LATIN AMERICAN TRADE NETWORK (LATN)

La Red Latinoamericana de Política Comercial apoyada por el IDRC (Canadá)

For eign Tr ad e a n d P o v e r t y Re d u c t i o n : Co n c e pt u a l
Questions a n d Re c e n t E x p e r i e n c e i n Br a z i l

V entu ra-Dia s , V iv ia n n e
workingPAPER
Noviembre 2007
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83
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Working Paper
 Foreign Trade and Poverty Reduction:
Conceptual Questions and Recent Experience in Brazil

Vivianne Ventura-Dias *

Economic reforms undertaken in Latin America almost two decades ago led to the opening of
markets for goods, services and capital, reduced the State presence in economic life, and
assigned a central role to market forces in decisions concerning production, consumption
and investment by private economic agents. The abundant literature on the recent Latin
American experience shows, however, that in most countries increases in international flows
of goods, services and capital were associated with mediocre rates of economic growth and
with modest or even negative progress in social indicators. Data for Latin America show that,
in those countries where there was economic growth, there was also growth in exports and
imports. For most countries, however, the expansion in trade and in capital flows was not
enough to stimulate the economy as a whole and generate growth, and with it create new
jobs, higher levels of incomes, reductions in the poverty that is endemic to the region or to
improve its dramatic patterns of social inequality. Therefore, the available information does
not allow for a definitive conclusion as to the direction of causality between trade and
economic growth. On the other hand, recent experience in Latin America does underline the
need for public policies and institutions to relay the positive impulses derived from trade to
the rest of the economy and to alleviate its negative impacts on employment, income and
well-being of the population.

Brazil’s experience in the 1990s shows that the benefits and costs of trade liberalisation and
of the intensification of economic integration are not distributed evenly among economic
agents, enterprises, industries or regions of the country. In accordance with the static theory
of international trade, the industries most affected by competition from imports, resulting in
substantial job losses, were the most capital- or technology-intensive sectors, such as
vehicles, capital goods and electronic goods, while the food and clothing industries were able
to maintain or even increase their levels of employment. But there were also job losses in
labour-intensive industries, such as in textiles, furniture and footwear, among others (Barros
and Corseuil, 2001). Contrary to the outcome suggested by traditional trade theory, there is
no evidence that low-skilled workers have benefited from changes in the labour market
resulting from trade liberalisation. The “cyclothymic” behaviour of Brazilian economy, with
years of impressive economic growth being followed by two or three years of near
stagnation, has done little to reduce poverty or improve the distribution of wealth.

However, not all the blame can be laid on trade liberalisation. Responsibility is much more
widely distributed among the multiple instruments of economic reform.

The economic literature emphasises that trade policy is deliberatively redistributive, because
it changes the regime of protection in a given country. The introduction, increase, reduction
or elimination of tariff and non-tariff barriers affects the prices of goods and productive factors
that make up the economy’s system of incentives. The aim of government, from the point of
view of static trade theory, is to induce intrasectoral movements in productive resources with
a view to obtaining the efficiency gains that result from changes in the prices of locally-
produced goods brought about by their exposure to competition from overseas producers.
This increase in efficiency should then affect the behaviour of the economy as a whole. The

* Vivianne Ventura-Dias is a researcher at the Brazilian section of LATN (the Latin American Network for Trade Policy), a
member of LATN’s Steering Committee and a collaborating professor at the Centre for Legal Sciences at the Federal
University of Santa Catarina.
 2

first-order effects of trade liberalisation are expressed, therefore, in changes in internal

prices, while there is a less direct and more ambiguous relationship between trade and
growth, trade and social inequality, and trade and poverty. The impacts of trade on social
and gender equality are intermediated by markets and other institutions and depend on the
structure and functioning of these markets, as well as on formal and informal rules, laws and
government policies that have an impact on the behaviour of economic agents and influence
over economic decisions. The effects of price changes on production, employment and
incomes depend, among other things, on the efficiency of markets in signalling these
changes to economic agents and, especially, on the capacity of different groups of agents
(workers, consumers, producers and investors) to respond to new market incentives1.

In addition, as Brazil’s experience demonstrates, it is very hard to isolate the impact of trade
on prices from other effects occurring simultaneously and derived both from internal factors
(monetary policy, liberalisation of the capital account, or technological change, for example)
and or systemic factors (financial crises, for example).

Another significant impediment to understanding the effect of trade on the well-being of

individuals, on social equity , gender equality and poverty lies in the absence of an analytical
model for international trade with greater descriptive and explanatory power than the
traditional model of factor composition. Although important steps have been taken in this
direction, no theory has yet been constructed that is able to interpret large-scale changes in
the nature of trade. Although economists have not yet arrived at a consensus, in the past 15
years there has been increasing recognition that the fragmentation of the productive process
(the value chain) of goods and services and its distribution over various geographical regions
in the form of international outsourcing, generates trade flows whose consequences for
employment and personal well-being have not been correctly interpreted by traditional
models (Bhagwati, Panagariya and Srinivasan, 2004; Feenstra, 2007; Grossman and Rossi-
Hansberg, 2006). There is enough empirical evidence to justify a conviction that the
association of trade, foreign direct investment (FDI) and migratory movements brings about
substantial change in the labour market, leading to a more elastic demand for labour, which
reduces the bargaining power of workers and adds to the volatility of the labour market (ILO-
WTO, 2007).

This essay seeks to develop some of these questions and call attention to the distributive
aspects of trade liberalisation and expansion, whose complexity demands redoubled efforts
on the part of researchers. It is divided into three parts. The first addresses some interlinked
conceptual questions concerning the distribution of the benefits of trade and of trade
liberalisation and, in particular, their impacts on social and gender inequality and on poverty,
in the current context of international outsourcing. The second part is a brief presentation of
the evidence of the transformations brought about by trade and by trade liberalisation in
Brazil, and of their impact on social and gender inequality and on poverty. The final section
presents a few considerations on instruments of public policy to reduce imbalances in the
distribution of the costs and benefits of trade.

1. The word capacity is used here in its broad sense, as defined by Sen (1999): ability to achieve different levels of
“functionings”. The ownership of goods and capital is important because it provides access to valuable conditions and
activities, which Sen calls functionings. Examples of this include being adequately fed and clothed, freedom from epidemics
and from death from easily treatable diseases, literacy, development of self-respect, and the ability to exercise one’s rights
as a citizen.
 3

The Distributive Effects of Trade and of Trade Policy: General Conceptual

Questions

The effects of trade should be separated into static and dynamic effects. Although trade
theory concentrates on the static aspects of efficiency gains through reallocation of
productive factors, it is the dynamic factors – such as changes in the productivity of workers
and enterprises, impacts on the process of absorption, creation and dissemination of
technological progress – that may explain the relations between trade and growth, trade and
employment, trade and poverty2; without forgetting that, at the level of the individual, trade
affects the quality of people’s lives through its impacts on markets (especially on the labour
market), on households, and on government spending (Winters, McCulloch and McKay,
2004).

Trade theory is optimistic about the static benefits of trade, both in terms of gains in
productive efficiency, and in terms of individual well-being of consumers, although it
recognises that these benefits are not distributed evenly between the factors of production
(land, labour and capital). Even if increased trade flows end up having a positive impact on
the economy, the benefits for individual sectors and factors in each country will depend on
the relative scarcity of factors and on the intensity with which they are used in the production
of goods. In the absence of policies that would alter the system of incentives, trade should
always favour products that make the most intense use of resources abundant in the country
and, by extension the productive factor that is most abundant in the country will be the main
beneficiary of trade liberalisation.

Models suggest that the expansion of trade should reduce poverty and inequality of factor
income because the exposure of local producers to international competition will encourage
a country to specialise in those products where it holds a competitive advantage. As
unskilled or low-skilled labour is the abundant factor in developing countries, liberalisation
should have a positive impact on wages, contributing to the reduction of inequality and of
poverty. In theory, then, there should be no conflict between trade, social development and
poverty reduction. These conclusions are valid, however, only when the basic assumptios of
the models regarding the structures of goods and factors markets, access to technology of
production and full employment of factors, before and after trade liberalisation hold3.

Trade liberalisation should have a bearing on factor prices due to the changes in prices of
those products that make use of these same factors more or less intensely in their
production. It is important to take care over the order proposed by the theory of comparative
advantage for the occurrence of change: trade acts directly on prices of products and change
in factor prices is a result of changes in the prices of final products. As will be explained later,
in the complex reality of modern trade, with free movement of capital between countries and
relative mobility of labour, it is factor prices that determine the location of enterprises and of
production; and it is absolute advantages (competitive advantages) and not comparative
advantages that explain specialisation of production (Jones, 1980).

Over time, distributive problems occur because changes in a country’s productive structure
provoked by the exposure of local producers to international competitors alter the level of

2. Rodrik (2006) criticises the lack of a strategy for growth to direct the economic reforms of the 1990s, which may not simply
be replaced by a search for greater efficiency in the economy.
3. Among other suppositions, the models require that each country’s factors of production are able quickly and without cost to
adapt to changes in demand and that they have access to complete market information. They also assume immobility of
factors across borders and that the goods produced are similar in their quality and other main characteristics. In addition,
they assume that market competition for goods and factors tends to bring prices closer to production costs so that the
factors of production are remunerated in terms of marginal productivity.
 4

demand for the services of productive factors. On the one hand, liberalisation results in the
reallocation of jobs to the detriment of enterprises that lose market share to external
competitors, while other enterprises benefit from an increase in external demand for their
products and from lower costs resulting from increased competition among their suppliers.
Jobs lost at enterprises suffering from international competition may be compensated by
others created at exporting enterprises, although this requires time for upgrading skills.
Short-term models of foreign trade assume that some factors of production are specific to
individual industries, making it harder for them to migrate to other industries: this is true of
machinery and land, and also of worker qualifications. Intuitively, factors specific to exporting
industries in expansion will share in the gains of trade; while factors specific to industries in
decline will suffer (Krugman and Obstfeld, 2004).

Problems of information, training and physical mobility, among others, prevent that in the
short term the expansion of exporting industries absorb workers released from contracting
import-competing industries. In this respect Bacchetta and Jansen (2003) emphasise the role
of institutions and public policy in reducing adjustment costs on workers and enterprises
either through direct compensation or through measures designed to improve the efficiency
of relevant markets.

It is important to take into account the changes in competitive conditions on international

markets that have occurred as a result of the widespread industrialisation of developing
countries, which ended up competing with each other both in agricultural and in
manufactured goods. Such changes have an impact on the results of trade liberalisation. In
the 1960s and 1970s, the expansion of low-skilled, labour-intensive exports from eastern
Asia of goods led to a reduction in these countries of the salary gap between skilled and
unskilled labour, in line with trade theory. The same did not happen in Latin America in the
late 1980s and early 1990s, when the region’s exports of manufactured goods began to face
competition from China and South Korea, with similar factor endowments. Wood (1997)
observed that there was an increased supply on global markets of labour-intensive goods.
The first impact of this expansion was a reduction in the prices of those labour-intensive
good; and that this, in a second phase, had a negative impact on income of production
factors directly involved. Under pressure from international competition, Latin American
countries had sought to develop a competitive advantage by producing goods that required
workers with intermediate skills, resulting in reduced demand for unskilled workers and a
widening of the salary gap.

Although there is no consensus on Wood’s ideas, there is empirical evidence that, in highly
competitive homogeneous goods markets, trade may have distributive effects through the
process of technological innovation. For example, imports of capital goods embodying skilled
labour intensive technologies cause changes in the structure of demand for labour, favouring
more skilled but less abundant workers.

As mentioned above, although it is still a subject of some controversy among economists,

changes in the nature of trade and the progressive association between trade, capital and
people flows challenge the conclusions of traditional models of trade (Krugman, 1995;
Helpman, 1999). Indeed, although the empirical evidence is sparce, current conditions of
international trade – with the increase in intermediate goods trade, the strong similarities
between productive structures in different countries, international outsourcing, the formation
of integrated international productive systems (co-ordinated by large multinational
corporations) and the intimate relationship between trade and FDI – have turned upside
down many of the underlying hypotheses of factor-based trade models4.

4. For bibliographical references, see Ventura-Dias (2003).

 5

Many writers on the subject have emphasised that differently from the simple trade
specialisation between industries, one observes a complex specialisation in different
productive activities within a given industry (Knetter and Slaughter, 1999; Rayment, 1983).
Although such activities employ capital and labour (skilled and unskilled) with different
intensities, the consequences for employment and income levels may be different from those
predicted by traditional theory. For example, Feenstra and Hanson (1996; 2001) suggest that
activities transferred from industrialised to developing countries may make less use of skilled
labour than the activities that remain in those countries. However, they make greater use of
skilled labour than is typical of manaufacturing activity in developing countries. Such
transfers of activities, through outsourcing between independent enterprises or through
transactions between enterprises of the same corporation (intrafirm transactions), increase
the demand for skilled labour in both the industrialised and the developing country.
Therefore, the salary gap between skilled and less skilled workers can increase, both in
those countries where skilled labour is abundant and in those where it is scarce.

On the other hand, the interaction between international trade, FDI and the international
system of integrated production results in a more elastic demand for labour. Trade
integration gives enterprises global access to factors of production either directly, through the
relocation of activities and/or outsourcing, or indirectly, through trade in intermediary inputs.
Trade increases the sensitivity of demand for labour to wage increases, as higher wages
imply higher production costs that may result in contraction of local production, reduced
demand for labour, and relocation of activities (Verdier, 2004). In some industries, trade and
FDI give greater arbitrage powers to multinational enterprises, and less bargaining power to
workers (OIT-OMC, 2007)5. High international mobility of capital, together with limited
mobility of labour, give corporations significant ability to locate and re-locate their productive
activities, producing insecurity among workers and spreading working conditions.

It is important to emphasise that, in contrast to what traditional trade theory suggests, the
distributive effects on employment and wages caused by the complex nature of current trade
are not limited to the process of trade liberalisation per se, but are part of trade itself. In other
words, in the absence of adequate policies and institutions, the distributive consequences of
trade expansion in terms of insecurity, unemployment and poverty may be permanent. To
reiterate: although trade theory accepts that the process of liberalisation may result in losses
for productive sectors and for individuals, these losses are seen as transitory, during a period
in which labour and capital are industry-specific and, therefore, have limited ability to migrate
to those exporting industries areas that are job creating. Over the medium and long term,
however, with greater inter-industrial mobility of production factors production, job destruction
by trade is compensated for by the creation of new jobs. In the process, the salary gap
between skilled and unskilled workers should be reduced. However, current patterns of
international trade – resulting from innovations in communications and transport as well as in
structural changes in economies, which have led to strong convergence in patterns of
production and consumption in different countries – have altered the dynamic of adjustments
between trade, employment and wages. Such issues require better analysis so that the right
instruments to reduce the social costs of new trade patterns may be identified.

A recent joint study by the International Labour Organization (ILO) and the World Trade
Organization (WTO) concluded that no simple generalisations should be made over the
relationship between trade and employment. After an extensive review of the literature on the
subject, the authors discarded the traditional model of trade as inadequate for explaining the
widespread increase in demand for skilled labour, both in industrialised and in developing

5. Jones (1980) made reference to the disadvantages suffered by workers trapped within national borders.
 6

countries. These outcomes are influenced by the new factors mentioned above, with
emphasis on the close relationship between trade and FDI, the nature of trade (intra-
industrial trade between industrialised countries and the fragmentation of the productive
process), and technological change. In particular, trade resulting from international
outsourcing is associated with a faster pace of technological change and a negative impact
(for workers) in the price-elasticity of demand for labour (ILO-WTO, 2007).

The Distributive Effects of Trade and Trade Policy: Poverty and Gender
Equality

The economist Ravi Kambur (2001) grouped into three the main disagreements between
conventional economists on one side and, on the other, social groups worried by the
distributive effects of trade: degree of abstraction, time horizon, and market and power
structures. The theory of equilibrium – implicit in the evaluation of the distributive impact of
trade policy, based on models of trade – is applied to highly abstract categories, a medium to
long term horizon, and competitive market structures (for goods and factors) in which there
are no power relationships or strategic actions. Trade theory refers to the distribution of the
trade benefits among abstract categories denominated as factors of trade – in other words,
between the earnings of capital, land, and labour. As mentioned above, that literature
recognises that trade liberalisation leads to gains but also to losses. It believes, however,
that the losses are short-term while, in the long term, the gains will have greater impact. This
being so, public policy should seek to mitigate the costs of the process of liberalisation,
helping those suffer from it to adapt to new realities of price and of international competition,
without abandoning the basic objective of opening the market to more trade. It should be
stressed that this positive evaluation of the distributive consequences of trade policy results
from the assumption, in conventional models, that mechanisms to promote fair competition
operate efficiently in markets for goods and factors6.

Changes in the dimensions of aggregation, time horizon and market structures have their
impact on conclusions concerning the relationships between international trade, social
equality and poverty. For the most vulnerable sectors, the short term is critical, as their liquid
assets are insufficient to make the transition to the phase of economic expansion expected in
the medium term according to the optimistic view of trade theory7. Moreover, their
knowledge and skills may not be required by those industries undergoing growth, either
because the competition between markets for goods and factors is imperfect, or because
such markets are segmented by deficient infrastructure, or because enterprises enjoy
monopolistic (monopsonic) powers.

For a more detailed analysis of the impact of trade on people, the unit under analysis should
be more concrete, and more attention should be given to short-term problems. The effects of
the new competitive conditions on local markets and on the associated systems of incentives
are felt by individuals, in their double capacity as worker-producer and as consumer,
generating what may be contradictory effects8. For example, the entry into a country of
cheaper consumer goods is of benefit to the worker as a consumer, while the same worker
may become unemployed if the enterprise he or she works for is less competitive than its
foreign competitors. The job lost at an enterprise suffering from foreign competition may be

6. It should also be stressed that the political economy implicit in trade models assumes the presence of a benevolent and
neutral State, and total passivity on the part of economic agents. In reality, economic agents are not homogenous, and the
literature of collective action shows how some agents are able to evaluate the costs and benefits of trade policies, to define
their preferences in the face of such policies, to overcome problems facing collective action, and to seek the means to
influence policy formulators (see Adserà and Boix, 2003).
7. In parody of Keynes, Kambur (2001, p. 10) says that ‘in the short term’ the poor may be dead.
8. Trade policy also has a fiscal dimension that may affect the family unit through its impact on social spending.
 7

compensated for by jobs created in exporting enterprises. However, as has been said, the
replacement of jobs lost by new jobs generated by trade demands enough time for the
workforce to be trained or retrained.

Within households, trade policy also has its impact in an increase (or decrease) of
reproductive labour, an aspect that principally (though not exclusively) affects women in the
realm of the non-monetised care economy9. Through its impact on employment and intra-
household relationships, trade liberalisation also affects levels of poverty, although the
direction of causality and the relationship itself remains ambiguous.

Trade and trade policies affect the household – as it is often at this level that decisions are
taken regarding production (especially in agriculture, and in family-run enterprises),
consumption and labour supply – and the individual well-being of each family member
depends not only on the monetary income that the family may be able to generate as a
whole, but also on the prices of the goods and services it consumes. Literature on household
economy shows that intra-household relationships are based on both cooperation and
conflict. Tensions between family members are often based on each members divergent
interests on distributing their time between different activities, some of which will generate
income for him or her as an individual, while others will contribute to the household income.
The bargaining power of each family member with regard to the use of his or her time
depends on their resources (assets), as well as labour-related attributes (education,
experience and skills) that generate income in the market10. The difference in levels of
access to productive resources (land, credit and technology) especially affects women in
agriculture and in small enterprises producing goods and services. Trade affects the
negotiating positions of women inside family units by adding to or depleting their resources,
when it invites female labour to participate in production for export (or when imported goods
eliminate the need for domestic female production).

There is extensive literature on trade and gender that documents the growth in demand for
female labour as a consequence of the expansion of production and of trade11. More
recently, some studies have gone as far as to investigate the impact of trade negotiations on
gender relations12. The scarcity of data renders those studies, largely descriptive, based on
statistical information that is partial and incomplete. Therefore, better data collection is
required to infer with solid grounds the future trends of specific gender equity problems (such
as the precariousness of female employment, impacts of the spread of technology on the
quality of female employment, sectoral employment trends, etc.).

The relationship between trade and poverty is also complex and difficult to describe in a
simple model. On one hand, as has been mentioned, the effects of trade on poverty are
indirect, for example, through the labour market or through patterns of consumption; on the
other hand, poverty is a multidimensional phenomenon that is not described by income levels
alone (Winters, McCulloch and McKay, 2004). McCulloch, Winters and Cirera (2001)

9. Although the market may supply goods and services to meet most human needs, reproduction of the workforce still
depends on goods and services that are produced inside the household, in general (though not exclusively) through unpaid
female work in activities that are not included in calculations of the sum of economic output (GDP). The care economy
comprises those activities providing physical and emotional attention to others, including those undertaken within the
household but also community work and caring for the sick and elderly. Part of the care economyconsists of remunerated
activities (nursing, social assistance and others) where female labour predominates. The concept of the care economy
remains imprecise. See Elson (1999).
10. For an overview of the literature, see Fafchamps (1998); Folbre (1994; 2004). Winters (1999) suggests the family unit as a
means of measuring the broad effects of trade in poverty reduction. Folbre (2004), looking at the allocation of resources in
the household, analyses the problems of coordination that prevent this allocation from corresponding to the processes that
are idealised in competitive markets.
11. For more detailed bibliographical references, see Ventura-Dias (2005); Thorin (2001).
12. Gammage, Jorgensen, McGill and White (2002); Parada and Morales (2005); Salvador (2003).
 8

describe three ways in which trade liberalisation may have an impact on levels of poverty: (i)
prices, in that the direct impact on levels of poverty will depend on whether poor families are
net consumers or net producers of the product whose price has changed, and on whether
the change in price is transmitted to the poor producer (through distribution channels); (ii) the
performance of enterprises, through the impact of trade on profits and, subsequently, on jobs
and salaries; and (iii) taxes and public spending.

The literature on the subject emphasises, however, that trade liberalisation that favours the
reduction of poverty should be accompanied by public policies that aim to integrate the
poorest members of the population into market institutions, especially the rural population.
Among the proposed mechanisms are: (i) efficient distribution channels, to ensure that the
poor receive the benefits of the new incentives and that they have access to imported inputs;
(ii) access to assets (physical, human and social) to allow them to respond to the new
opportunities launched by foreign demand ; and (iii) a safety net to protect those agents who
may fall into poverty as a result of trade liberalisation and expansion. Trade liberalisation
may alter the nature of the risk and uncertainty faced by poor families by removing protection
for agricultural production, for example, and exposing vulnerable productive units to external
shocks. The capacity of the poor to deal with the risk and uncertainty of economic integration
will depend on the creation by governments of social safety nets.

Brazil’s Experience with Trade Liberalisation and the Expansion of Exports

From about $49 billion in 1999, Brazil’s exports grew to more than $137 billion in 2006, while
imports reached more than $90 billion. The expansion of Brazil’s trade with the rest of the
world took place under a trade regime that may be described as pragmatic liberalisation13.
From 1993, successive governments abandoned the discretionary protectionism that had
hitherto characterised Brazilian trade policy and retained the tariff structure (more uniform
and at lower levels) that had resulted from reforms at the beginning of the 1990s. At the
same time, however, there was little interest in deepening liberalisation14. Although exports
began to reach significant proportions from 2002, their growth and diversification are part of a
long process of structural change that took place over the progressive integration of Brazil
into the global economy. Changes in employment, in production, in the asset ownership of
enterprises and in their relocation away from the large metropolitan areas, among other
factors, were not the direct result of the rationalisation of Brazil’s tariff structures in 1990 to
1993, but this process did signal to Brazilian enterprises the inevitable need to adjust to new
conditions of production and of international competition.

It is no exaggeration to stress that the changes resulting from trade liberalisation and from
trade expansion took place in a context of extreme inequality in terms both of results and of
opportunities, each of which had their impact on the other15. Inequality of results can be
seen in inequalities of incomes, education, consumption, salaries and access to private and
public services, among other things, while inequalities of opportunity refer to different
degrees of access enjoyed by individuals to assets, goods and services, etc., due to

13. Although the Brazilian government uses customs tariffs ad-valorem as its main instrument of trade policy and continues to
make its trade regime simpler and more transparent, the WTO report shows that the process of changing tariff levels
remains discretionary (OMC, 2004). Baumann et al. (1997) analyse changes in tariffs between July 1994 and September
1996. Over these 27 months, the authors identified pronounced differences in tariff levels for different products.
14. In July 1993, the average nominal tariff was 11.4%; in January 2004, the average tariff was 10.4% (WTO, 2004).
15. John Roemer (1998) suggests that the relevant outcomes (such as consumption, wages, etc) may be understood as
determined by two large sets of variables. Those that, to a certain degree, are within individual control are called effort
variables. Those variables that help to determine outcomes, but are beyond the control of the individuals, are called
circumstance variable. In the framework suggested by Roemer, equality of opportunity exists if the circumstances subject
to modification are not predetermined – they do not produce systematic differences in individual outcomes. The only
differences in outcomes considered “fair” are those caused by differences in individual effort (quoted by the World Bank,
2003, p. 4).
 9

attributes beyond their control (circumstances), such as race, gender, geographical origin,
etc16.

The direct impact of foreign trade on net employment creation was not significant in the
aggregate, although it was more significant if we consider only manufacturing employment.
For Moreira and Najberg (1999), in absolute numbers, the “employment cost” of trade
liberalisation was small (a little more than one million jobs lost, or 1.8% of those in work). The
positive effects of trade were felt most strongly in the most labour-intensive sectors such as
agriculture, mining and services, although the results were below what was suggested by
trade literature. In general terms, the structure of employment by sector after liberalisation is
in line with the specialisation that had been expected, given Brazil’s static comparative
advantages resulting from its abundance of natural resources. Moreira and Najberg (1999)
show that, in labour-intensive industries, there was a fall in employment levels that was less
than that seen in capital-intensive manufacturing. Nevertheless, the effect of trade
liberalisation on job creation in labour-intensive industries was, negative despite the variation
in outcomes by industry.

The increase in labour productivity, partly as a result of trade liberalisation, had as its
counterpart a reduction in employment in the formal manufacturing sector, which was
partially absorbed by growth in formal employment in retailing and services and, to a greater
extent, by the expansion of the informal economy. Between 1990 and 1993, both production
and employment fell in almost all sectors, although the fall in employment was more
significant. Between 1994 and 1997, while employment remains falling output shows positive
rates of growth17. Between 1990 and 1997, formal employment in manufacturing industry
fell in both absolute and relative terms, with industrial employment falling from 25% to 16%
as a share of total employment (Baumann, 2000)18. In 2002, more than 50% of the
workforce was employed in the informal economy, unemployment rate was almost 12% (of
the economically active population), and average earnings had lost 15% of their spending
power compared with 199719. These data, however, do not reflect only trade liberalisation
effects but the sum of all structural reforms effects20.

Although industrial restructuring has proceeded in accordance with Brazilian static

comparative advantages, it has not been accompanied by the expected corollary effect on
the occupational structure and income distribution pattern. Indeed, in industries more capital
and skilled labour intensive trade liberalisation resulted in a relative increase in imports
and/or in changes in the asset ownership of enterprises, but there is no evidence of a
reduction in wage inequality between skilled and unskilled workers or of a reduction in capital
gains21. On the other hand, job losses affected mostly less skilled and less educated
workers, underlying the importance of technology to supplementing simple trade models.

16. Race and gender are two attributes that explain a large part of income inequalities, in that order: some 12% of income
inequalities are the result of racial inequalities (World Bank, 2003).
17
Najberg, Puga e Oliveira (2000) analysed the impact of birth and death of firms in thea creation of formal jobs, in 1996-1997.
Empirical data showed the importance of new establishments in the demand for formal jobs. During the two years, there
was a net increase of 1,3 milllion jobs in microenterprises whereas there was a reduction of 729 thousand formal jobs in the
large enterprises.
18. From 1997, employment growth in retail and services no longer compensated for falling manufacturing employment,
leading to a clear trend of overall open unemployment growth. Since 1998, open unemployment has increased even more,
with a reduction in both retailing and services jobs (Camargo, Neri and Reis, 2000).
19. Arbache (2004: 30).
20. Structural reforms include those determined by the new Constitution of 1988. Néri and Camargo (2000: 290) suggested
that the overlap between trade liberalisation and the post-Constitutional period prevents an accurate identification of the
determining factors behind the increase in labour productivity. The increase in labour costs derived from mandated
changes in the Constitution may have been more crucial than greater exposure to competition due to trade liberalisation.
21. Arbache and Corseuil (2001: 1) mentioned studies on the impact of trade liberalisation on enterprises’ profit margins, with
ambiguous results. The model of factor use provides a better explanation of the effects on income ex-ante and ex-post of
land and capital.
 10

Along with the need to cut costs to face up to international competition, new imported capital
and intermediate goods embody technologies whose skilled labour bias was sufficiently great
to make up for for the reduction in skilled labour predicted by the Heckscher-Ohlin model22.

Studies show that wages, employment and the competitiveness of the economy were
significantly affected by economic reforms, even if income inequality has remained relatively
stable, as a result of changes in the amount of schooling among workers23. Arbache and
Corseuil (2001) concluded that the relation between imports and total sales (import
penetration coefficient) seemed to be more closely correlated to changes in employment,
while the the relation between exports and total sales (export intensity coefficient) seemed to
be correlated with relative wage variations.

Arbache and De Negri (2002) concluded that workers in exporting enterprises were more
(and not less) skilled than workers in non-exporting enterprises. Labour skills were measured
by average years of education and by average years in employment, as a proxy for “learning
on the job”. Working on the principle of complementarity between capital and skilled labour,
the authors concluded that levels of technology content in exporting enterprises were higher
than those in non-exporting enterprises. They also found evidence that wages of workers in
exporting enterprises were higher than those in non-exporting enterprises. Although the
direction of causality between productivity and exports is ambiguous, the authors concluded
that productivity in exporting enterprises was greater than that in non-exporting enterprises.

Quantitative analysis demonstrates that the negative impact of international trade in the
creation or destruction of jobs for workers of different skills has been much less than that
resulting from technological change: imports were responsible for the loss of 1.97 million
jobs, while technological change caused the loss of 4.9 million. In the absence of imports and
technological change, there would have been an increase of 12.5% in unskilled jobs.
Technological change offers a better explanation for the creation of skilled jobs. The absence
of imports would have allowed the creation of 3.8% more skilled jobs, while the absence of
technological change would have prevented the creation of 15.8% new skilled jobs24. In
summary, on the domestic market, increased consumption and technological change were
beneficial to more skilled workers. The studies concluded that there is empirical evidence to
demonstrate that trade liberalisation (in the circumstances in which it occurred in Brazil) had
a negative impact on less qualified and less educated workers25.

To reduce inequality in income distribution, trade should favour the creation of jobs
compatible with the structure of the labour market. As has been suggested, in the specific
case of Brazilian manufacturing industry, there is no empirical evidence that greater
exposure to international competition has caused an increase in demand for unskilled labour,
and there is no indication that this situation will change in the future.

Studies analysed by Soares, Servo and Arbache (2001) show that the impact of trade
liberalisation on income distribution in Brazil was very small. Although there has been an
increase in the dispersion of average wages between groups with similar educational levels,
this was cancelled out by a fall in the dispersion of salaries within such groups.

22. For a description of some empirical studies with ambiguous results regarding the hypotheses of Hechscher-Ohlin, see
Soares, Servo and Arbache (2001).
23. Arbache (2002). For references to other studies, see also Arbache and Corseuil (2001). Arbache (2004) mentions studies
that find evidence that trade liberalisation reduces the gap between formal and informal salaries in manufacturing industry.
24. Arbache (2004: 32). For a breakdown of the effects of productivity and trade liberalisation on variations in employment, see
also Moreira and Najberg (1999).
25. For a review of major conclusions of empirical studies in Brazil, see Soares, Servo and Arbache (2001).
 11

Nevertheless, these studies are limited to the formal economy and manufacturing
employment. The impacts of trade on agriculture are much less known, as data do not exist
that would permit an analysis of the impact of liberalisation and the expansion of trade on
rural output, employment and income. The most recent agricultural census was carried out in
1995-1996, before the expansion of agricultural exports. Brazilian agricultural export sector
has been the engine of the continuous expansion of the country’s exports and of the
generation of large trade surpluses. Studies at municipal level show the long-term benefits of
the development of agriculture on income generation, population growth, tax receipts and
living conditions (Bonelli, 2001). The available data, although outdated, show that Brazilian
agriculture is very heterogeneous, with enterprises of different sizes, with different business
structures, levels of productivity and access to finance and technological innovation.

In particular, the subsector known as family farm agriculture has strong social components,
given its close association with rural poverty, social inclusion, and protection of the
environment. The debate over the permanence and strengthening of family farm agriculture
is also linked to food security, given the role it plays in the production of foodstuffs for the
domestic market.

Family farm agriculture is a wide-reaching concept. It ranges from subsistence farming to

efficient small-scale production fully integrated into the market26. On the basis of the
Agricultural Census for 1995-1996 Incra (National Institute of Colonisation and Agrarian
Reform), with the support of the FAO (Food and Agriculture Organisation), prepared special
tables that demonstrates the importance of family farm agriculture, defined according to
social production relations rather than simply by the area farmed or the value of farm
produce27. The data (the only data available) show that family farms made up 85.2% of all
establishments identified by the Census, occupied 30.5% of the total area farmed, and were
responsible for 37.9% of the gross national agricultural product (VBP), receiving, in the year
covered by the Census, just 25.3% of agricultural credit. Broken down by region, family farm
agriculture was responsible for more than 50% of VBP in Brazil’s north and south, while the
centre-west had the smallest proportion of family farms28.

According to analysts, trade liberalisation was neither uniformly beneficial nor entirely
detrimental to family farm agriculture. It had distinct effects according to produce,
geographical region, size of farm, and the period under analysis. Lower prices for farm inputs
were of benefit both to export-oriented production and to local production destined for the
domestic market (the consumption effect). In some cases, however, the removal of tariff and
non-tariff barriers led to the substitution of imported produce taking for domestic produce.
Some writers have criticised tariffs reductions for being excessive and for disregarding the
negative effects on prices of agricultural subsidies in industrialised countries. On the other
hand, after the creation of Mercosul (Southern Common Market) wheat imported from
Argentina led to a reduction in the relative price of wheat, to the detriment of family farming
both from its direct effect and from its substitution effect on other products (beans, manioc
and potatoes, among others). In regional terms, a large part of the gains were concentrated
in Brazil’s centre-west, while the south (home to the most efficient family farms) bore most of
the difficulties.

26. Homem de Melo (2001: 13) uses Ricardo Abramovay’s definition: “Family farm agriculture is that which has no permanent
employees and/or has fewer than five temporary employees in any given month of the year”.
27. For INCRA, family farm agriculture should satisfy two conditions: work on the farm is directed by the producer; and work
undertaken by the family is greater than that undertaken by hired labour. See Guanziroli and Cardim (2000).
28. Brazil’s south is stronger in terms of family farm agriculture, which makes up 90.5% of all farms in the region, occupying
43.8% of farm land and producing 57.1% of VBP (Gross National Agricultural Product), with 43.3% of agricultural credit in
the region. The north-east region had the largest number of family farms, occupying 43.5% of the region’s land, producing
43% of its VBP, but receiving just 26.7% of the region’s agricultural credit (Guanziroli and Cardim, 2000: 17).
 12

For the subsector of family farms organised as market-oriented enterprises, the benefits of
liberalisation were seen in greater land productivity, mostly resulting from a reduction in
farmed area but also from lower production costs. In general terms, family farm produce
suffered from the effects of trade liberalisation on agricultural produce prices , but benefited
from the relative fall in farm inputs prices. Lower prices for conventional inputs (such as
fertilizers and pesticides) as well as for new inputs (such as an enormous range of machinery
and tools, vaccines and veterinary medicines) were of greater benefit to family farms with
greater access to capital29.

In the same way, relationships between trade and gender equality are intermediated by the
relationship between trade and growth, trade and the labour market, and trade and prices.
There is a scarcity of studies that analyse the impact of trade liberalisation on gender
asymmetries in Brazil. Castilho and Guedes (2002) refer to the fact that studies concentrate
on questions of segmentation of female labour, of the precariousness of those jobs filled by
women and of the double working day, given that the non-monetised reproductive labour is
still predominantly carried out by women30.

Researchers have concentrated on constructing an analytical methodology to incorporate the

two chief components of female labour: (i) reproductive labour, consisting of the daily
activities of maintaining and reproducing the family or the community (the care economy),
which may also include subsistence activities; and (ii) productive labour, consisting of those
activities producing monetary income (or non-monetary income, when carried out in a family
business). For opportunistic reasons (the lack of data and of an structured analytical corpus),
research into the effects of trade on wage discrimination, or on type of occupation. have
focused on female formal employment. According to Castilho and Guedes (2002: 17), most
studies dealing with gender and trade liberalisation concentrate on “the effects on integrating
women in the labour market and, in particular, on the precariousness of female jobs and the
extent to which this part of the population has served as a “variable of adjustment” in the
Brazilian economy”. Other studies deal with the impact on trade expansion, of the flexibility in
the size of the working force and of working hours due to the availability of female labour.

Public Policies for a More Balanced Distribution of the Gains and Losses
Resulting from Trade

This brief review of part of the voluminous literature on the distributive impacts of trade (and,
especially, on the recent Brazilian experience) allows us to conclude that trade is less
threatening than its most severe critics would have it, but much less of a promoter of
significant social change than is proclaimed by its most intransigent defenders. The official
document produced by the ILO and the WTO recognises that current conditions of
international trade, with the fragmentation of production and the intra-industrial specialisation
of tasks (activities), imparts to enterprises greater power of arbitrage over prices, weakens
the bargaining position of workers, and leads to job insecurity (ILO-WTO, 2007). A recent
study by the World Bank also concludes that an emphasis in the process of economic reform
on an increase in static efficiency has left aside institutional and dynamic factors that are
fundamental to realising the objectives of growth and of extending the benefits of trade to the
population as a whole (Rodrik, 2006).

29. See Homem de Melo (2001). The author concludes that family farm agriculture in Brazil produces predominantly for the
domestic market (including for families themselves), even though not all products are foodstuffs (tobacco, for example). On
the other hand, corporate agriculture produces predominantly for export.
30. Castilho and Guedes (2002).
 13

There is no evidence that trade leads to an increase in poverty (measured by income levels)
or to social inequality in aggregate terms, although there is little empirical understanding of
the mechanisms that transmit the negative effects of trade at the level of the family unit. In
the specific case of gender equality, studies on the impact of trade policies on gender
equality will necessarily be incomplete, if they fail to include the dynamics of relationships
within and outside households. For the well-being of women to improve, women must
acquire greater economic autonomy to escape from their subordinate state and from their
lack of ability to take decisions both inside and outside the home. Given the activities
exercised by women simultaneously in the productive and reproductive spheres, studies
should seek to integrate both areas, because it is in the care economy that gender relations
are realigned in terms of the power relationships between men and women.

Empirical studies into the effects of trade liberalisation (unilateral or negotiated through
agreements of wide scope) and of trade expansion on poverty and on social and gender
equality should take account of the high concentration of income, assets and opportunities
according to economic class, race and gender in Brazilian society. The nature of trade
effects on enterprises, households and the owners of productive resources will be
determined by the relative access of economic agents to goods, services and market
opportunities, as well as by the existence and functioning of institutions to coordinate the
actions of agents and markets. Systemic factors, together with individual characteristics such
as income, gender and race, define the manner in which trade and trade policy have their
impact on economic agents. The dimension of gender cuts across economic and social
classes and ethnic groups, just as dimensions of class and race cut across gender relations.
Analysts have concluded that a strong factor in the segmentation of labour markets in Brazil
is the inequality that exists in terms of access to high-quality education. A study sponsored
by the World Bank (World Bank, 2003) indicates that the unequal distribution of education
explains about 30% of income inequality in Brazil, while differences in salary derived from
different levels of qualification explain another 32%. These two factors are multipliers,
because wage inequality is partially determined by the structure of schooling distribution (skill
supply). Therefore, policies designed to reduce poverty and inequality should seek to reduce
disparities in the skills composition of the workforce, so that the positive impact of greater
efficiency resulting from integration into international markets may be distributed among a
greater share of the population.

In particular, in the case of agriculture in Brazil, studies show that in many cases, in the
absence of appropriate polices to support family farm agriculture, this sector is unable to
compete with subsidised products from industrialised countries. For small producers to reap
the benefits of trade, it is important that trade liberalisation should be accompanied by
agricultural support policies that provide greater access for producers to markets, to
distribution channels, to credit and to technology.

There is a consensus among economists that trade creates “winners” and “losers” and that
there are economic arguments why “winners” should compensate other economic sectors
and social groups for their losses. In the same way, there is a certain consensus on the
importance of institutional and organisational factors designed to ensure a more equitable
distribution of the gains and losses derived from trade. There remain, however, strong
disagreements not only in relation to the types of institutions and organisations that are
necessary, but also in relation to the types of instruments that should compensate for losses.
In addition, literature on the subject has been careful not to propose compensation for
individuals and sectors that would prevent adjustments in the allocation of resources among
industries in the medium and long term.
 14

The principle of compensation in itself involves profound ethical questions. A situation in

which only part of society benefits from the growth of trade, and in which the benefits are so
great as to enable the winners to buy the compliance of the part that bears the costs, is
unlikely to produce what John Rawls referred to as “a well ordered human association”31.
Under normative trade models, this situation does not come about because unequal
distribution of income among factors is a short-term, transitory phenomenon and the State is
seen as a “benevolent dictator”, with the capacity to formulate and implement trade policies
from a technical point of view, without favouring organised interest groups.
Thus, the point is not to formulate compensatory mechanisms to correct problems of
adjustment that may arise, but to recognise the sources of inequality of opportunity and of
results – for men and women – that exist in society, and to include distributive relationships
and institutional structures, together with efficiency objetive, in the design and
implementation of public policies (Elson and Çagatay, 2000).

31. A social consensus on the distribution of social production is one of the pillars of a well ordered society (Rawls, 1999).
 15

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