added their voices to those of economists and development specialists saying that one-size-fits-all liberalization is unsuited to the complexity of the real world.

By the same token, complementary and adjustment measures must also be specific to the country, sector, region and groups most at risk of experiencing adverse effects of new trade rules or trading patterns.

The Distributional Impacts report acknowledges this, saying that specific country studies will be necessary to identify the population groups that may require additional support, and for policy makers to craft better measures and policies for informing policies to help mitigate losses and distribute gains from trade reforms more broadly.

This approach sits comfortably with the human rights approach according to which an overview of the situation is necessary to establish the best response. It may sound trite but it is often overlooked that the essential first step towards promoting the realization of social objectives – whether expressed as human rights or not – is diagnosis and knowledge of the existing situation.

Human rights can refine and amplify the message

From a human rights perspective, however, the report falls short on a number of points. This article suggests that applying a human rights lens will strengthen future studies of impacts of trade reforms, and result in policy responses that are more comprehensive and well-suited to remedying inequalities in access to benefits of such reforms.

Adjust the starting point

The report states its objective as being to “ensure continued support for trade.” At various points the report appears to say that entering into trade is the overall objective, and makes revealing lapses in seeming to conflate traders’ interest with development interests. For example it presents the World Bank’s engagement with the African Union on AfCFTA implementation, describing the activities as key to ensuring fairness and a level playing field for traders.

The human rights starting point would emphasize that the objective is to ensure that the benefits of trade are distributed fairly. It would seek to ensure that adverse effects are minimized and do not affect the weakest disproportionately or exacerbate existing patterns of discrimination, and requires that special attention be given to any worse‑off regions or areas and to any specific groups or subgroups which appear to be particularly vulnerable or disadvantaged.

The report focuses on how trade shocks affect consumers and workers, areas for which data are indeed the most readily available. The human rights perspective reminds us that the starting point of such analysis should be those referred to in the previous paragraph, who are in worse-off areas or who appear most vulnerable, disadvantaged or at risk from trade reforms.

The report must be commended for recognizing that new assessment tools may be needed, and acknowledging that many trade models’ assumptions are inadequate to capture the full range even only of employment effects of new trade patterns and policies, let alone broader societal effects. Building on this we must develop and use better, more sophisticated models and methods for anticipating adverse impacts of trade, paying special heed to worse‑off regions or areas and groups or subgroups which may be particularly vulnerable, as human rights require. We will have to broaden the lens of enquiry irrespective of the availability of data, and this will probably require the combination of different research methods so as to better reflect those areas that are often left out of trade modelling or quantitative approaches.

How rights-consistent are proposed measures?

Two of the responses referred to in the Distributional Impacts report are likely to jar with human rights advocates. One is the report’s reference to how the informal economy in some emerging economies serves as a buffer, expanding after a trade shock to help workers adjust to changes in the labour market. Whilst the informal sector does indeed often serve as a buffer, the report’s apparent acceptance of the situation sits uncomfortably with human rights principles, given the social risks that come with informality such as lack of labour rights, social protection and other concerns.

The other is the need for labour markets to adjust to changes following a trade shock. The report appears to favour reallocation of labour through flexibility of labour markets: “a flexible labour market will support the required reallocation of labour whereas a highly regulated labour market will slow it down.” the report says. Here again, too much flexibility in labour markets could run counter to human rights standards that protect workers. Were these responses to be pursued in trade-related policies they should be guided by the need to protect rights relating to labour.

How comprehensive is comprehensive?

The report claims to provide a comprehensive set of complementary policies and economy-wide approaches to implementation that are necessary for trade to reduce poverty and inequality. Surprisingly though, the policy agenda it outlines notes only three types of complementary policies to improve the distributional impacts of trade policy reforms: reducing distortions and strengthening the functioning of markets, reducing trade costs, and speeding up labour market adjustment.  At other points the report does refer to the need to develop workers’ skills so as to make them more employable and it does acknowledge in passing that in low-income countries where agriculture is important, adjustment at the smallholder or farmer level will be more relevant than labour market adjustment costs.

The report notes in passing that trade policy changes alter government revenue: “the direct effect of the reduction of tariffs (or other trade taxes) might lead to lower tariff revenue; however, if it stimulates more demand for imports or increases economic activity and revenue from other taxes, the overall impact on government revenue could be positive. Changes in tax revenue could alter the value of government expenditures on behalf of the poor, including direct transfers to households.” Whether from a pro-poor, development or human rights perspective, the question of replacing revenue that governments have foregone through liberalization is so important that a comprehensive set of policies would necessarily require more than the brief generalities the Distributional Impacts report includes.

Another striking point is that the report does not engage with the fact that trade reforms now tend to take place in the setting of trade-related measures that go vastly beyond liberalization of exports and imports, to include deregulation, deep integration and policy coordination and which would require an even broader set of complementary measures.

With this in mind, the report’s view of comprehensive seems narrow, and appears to still be mired in the old view that oiling the wheels of liberalized trade will ultimately provide the whole of society with benefits. A human rights approach, setting its focus on the most vulnerable and disadvantaged, would result in a very different set of proposed complementary policies. Human rights might include those proposed in the report but would add others such as implementation of progressive fiscal policies, education, training and skills development programmes, social safety nets broad enough to catch those in informal employment, as well as measures to redress underlying patterns of discrimination.

Human rights and a global policy agenda that delivers for the poor

In acknowledging that observations of the impacts of trade need to be more granular than they have been until now, the Distributional Impacts report is a welcome step on the road to more inclusive trade policies. It brings the opportunity to open a discussion about how human rights and economic approaches can usefully enrich each other. There is huge value in the literature and methodologies for assessing impacts of trade on different groups and subnational regions that the report presents. The human rights community could learn from these and would be well-advised to apply them.

Conversely the economics community could derive value from integrating key human rights principles in this type of analysis. One is adopting people’s lived experience as a starting point – rather than starting by looking at adverse side-effects of trade reforms as an inconvenience to be remedied. Indeed a human rights approach reminds us to take a truly comprehensive view of determinants of adequate standards of living and inequality, and requires going beyond providing minor reparations for those most affected by the ravages liberalization can bring.

Second, human rights has well-developed methodologies for studying impacts of policies on different groups, based on qualitative, descriptive and quantitative methods. These can usefully enrich the primarily quantitative approach put forward in the Distributional Impacts report. Doing so will maximize the chances of developing adequate complementary policies, as adequate responses are most likely to flow from adequate analysis.

Third, It is not just a trade-related imperative to ensure that the social and economic infrastructure results in fairly distributed outcomes, but a central, moral one. Human rights reminds of this, and bolsters the approach with a clear legal framework. All countries in the world have voluntarily agreed to respect human rights. It follows that the international organizations of which they are members – including the World Bank – are also bound by human rights law.

* Engel, Jakob, Deeksha Kokas, Gladys Lopez-Acevedo, and Maryla Maliszewska. 2021. The Distributional Impacts of Trade: Empirical Innovations, Analytical Tools, and Policy Responses. Trade and Development. Washington, DC: World Bank. doi: 10.1596/978-1-4648-1704-5.

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