Gainers and Losers from Trade Reform in Morocco

Transcription

1 Publc Dsclosure Authorzed Publc Dsclosure Authorzed Publc Dsclosure Authorzed Publc Dsclosure Authorzed Mddle East and North Afrca Ganers and Losers from Trade Reform n Morocco Workng Paper Seres No. 37 August 2004 The World Bank Produced by the Offce of the Chef Economst Summares n Arabc and French by Martn Ravallon and Mchael Lokshn

2 30057 Ganers and Losers from Trade Reform n Morocco by Martn Ravallon and Mchael Lokshn Development Research Group, World Bank August 2004 Dscusson papers are not formal publcatons of the World Bank. They represent prelmnary and often unpolshed results of country analyss and research. Crculaton s ntended to encourage dscusson and comments; ctaton and the use of the paper should take account of ts provsonal character. The fndngs and conclusons of the paper are entrely those of the authors and should not be attrbuted to the World Bank, ts afflated organzatons, or to members of ts Board of Executve Drectors or the countres they represent.

3 Acknowledgements For helpful dscussons on ths topc we are grateful to Touham Abdelkhalek, Jenne Ltvack, Rachd Doukkal and Chrs Ward. The assstance of Nthn Umapath and Dmtr Kaltsas s gratefully acknowledged.

4 Table of Contents Summary 1. Introducton Measurng and explanng the welfare mpacts of reform usng mcro data Measured welfare mpacts of trade reform n Morocco The predcted prce changes and the survey data Impled welfare mpacts at household level Who are the net producers of cereals n Morocco? Vertcal versus horzontal mpacts on nequalty Two caveats Conclusons...12 References...29 Tables Table 1. Predcted prce changes due to agrcultural trade reform n Morocco...14 Table 2a. Consumpton shares and welfare mpacts through consumpton...15 Table 2b. Percentage gans from each polcy: Producton component...16 Table 3. Household mpacts of four trade reforms...17 Table 4. Mean gans from Polcy 4 by regon...18 Table 5. Decomposton of the mpact on nequalty...18 Table 6. Summary statstcs on explanatory varables n the regresson analyss...19 Table 7. Regresson of per capta gan/loss on selected household characterstcs...20 Table 8. Urban-rural splt of regressons for per capta gans...22 Fgures Fgure 1. Impacts on poverty...24 Fgure 2. Frequency dstrbutons of gans/losses for Polces 1 and Fgure 3. Absolute and proportonate gans for Polces 1 and 4 plotted aganst percentle of consumpton...26 Fgure 4. Producton/consumpton decomposton of the welfare mpacts for Polcy 4, plotted aganst percentle of consumpton per person...27 Fgure 5. Net producers of cereals n the dstrbuton of total consumpton per person n rural areas...28

5 Summary We use Morocco s natonal survey of lvng standards to measure the short-term welfare mpacts of pror estmates of the prce changes attrbuted to varous agrcultural trade reform scenaros for de-protectng cereals the country s man food staple. We fnd small mpacts on mean consumpton and nequalty n the aggregate. There are both ganers and losers and (contrary to past clams), the rural poor are worse off on average after de-protecton. We decompose the aggregate mpact on nequalty nto a vertcal component (between people at dfferent pre-reform welfare levels) and horzontal component (between people at the same pre-reform welfare). There s a large horzontal component, whch domnates the vertcal mpact of full de-protecton. The dverse mpacts reflect a degree of observable heterogenety n consumpton behavor and ncome sources, wth mplcatons for socal protecton polces.

6 ملخص: يهدف استخدام الاستقصاء القومي المعني بمستويات المعيشة بالمملكة المغربية إلى قياس الا ثار القصيرة الا مد على الرفاهة للتقديرات السابقة الخاصة بتغيرات الا سعار وذلك بحسب سيناريوهات متعددة من سيناريوهات إصلاح تجارة المنتجات الزراعية من أجل إزالة الا جراءات الحماي ية المفروضة على تجارة الحبوب والتي تعتبر مادة غذاي ية ري يسية في المغرب. وجدنا لذلك تا ثير ا صغير ا على متوسط الاستهلاك وعلى إجماليات عدم المساواة. رابحون فهناك وخاسرون على حد سواء (على عكس ادعاءات سابقة) إلا أن الفقراء في المناطق الريفية أسوأ حالا في المتوسط بعد إزالة الا جراءات الحماي ية. وتم تقسيم عناصر التا ثير الا جمالي على عدم المساواة إلى مكو ن "رأسي" (بين الناس عند رفاهة مستويات مختلفة قبل الا صلاح) ومكو ن "أفقي" ) بين الناس عند نفس مستوى الرفاهة قبل الا صلاح). ويوجد مك ون أفقي آبير يهيمن على التا ثير الرأسي للا زالة التامة للا جراءات الحماي ية. وتعكس الا ثار المختلفة درجة من التنوع الملحوظ في السلوك الاستهلاآي ومصادر الدخل مع مدلولات على سياسات الحماية الاجتماعية.

7 Résumé Nous nous servons de l enquête natonale marocane sur les condtons de ve pour mesurer les mpacts de ben-être à court terme d estmatons antéreures des fluctuatons de prx attrbuées aux dvers scénaros de réforme du commerce agrcole vsant à soustrare les céréales prncpale denrée de premère nécessté du pays au régme de protecton. Nous constatons des mpacts mneurs sur la consommaton moyenne et l négalté dans l agrégat. Il y a à la fos des gagnants et des perdants et (contrarement aux revendcatons passées), les pauvres du mleu rural se trouvent plus mal nants après suppresson de la protecton. Nous décomposons l mpact global sur l négalté en une composante «vertcale» (entre populatons se stuant à des nveaux dfférents de ben-être avant la réforme) et une composante «horzontale» (entre populatons se stuant au même nveau de ben-être avant la réforme). La composante horzontale est mportante et domne l mpact vertcal d une totale suppresson de la protecton. Les mpacts dfférents reflètent un degré observable d hétérogénété dans le comportement de consommaton et les sources de revenu, avec des mplcatons pour les poltques de protecton socale.

8 1. Introducton As a water-scarce country, Morocco does not have much natural advantage n the producton of water-ntensve crops such as most cereals, ncludng wheat, whch s used to produce the country s man food staples. The desre for aggregate self-suffcency n the producton of food staples has led n the past to governmental efforts to foster domestc cereal producton, even though cereals can be mported more cheaply. Snce the 1980s, cereal producers have been protected by tarffs on mports as hgh as 100%. There have been concerns that the consequent reallocaton of resources has hurt consumers and constraned the growth of producton and trade. Reform to the current ncentve system for cereals has emerged as an mportant ssue on the polcy agenda for Morocco (World Bank, 2003). The major obstacles to reform stem from concerns about the mpacts on household welfare, partcularly for the poor. There has been very lttle careful research nto who wll gan and who wll lose from such reforms. Nonetheless, there has been much debate about the equty mplcatons. It s generally agreed that urban consumers are lkely to gan from lower cereal prces. More contentous are the welfare dstrbutonal mpacts n rural areas. Defenders of the exstng protecton system have argued that there wll be large welfare losses to the rural economy from trade reform. Crtcs have argued aganst ths vew, clamng that the bulk of the rural poor tend to be net consumers, and so lose out from the hgher prces due to trade protecton. They argue that the rural poor are lkely to gan from the reform, whle t wll be the well off n rural areas who tend to be net producers who wll lose; see for example, Abdelkhalek (2002) and World Bank (2003). Ths paper studes the household welfare mpacts of the relatve prce changes nduced by specfc trade polcy reform scenaros for cereals n Morocco. Past analyses of the welfare mpacts have been hghly aggregated, focusng on just one or a few categores of households. Here we estmate mpacts across 5,000 sampled households n the Morocco Lvng Standards Survey for 1998/99. Ths allows us to provde a detaled pcture of the welfare mpacts, so as to better nform dscussons of the socal protecton polcy response to trade lberalzaton. Past approaches to studyng the welfare mpacts of specfc trade reforms have tended to be ether partal equlbrum analyses, n whch the welfare mpacts of the drect prce changes due to tarff changes are measured at household level, or general equlbrum analyses, n whch secondround responses are captured n a theoretcally consst way but wth consderable aggregaton across household types. In general terms, the economcs nvolved n both approaches s well known. And both approaches have found numerous applcatons. We combne these two approaches. In partcular, the prce changes nduced by the tradepolcy change are smulated from a general equlbrum analyss done for a Jont Government of Morocco and World Bank Workng Group. We take the methods and results of that analyss as gven and carry them to the Moroccan Lvng Standards survey. Our approach respects the rchness of detal avalable from a modern ntegrated household survey, allowng us to go well beyond the hghly aggregatve types of analyss one often fnds. We not only measure expected mpacts across the dstrbuton of ntal levels of lvng, but we also look at how they vary by other characterstcs, such as locaton. We are thus able to provde a reasonably detaled map of the predcted welfare mpacts by locaton and soco-economc characterstcs. In studyng the dstrbutonal mpacts of trade reform we make a dstncton between the vertcal mpact and horzontal mpact. The former concerns the way the mean mpacts vary wth 1

9 level of pre-reform ncome; how does the reform affect people at dfferent pre-reform ncomes? The horzontal mpact relates to the dspartes n mpact between people at the same pre-reform ncome. As argued n Ravallon (2004), many past dscussons of the dstrbutonal mpacts of trade and other economy-wde reforms have tended to focus more on the vertcal mpacts, analogously to standard practces n studyng the beneft ncdence of tax and spendng polces. However, as we wll demonstrate here, ths focus may well mss an mportant component of a polcy s dstrbutonal mpact, arsng from the horzontal dsperson n mpacts at gven pre-reform ncomes. We show how the mpact of a polcy on a standard nequalty measure can be straghtforwardly decomposed nto ts vertcal and horzontal components. The former tells us how much of the change n total nequalty can be accounted for by the way n whch mean mpacts condtonal on pre-reform ncome vary wth the latter. If there s no dfference n the proportonate mpact by level of ncome then the vertcal component s zero. The horzontal component tells us the contrbuton of the devatons n mpacts from ther condtonal means. Only when the mpact of the reform s predcted perfectly by prereform ncome wll the horzontal component be zero. We study the relatve mportance of these two components of our predcted dstrbutonal mpact of trade reform n Morocco. The followng secton dscusses our approach n general terms. Secton 3 presents our results n detal, whle secton 4 revews the man fndngs. 2. Measurng and explanng the welfare mpacts of reform usng mcro data We use pre-exstng estmates of the household-level welfare mpacts of the prce changes generated by a Computable General Equlbrum (CGE) model. The CGE analyss generates a set of prce changes; these embody both the drect prce effects of the trade-polcy change and ndrect effects on the prces of both traded and non-traded goods once all markets respond to the reform. Standard methods of frst-order welfare analyss are used to measure the gans and losses at household level. Our focus here s very much on the short-term welfare mpacts. In keepng wth the lmtatons of the precedng general equlbrum analyss, our approach does not capture the dynamc effects of trade reform through labor market adjustment and technologcal nnovaton. Nor does t capture potental gans to the envronment. 1 The specfcs of our approach to estmatng welfare mpacts at the household level can be outlned as follows. 2 Each household has preferences over consumpton and work effort represented d d by the utlty functon u q, L ) where s a vector of the quanttes of commodtes demanded by household and L ( q s a vector of labor supples by actvty, ncludng supply to the household s 1 2 Though t s not a subject of the present analyss, arguments are also made about adverse envronmental mpacts arsng from the expanson of protected cereal producton nto margnal areas, It s clamed that scarce water resources have also been dverted nto soft wheat producton. For further dscusson see World Bank (2003). There are many antecedents of our approach n the lteratures on both tax reform and trade reform, though there are surprsngly few applcatons to pont to n the ex ante assessment of actual reform proposals. For another example see Chen and Ravallon (2004). Hertel and Remer (2004) provde a useful overvew of the strengths and weaknesses of alternatve approaches to assessng the welfare mpacts of trade-polces, ncludng references to emprcal examples for developng countres. 2

10 own producton actvtes. 3 The household s assumed to be free to choose ts preferred combnatons d q L of and subject to ts budget constrant. The household owns a producton actvty that generates a proft s s s s s π ( p ) = max[ p q c ( q )] where p s the vector of supply prces, and c ( s q ) s the household-specfc cost functon. 4 The ndrect utlty functon of household s gven by: v d s [ p, p d, w ] = max [ u ( q, L ) p q = w L + π ( p )] (1) d ( q, L ) d where p s the prce vector for consumpton, w s the vector of wage rates. d d We take the predcted prce mpacts from the CGE model as gven for the analyss of household-level mpacts. In measurng the mpacts we are constraned of course by the data, whch do not nclude prces and wages. However, ths lmtaton does not matter to calculatng a frst-order approxmaton to the welfare mpact n a neghborhood of the household s optmum. Takng the dfferental of (1) and usng the envelope property (whereby the welfare mpacts n a neghborhood of an optmum can be evaluated by treatng the quantty choces as gven), the gan to household (denoted g ) s gven by the money metrc of the change n utlty: s g du v π = m j= 1 [ p s j q s j dp p s j s j p d j q d j dp p d j d j ] + n k= 1 ( w k L s k dw w k k ) (2) where v π equaton 1) and s the margnal utlty of ncome for household (the multpler on the budget constrant n s L k s the household s external labor supply to actvty k. (Notce that gans n earnngs from labor used n own producton are exactly matched by the hgher cost of ths nput to own-producton). The proportonate changes n prces are weghted by ther correspondng expendture shares; the weght for the proportonate change n the j th sellng prce s revenue (sellng value) from household producton actvtes n sector j; smlarly (negatve) weght for demand prce changes and actvty k. The term p s j q s j p s w k L k equ-proportonate ncrease n the prce of commodty j. d j q d j p s s j q j d d j p j q, the s the s the weght for changes n the wage rate for gves (to a frst-order approxmaton) the welfare mpact of an Equaton (2) s the key formula we wll use for calculatng the welfare mpacts at household level, gven the predcted prce changes. In the specfc model we wll use (as dscussed later), real wage rates are fxed. So the last term on the rght hand sde of (2) drops out. (We dscuss lkely mplcatons of relaxng ths assumpton n secton 3.5). 3 4 We make the standard assumptons that goods have postve margnal utltes whle labor supples have negatve margnal utltes. On can readly nclude nput prces n ths cost functon; see Chen and Ravallon (2004) for a more general formulaton. In the present context ths makes no dfference to the subsequent analyss so we subsume factor prces n the cost functon to smplfy notaton. 3

11 Notce that by applyng the calculus n dervng (2) we are mplctly assumng small changes n prces. Relaxng ths requres more nformaton on the structure of the demand and supply system; see for example Ravallon and van de Walle (1991). Ths would ental consderable further effort, and the relablty of the results wll be questonable gven the aforementoned problem of ncomplete prce and wage data. For the same reason, we wll have lttle choce but to largely gnore geographc dfferences n the prces faced, or n the extent to whch border prce changes are passed on locally. Havng estmated the mpacts at household level, we can study how they vary wth prereform welfare, and what mpact the reform has on poverty and nequalty. Let denote the prereform welfare per person n household whle y = y + g s ts post-reform value, where s the gan to household. (Ideally, wll be an exact money-metrc of utlty, though n practce t can be expected that t s an approxmaton gven omtted prces or characterstcs). The dstrbuton of * * * post-reform welfare levels s y1, y 2,... yn. By comparng standard summary measures of poverty or nequalty for ths dstrbuton wth those for the pre-reform dstrbuton, overall mpacts. y * y g y 1, y2,...y n, we can assess Of obvous nterest s to see how the gans vary wth pre-reform welfare. Is t the poor who tend to gan, or s t mddle-ncome groups or the rch? However, t s mportant to recognze that the assgnment of mpacts to the pre-reform dstrbuton s very unlkely to be a degenerate dstrbuton, wth no dstrbuton of ts own. There wll almost certanly be a dsperson n mpact at gven prereform welfare. Ths wll arse from (observable and unobservable) heterogenety n characterstcs and prces. It could also arse from errors n the welfare measure. Averagng across the dstrbuton of mpacts at gven pre-reform welfare, one can calculate the condtonal mean mpact gven by: c g = E g y = y ) (3) ( where the expectaton s formed over the condtonal dstrbutons of mpacts. By ncludng a subscrpt n the expectatons operator n (3), we allow the possblty that the horzontal dsperson n mpacts s not dentcally dstrbuted. In our emprcal mplementaton, equaton (3) wll be estmated usng a non-parametrc regresson. Takng these observatons a step further, we can thnk of the overall mpact on nequalty as havng both vertcal and horzontal components. 5 Ths s straghtforward for the Mean Log Devaton (MLD) an nequalty measure known to have a number of desrable features. 6 The mean log * * * devaton defned on the dstrbuton of post-reform welfares y1 y2,... y s gven by:, n I * = 1 n n = 1 ln( y * / * y ) (4) 5 6 Antecedents to ths type of decomposton can be found n the lterature on horzontal equty n taxaton. In the context of assessng a tax system, Auerbach and Hassett (2002) show how changes n an ndex of socal welfare can be decomposed nto terms reflectng changes n the level and dstrbuton of ncome, the burden and progressvty of the tax system and a measure of the change n horzontal equty. For further dscusson of the MLD see Bourgugnon (1979) and Cowell (2000). MLD s a member of the General Entropy class of nequalty measures. 4

12 where y * n * / = 1 n = y n s mean post-reform welfare. Smlarly, 1 I = n = 1 ln( y / y ) s the pre-reform MLD. (In both (4) and (5) t s assumed that y > 0 and 0 for all. Thus I y * > I s the change n nequalty attrbutable to the reform. The proposed decomposton of the overall change n nequalty can then be wrtten as: (5) * - I * 1 I = n n = 1 n n c + 1+ g / y 1 1+ g / y = 1 1 g + / y ln ln c ln 1+ g / y n = 1 1+ g / y n = 1 1+ g / y vertcal component + horzontal component (6) The vertcal component s the contrbuton to the change n total nequalty (I * - I ) of the way n whch mean mpacts vary wth pre-reform welfare levels. If there s no dfference n the proportonate c mpact by level of welfare ( g / y = g y for all ) then the vertcal component s zero. The / horzontal component s the contrbuton of the devatons n mpacts from ther condtonal means. If c the mpact of the reform s predcted perfectly by pre-reform welfare ( g = for all ) then the horzontal component s zero. g We also want to try and explan the dfferences n mpacts n terms of observable characterstcs of potental relevance to socal protecton polces. The way we have formulated the problem of measurng welfare mpacts above allows utlty and proft functons to vary between households at gven prces. To try to explan the heterogenety n measured welfare mpacts we can suppose nstead that these functons vary wth observed household characterstcs. The ndrect utlty functon becomes: s d s d d d d 1 v ( p, p, w ) = v( p, p, w, x, x2 ) = max[ u( q, L, x1 ) p q w L = π ] (7) where π = π ( p, x2 ) = max[ p q c( q, x2 )]. Note that we allow the characterstcs that nfluence preferences over consumpton ( ) to dffer from those that nfluence the profts from ownproducton actvtes ( ). s x 2 s s x 1 s The gan from the prce changes nduced by trade reform, as gven by equaton (7), depends on the consumpton, labor supply and producton choces of the household, whch depend n turn on prces and characterstcs, and. For example, households wth a hgher proporton of chldren x 1 x 2 wll naturally spend more on food, so f the relatve prce of food changes then the welfare mpacts wll be correlated wth ths aspect of household demographcs. Smlarly, there may be dfferences n tastes assocated wth stage of the lfe cycle and educaton. There are also lkely to be systematc covarates of the composton of welfare. Genercally, we can now wrte the gan as: s d g = g p, p, w, x, x ) (8) ( 1 2 5

13 However, we do not observe the household-specfc wages and prces. So we must make further assumptons. In explanng the varaton across households n the predcted gans from trade reform we assume that: () the wage rates are a functon of prces and characterstcs as d s w = w p, p, x, x ) and () dfferences n prces faced can be adequately captured by a ( 1 2 complete set of regonal dummy varables. Under these assumptons, and lnearzng (8) wth an addtve nnovaton error term, we can wrte down the followng regresson model for the gans: g k = β x + β x + γ D + ε k k (9) k where D =1 f household lves n county k and D = 0 otherwse and ε s the error term. k 3. Measured welfare mpacts of trade reform n Morocco 3.1 The predcted prce changes and the survey data The prce changes (mpled by trade reform) we use here were generated by a CGE model that was commssoned by a jont workng group of the Mnstry of Agrculture, Government of Morocco, and the World Bank, as documented n Doukkal (2003). The model was constructed wth the am of realstcally representng the functonng of the Moroccan economy around The model was explctly desgned to assess the aggregate mpacts of de-protectng cereals n Morocco. In addton to allowng for nteractons between agrculture and the rest of the economy (represented by sx sectors), the model s qute detaled n ts representaton of the agrcultural sector. It allows for 16 dfferent crops or groups of crops, three dfferent lvestock actvtes, 13 major agro-ndustral actvtes, sx agro-ecologcal regons, and wthn each regon the model dstngushes between ranfed agrculture and four types of rrgated agrculture. The model has two types of labor, both wth fxed real wage rates. Four polcy smulatons are undertaken. The smulatons then dffer n the extent of the tarff reductons for cereals, namely 10% (Polcy 1), 30% (Polcy 2), 50% (Polcy 3) and 100% (Polcy 4). In all cases, the government s exstng open-market operatons, whch attempt to keep down consumer prces by sellng subsdzed cereals, are also removed. 7 The loss of revenue from a 50% tarff cut approxmately equals the savng on subsdes. Table 1 gves the predcted prces changes for varous trade lberalzaton scenaros, based on Doukkal (2003). 8 As one would expect, the largest prce mpact s for cereals, though there are some non-neglgble spllovers nto other markets, reflectng substtutons n consumpton and producton and welfare effects on demand. Some of these spllover effects are compensatory. For example, some producer prces rse wth the de-protecton of cereals. 7 8 In addton to admnsterng the tarffs on mported soft wheat, the Government of Morocco buys, mlls and sells around one mllon tons of soft wheat n the form of low grade flour, whch s sold on the open market to help consumers. Rachd Doukkal kndly provded prce predctons from the CGE model mapped nto the categores of consumpton and producton dentfed n the survey. The producton revenues were calculated from the survey data by matchng these consumpton categores to the varables contanng nformaton about household producton of the correspondng goods. 6

14 The survey data set used here s the Enquête Natonal sur le Nveau de Ve Ménages (ENNVM) for 1998 done by the government s Department of Statstcs, whch kndly provded the data set for the purpose of ths study. Ths s a comprehensve mult-purpose survey followng the practces of the World Bank s Lvng Standards Measurement Study. 9 The ENNVM has a sample of 5,117 households (of whch 2,154 are rural) spannng 14 of Morocco s 16 regons (the low densty southernmost regon the former Spansh Sahara was excluded). The sample s clustered and stratfed by regon and urban/rural areas. The survey dd not nclude households wthout a fxed resdence ( sans abrs ). The survey allows calculaton of a comprehensve consumpton aggregate (ncludng mputed values for consumpton from own producton). We used the consumpton numbers calculated by the Department of Statstcs. Ths s our money metrc of welfare. Ideally ths would be deflated by a geographc cost-of-lvng ndex, but no such ndex was avalable, gven the aforementoned lack of geographc prce data. 3.2 Impled welfare mpacts at household level Tables 2a, 2b whch gve the budget and ncome shares at mean ponts and the mean welfare mpacts broken down by commodty based on the ENNVM; Table 2a s for consumpton whle 2b s for producton. Notce how dfferent consumpton patterns are between urban and rural areas; for example, rural households have twce the budget share for cereals as urban households. Strkngly, whle there s a 1.7% gan to urban consumers a s whole, ths s largely offset by the general equlbrum effects through other prce changes (Table 2a). Also notce that ncome obtaned drectly from producton accounts for about one quarter of consumpton; the rest s labor earnngs, transfers and savngs. Of course n rural areas, the share s consderably hgher, at 87%. And about one thrd of ths s from cereals. 10 Table 3 summarzes the results on the mpled welfare mpacts. Our results ndcate that the partal trade reforms have only a small postve mpact on the natonal poverty rate, as gven by the percentage of the populaton lvng below the offcal poverty lnes for urban and rural areas used by the Government s statstcs offce. 11 However, a larger mpact emerges when we smulate complete de-protecton (Polcy 4). Then the natonal poverty rate rses from 20% to 22%. All four reforms ental a decrease n urban poverty (though less than 0.4% ponts) and an ncrease n rural poverty. (We wll examne mpacts over the whole dstrbuton below). Turnng to the mpacts on nequalty n Table 3, we fnd that the trade reforms yeld a small ncrease n nequalty, wth the Gn ndex rsng from n the base case to wth a complete de-protecton of cereals (Polcy 4). Impacts are smaller for the partal reforms (Polces 1-3). The overall per capta gan s postve for the smaller tarff reducton (Polcy 1) but becomes negatve for Polces 2, 3 and 4. As one would expect, there s a net gan to consumers and net loss to producers, though the amounts nvolved are small overall. There are small net gans n the urban sector for Polces 1-3. Larger mpacts are found n rural areas, as we would expect. The mean percentage loss from complete de-protecton s a (non-neglgble) 5.7% n rural areas. 9 The survey s desgn and content are smlar n most respects to the 1991 Lvng Standards Survey for Morocco documented n the LSMS web ste: 10 Notce that there s no ncome from meat recorded n the data. The most plausble explanaton s that Moroccan farmers sell lvestock to butchers or abattors rather than sellng meat as such. Followng conventonal survey processng practces, lvestock s treated as an asset, so that proceeds from the sellng of lvestock s not treated as ncome. Ths s questonable. As a test, we redd our man calculatons usng the survey data on the transacton n lvestock, and addng net sales nto ncome. Ths made neglgble dfference to the results. Detals are avalable from the authors. 11 These have been updated usng the CPI. The poverty lnes were 3922 Drham per year n urban areas and 3037 n rural areas. See World Bank (2001) for detals. 7

15 Table 3 gave our results for the mpact on poverty as estmated usng the government s offcal poverty lnes. It s mportant to test robustness to alternatve poverty lnes. For ths purpose, we use the poverty ncdence curve, whch s smply the cumulatve dstrbuton functon up to a reasonable maxmum poverty lne. The results are gven n Fgure 1; to make the fgure easer to read we focus on Polces 1 and 4. (The curves for Polces 2 and 3 are between these two). We see that there s an ncrease n poverty overall from complete de-protecton; ths s robust to the poverty lne and poverty measure used (wthn a broad class of measures; see Atknson, 1987). The mpact on poverty s almost entrely n rural areas; ndeed, there s vrtually no mpact on urban poverty. However, n rural areas the results n Fgure 1 suggest a szeable mpact on poverty from complete de-protecton. The mean loss as a proporton of consumpton for the poorest 15% n rural areas s about 10%. There s an ncrease n the proporton of the rural populaton lvng below 2000 Drham per person per year from 6.2% to 9.9%; the proporton lvng below 3000 Drham rses from 22.2% to 26.3%. (For the country as a whole, the poverty rate for the former poverty lne rses from 2.8% to 4.4% under Polcy 4, whle t rses from 11.4% to 13.1% for the 3000 Drham lne). Our fndng of adverse mpacts on the rural poor contradcts clams made by some observers who have argued that the rural poor tend to be net consumers of cereals, the commodty that ncurs the largest prce decrease wth ths trade reform (Table 1). We wll return to ths pont when we study the welfare mpacts further. Table 4 gves the mean mpacts of Polcy 4 by regon, splt urban and rural. Impacts n urban areas are small n all regons, wth the hghest net gan as a percentage of consumpton beng 1.3% n Tanger-Tetouan, closely followed by Tensft Al Haouz and Fes-Boulemane. The rural areas wth largest mean losses from de-protecton of cereals are Tasla Azlal, Meknes Tafl, Fes-Boulemane and Tanger-Tetouan. Table 4 also gves mean mpacts for the poorest 15% n rural areas (n terms of consumpton per person). When we focus on the rural poor defned ths way, the regon ncurrng the largest mean loss for rural households s Tanger-Tetouan, followed by Fes-Boulemane and Chaoua- Ouardgha. The contrast between the small net gans to the urban sector and net losses to the rural poor s most marked n Tanger-Tetouan. To begn explorng the heterogenety n welfare mpacts, Fgure 2 gves the cumulatve frequency dstrbutons of the gans and losses. To smplfy the fgure we agan focus on Polces 1 and 4. We fnd that wth complete de-protecton (Polcy 4) about 8.9% of the households ncurred losses greater than 500 Drhams per year (about 5% of overall mean consumpton) whle about 5% lose more than 1000 Drhams per year. As one would expect, there s a thcker tal of negatve gans for rural areas. About 16% of rural households lose more that 500 Drhams and 10% lose more than In Fgure 3 we plot the mean gans aganst percentles of consumpton per capta for Polces 1 and 4. We gve both absolute gans/losses and gans as a % of the household s consumpton. For polcy 1, there s a tendency for the mean absolute gan to rse as one moves from the poorest percentle through to the rchest, though the gradent s small. The mean proportonate gan s qute flat. For Polcy 4, mean absolute mpacts also rse up to the rchest decle or so, but then fall. Proportonate gans follow the same pattern though (agan) the gradent seems small. However, what s most strkng from Fgure 3 s the wde spread, partcularly downwards (ndcatng losers from the reform). The varance n absolute mpacts s partcularly large at the upper end of the consumpton dstrbuton, though f anythng the dsperson n proportonate mpacts tends to be greater at the other end of the dstrbuton, amongst the poorest. 8

16 In Fgure 4 we provde a splt between producers and consumers for Polcy 4. As we would expect, to the extent that there s much mpact on producers, they tend to lose, though not more so for poor producers than rch ones. For consumpton we tend to see more ganers, and a hgher varance n mpact as one moves up the consumpton dstrbuton. However, we see that the downward dsperson n total welfare mpacts n Fgure 3 s due more to the condtonal varance n mpacts through producton than through consumpton. There are two qute strkng fndngs n these Fgures. Frstly, notce that there are szeable losses on the producton sde amongst the poor. Granted, some large losses are evdent for the hgh ncome groups. But the clams that the poor do not lose as producers are clearly false. Furthermore, the poor are often not seeng compensatory gans as consumers. Secondly, t s notable that the results n Fgures 3 and 4 ndcate that the mean gans vary lttle wth mean consumpton. Focusng on the poor versus the rch s hardly of much nterest n characterzng ganers and losers from ths reform. The dversty n mpacts tend to be horzontal n the dstrbuton of ncome, meanng that there tend to be larger dfferences n mpacts at gven consumpton than n mean mpacts between dfferent levels of consumpton. Next we examne these two fndngs n greater detal. 3.3 Who are the net producers of cereals n Morocco? In the populaton as a whole, we fnd that 16% of households are net producers (value of cereals producton exceeds consumpton). These households are worse off from the fall n cereal prces due to de-protecton. In rural areas, the proporton s 36%. However, the survey data do not support the clam that the rural poor n Morocco are on average net consumers of cereals. Fgure 5 shows how producers and net producers are spread across the dstrbuton of total household consumpton per person n rural Morocco. We gve both the scatter of ponts and the condtonal means estmated usng the local regresson method. 12 In the frst (top left) panel we gve the proporton of producers. Then we gve the proporton of net producers (for whom producton exceeds consumpton of cereals n value terms). Fnally we gve net producton n value terms. In each case the horzontal axs gves the percentle of the dstrbuton of consumpton from poorest through to rchest. We fnd that a majorty of the rural poor produce cereals. Naturally much of ths s for home consumpton. However, even f we focus solely on net producers, we fnd that over one thrd of the poorest quntle tend to produce more than they consume. Furthermore, the mean net producton n value terms tends to be postve for the poor; n rural areas, the losses to poor producers from fallng cereal prces outwegh the gans to poor consumers. More than any sngle feature of the survey data, t s ths fact that les at the heart of our fndng that the rural poor lose from the reform. 3.4 Vertcal versus horzontal mpacts on nequalty To measure the relatve mportance of the vertcal versus horzontal dfferences n mpact, we can use the decomposton method outlned n secton 2. Ths decomposton requres an estmate of 12 See Cleveland (1979). Ths s often referred to as LOWESS (Locally Weghted Scatter Plot Smoothng). We used the LOWESS program n STATA. 9

17 the condtonal mean E ( g y),.e., the regresson functon of g on y. We estmated ths usng the nonparametrc local regresson method of Cleveland (1979). Table 5 gves the results of ths decomposton for each polcy reform. For the small partal reform under Polcy 1, the vertcal component domnates, accountng for 73% of the mpact on nequalty. However, as one moves to the bgger reforms, the horzontal component becomes relatvely large. Indeed, we fnd that 119.8% of the mpact of Polcy 4 on nequalty s attrbutable to the horzontal component, whle -19.8% s due to the vertcal component. So we fnd that the vertcal component was nequalty reducng for Polcy 4, even though overall nequalty rose (Table 5). There s clearly a hgh degree of horzontal nequalty n measured mpacts at gven mean consumpton. Some of ths s undoubtedly measurement error, whch may well become more mportant for larger reforms. But some s attrbutable to observable covarates of consumpton and producton behavor, as dscussed n secton 2. In tryng to explan ths varance n welfare mpacts, the characterstcs we consder nclude regon of resdence, whether the household lves n an urban area, household sze and demographc composton of the household, age and age-squared of the household head, educaton and dummy varables descrbng some key aspects of the occupaton and prncple sector of employment; Table 6 gves summary statstcs on the varables to be used n the regressons. We recognze that there are endogenety concerns about these varables, though we thnk those concerns are mnor n ths context, especally when weghed aganst the concerns about omtted varable bas n estmates that exclude these characterstcs. Under the usual assumpton that the error term s orthogonal to these regressors we estmate equaton (9) by Ordnary Least Squares. The results are gven n Table 7. Recall that these are averages across the mpacts of these characterstcs on the consumpton and producton choces that determne the welfare mpact of gven prce and wage changes. Ths makes nterpretaton dffcult. We vew these regressons as beng manly of descrptve nterest, to help solate covarates of potental relevance n thnkng about compensatory polcy responses. Focusng frst on the results for Polcy 4, we fnd that larger losses from full de-protecton of cereals are assocated wth famles lvng n rural areas, that are relatvely smaller (the turnng pont n the U-shaped relatonshp s at a household sze of about one), have more wage earners, hgher educaton, work n commerce, transport etc., and lve n Chaoua-Ouardgha, Rabat, Tadla Azlal and Meknes Tafl. Recall that these effects stem from the way household characterstcs nfluence net tradng postons n terms of the commodtes for whch prces change. So, for example, t appears that larger famles tend to consume more cereals, and so gan more from the lower cereals prces. Results are smlar for partal de-protecton, though educaton becomes nsgnfcant for Polcy 1. In Table 8 we gve an urban-rural breakdown of the regressons for Polces 1 and 4. There are a couple of notable dfferences. (Agan we focus on Polcy 4 n the nterests of brevty). We fnd sgnfcant postve effects of havng more chldren and teenagers on the gans from trade reform n rural areas, presumably because such famles are more lkely to be cereal consumers. The educaton effect at hgher levels of schoolng s much more pronounced n urban areas. The effect of workng n the transport and commerce sector s more statstcally sgnfcant n urban areas, though ths effect s stll szeable n rural areas. The regonal effects are more statstcally sgnfcant n urban areas than n rural areas. Of course there are stll szable regonal dfferences n mean mpacts n Table 8, though they are statstcally less sgnfcant than we found n Table 7. In fact the quanttatve magntudes of the regonal dfferences are just as large for rural areas n Table 8 as for urban plus rural areas n Table 7. 10

18 It should not be forgotten that the results n Tables 7 and 8 are condtonal geographc effects (condtonal on the values taken by other covarates n the regressons). As we saw n Table 4, there are pronounced (uncondtonal) geographc dfferences n mean mpacts n rural areas across dfferent regons. Whether one draws polcy lessons more from the condtonal or uncondtonal effects depends on the type of polcy one s usng. If t s smply regonal targetng then of course the uncondtonal geographc effects n Table 4 wll be more relevant. However, fner targetng by household characterstcs, n combnaton wth regonal targetng, wll call for the sorts of results presented n Tables 7 and 8. The share of the varance n gans that s accountable to these covarates s generally less than 10%. Values of R 2 of ths sze are common n regressons run on large cross-sectonal data sets, though t remans true that a large share of the varance n mpacts s not accountable to these covarates. (The excepton to our low R 2 s for Polcy 1, for whch almost half of the varance n gans across urban households s explaned). It must be expected that there s a szable degree of measurement error n the gans, stemmng from measurement error n the underlyng consumpton and producton data. No doubt there are also mportant dosyncratc factors n household-specfc tastes or producton choces. These regressons try to explan the varance n the gans from the reform. It s of nterest to see f we can do any better n explanng the ncdence of losses from reform amongst the poor. Ths s arguably of greater relevance to compensatory polces, whch would presumably want to focus on poor losers. To test how well the same set of regressors could explan who was a poor loser from the reforms we constructed a dummy varable takng the value unty f a rural household ncurred a negatve loss and was poor ; to assure a suffcent number of observatons takng the value unty we set the poverty lne hgher than the offcal lne, namely at a consumpton per person of 5,000 Drham per year (rather than the offcal lne of about 3,000). (We confned ths to rural areas snce that s where the losses are concentrated). In the case of full de-protecton (Polcy 4), we fnd that about 14% of the varance n ths measure can be explaned by the set of regressors n Table 8 whle for Polcy 1 the share s 20%. 13 Whle there are a number of dentfable covarates for dentfyng lkely losers amongst the poor, t s also clear that there s a large share of the varance left unexplaned. Another way to assess how effectvely ths set of covarates can explan the ncdence of a net loss from reform amongst the poor s by comparng the actual value of the dummy varable descrbed above wth ts predcted values from the model, usng a cut off probablty of 0.5. For Polcy 4, there are 472 households out of 2,100 who were both poor and ncurred a loss due to the reform. Of these the model could only correctly predct that ths was the case for 18% (86 households). For Polcy 1, the model predcton was correct for 27% of the 463 households who were both poor and were made worse off by the reform. Yet most forms of ndcator targetng whereby transfers are contngent on readly observed varables, such as locaton would be based on smlar varables to those we have used n our regressons; ndeed, f anythng targeted polces use fewer dmensons. Ths suggests that ndcator targetng wll be of only lmted effectveness n reachng those n greatest need. Self-targetng mechansms that create ncentves for people to correctly reveal ther status (such as usng work requrements) may be better able to do so. 13 The R 2 for OLS regressons are and for Polcy 4 and 1 respectvely. Usng nstead a probt model to correct for the nonlnearty the pseudo R 2 s are and

19 3.5 Two caveats Whle the above results are suggestve, two lmtatons of our analyss should be noted. The frst stems from the fact that the Doukkal (2003) model assumed fxed wage rates. Whle senstvty to alternatve labor market assumptons should be checked, we can speculate on the lkely mpacts of allowng real wages to adjust to the reforms. Here t can be argued that the export-orented cash crops that wll replace cereals wll tend to be more labor ntensve than cereals. Thus we would expect hgher aggregate demand for the relatvely unsklled labor used n agrculture, and hence hgher real wages for relatvely poorer groups. Ths wll undoubtedly go some way toward compensatng the rural poor, and may even tlt the vertcal dstrbutonal mpacts n favor of the poor. A second concern s that there may well be dynamc gans from greater trade openness that are not beng captured by the model used to generate the relatve prce mpacts; for example, trade may well facltate learnng about new agrcultural technologes and nnovaton that brngs longerterm gans n farm productvty. These effects may be revealed better by studyng tme seres evdence, combned wth cross-country comparsons. 4. Conclusons The welfare mpacts of de-protecton n developng countres have been much debated. Some people have argued that external trade lberalzatons are benefcal to the poor whle others argue that the benefts wll be captured more by the non-poor. Expected mpacts on domestc prces have fgured promnently n these debates. The paper has studed the welfare mpacts at household level of the changes n commodty prces attrbuted to a proposed trade reform, namely Morocco s de-protecton of ts cereals sector. Ths would ental a sharp reducton n tarffs, wth mplcatons for the domestc structure of prces and hence household welfare. The paper draws out the mplcatons for household welfare of the prevous estmates of the prce mpacts of reform done for a Jont Government of Morocco and World Bank Commttee. Standard methods of frst-order welfare analyss are used to measure the gans and losses at household level usng a large sample survey. In a number of respects, our detaled household-level analyss throws nto queston past clams about the lkely welfare mpacts of ths trade reform. In the aggregate, we fnd a small negatve mpact on mean household consumpton and a small ncrease n nequalty. There s a szable, and at least partly explcable, varance n mpacts across households. Rural famles tend to lose; urban households tend to gan. There are larger mpacts n some provnces than others, wth hghest negatve mpacts for rural households n Tasla Azlal, Meknes Tafl, Fes-Boulemane and Tanger-Tetouan. Mean mpacts for rural households n these regons are over 10% or more of consumpton. There are clearly szeable welfare losses amongst the poor n these specfc regons. The adverse mpact on rural poverty stems n large part from the fact that the losses to the net producers of cereals outwegh the gans to the net consumers amongst the poor. Thus, on balance rural poverty rses. Ths contradcts the generalzatons that have been made n the past that the rural poor n Morocco tend to be net consumers of gran, and hence ganers from trade reform. Yes, a majorty are net consumers, but on balance the welfare mpacts on the rural poor are negatve. Our results lead us to queston the hgh level of aggregaton common n past clams about welfare mpacts of trade reform. We fnd dverse mpacts at gven pre-reform consumpton levels. Ths horzontal dsperson becomes more marked as the extent of reform (measured by the sze of 12

20 the tarff cut) ncreases. Indeed, we estmate that all of the mpact of complete de-protecton of cereals on nequalty s horzontal rather than vertcal; the vertcal mpact on nequalty was actually nequalty reducng. For a modest reform of a 10% cut n tarffs, the vertcal component domnates, though there s stll a large horzontal component. It s clear from our results that n understandng the socal mpacts of ths reform, one should not look solely at ncome poverty and ncome nequalty as conventonally measured; rather one needs to look at mpacts along horzontal dmensons, at gven ncome. We have been able to dentfy some specfc types of households whose consumpton and producton behavor makes them partcularly vulnerable. These results are suggestve of the targetng prortes for compensatory programs. The fact that we also fnd a large share of unexplaned varance n mpacts also ponts to the lmtatons of targetng based on readly observable ndcators, suggestng that self-targetng mechansms may also be needed. 13

21 Table 1. Predcted prce changes due to agrcultural trade reform n Morocco Sectors Consumers (% change n prces) Producers (% change n prces) Polcy 1 Polcy 2 Polcy 3 Polcy 4 Polcy 1 Polcy 2 Polcy 3 Polcy 4 Cereals and cereals products Fresh vegetables Fruts Dary products and eggs Meat (red and poultry) Sugar Edble ols Fresh and processed fsh Other ag. and processed food Servces Energy, electrcty and water Other ndustres Note: The tarff cuts on mported cereals are 10%, 30%, 50% and 100% for Polces 1,2,3 and 4 respectvely. 14

22 Table 2a. Consumpton shares and welfare mpacts through consumpton Consumpton Shares Polcy 1 Polcy 2 Polcy 2 Polcy 4 Natonal Cereals Fresh vegetables Fruts Dary products and eggs Meat (red and poultry) Sugar Edble ols Fresh and processed fsh Ag. and processed food Servces Energy, electrcty, water Other ndustres Total Urban Cereals Fresh vegetables Fruts Dary products and eggs Meat (red and poultry) Sugar Edble ols Fresh and processed fsh Ag. and processed food Servces Energy, electrcty, water Other ndustres Total Rural Cereals Fresh vegetables Fruts Dary products and eggs Meat (red and poultry) Sugar Edble ols Fresh and processed fsh Ag. and processed food Servces Energy, electrcty, water Other ndustres Total