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Globalization and complementary policies: Poverty impacts in rural Zambia1

Jorge F. Balat2, Guido G. Porto3

The World Bank

July 2005

SARPN acknowledges the World Bank as a source of this paper.
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Introduction

During the last decade, Zambia adopted several economic reforms, including macroeconomic stabilization measures, trade liberalization, export promotion, and the elimination of marketing boards in maize and cotton. These reforms were expected to be beneficial in terms of national welfare, diversity in consumption, and productivity growth. The effects on the distribution of income and poverty were more uncertain, and positive impacts at the household level were harder to secure. In fact, poverty in Zambia increased during the 1990s. In this paper, we have two main objectives: to investigate the links between trade, complementary policies and poverty observed in Zambia during the last decade, and to explore how new trade alternatives may bring about poverty alleviation in the future.

International trade introduces new opportunities and new hazards. Households are affected both as consumers and as producers or income earners. As consumers, households are affectedwhen there are changes in the prices of goods consumed by the family. As income earners, households are affected when there are responses in wages and in agricultural income. In this paper, we examine the two sides of the globalization-poverty link. Since rural poverty is widespread in Zambia, we focus our analysis on rural households.

We carry out a series of separate poverty exercises related to the consumption and income impacts. On the income side, we are interested in exploring some of the dynamics effects of international trade on rural areas and agricultural activities. By facilitating access to larger international markets and by boosting non-traditional export sectors, trade provides incentives for rural households to move from subsistence to market-oriented agriculture. To capture these effects, we identify relevant agricultural activities, by providing a detailed description of household productive activities, and we estimate the income differential generated by market agriculture over subsistence agriculture using matching methods. These estimates provide a quantification of the income gains that may arise due to access to international markets and to the expansion of non-traditional exports. In addition, these income differentials across traded and non-traded agricultural activities may indicate the existence of distortions and/or supply constraints that prevent farmers from taking full advantage of profitable trading opportunities. Exploring these distortions and constrains is important to fully understand the links between globalization and poverty.

On the consumption side, we look at the effects of the removal of maize subsidies. There are two critical observations that support our somewhat narrow focus. On the one hand, Zambian households devote a very large fraction of total expenditure to food and, within food items, to maize; on the other, one of the major agricultural reforms comprised the elimination of the maize marketing board. In addition, we can use this experiment to look at the role of complementary policies. Concretely, the increase in the price of maize was expected to cause large welfare effects. But it triggered substitution effects towards cheaper varieties of maize that was only possible when the government facilitated entry into the small-scale mill industry. This is an instance in which complementary policies allowed households to smooth some of the welfare impacts of the increase in maize prices. However, the government restricted maize imports by small mills, or gave preference over publicly imported maize to industrial mills, and this hurt consumers in times of production shortages.

The paper is organized as follows. In Section 2, we describe the trends in poverty observed in Zambia during the 1990s, we review the major reforms adopted during this period, and we characterize trends in traditional (mining) and non-traditional (agriculture) exports. In Section 3, we look at sources of income and we estimate income differential gains in market agriculture. In section 4, we study the expenditure patterns of Zambian households and we explore the welfare costs of the elimination of consumption subsidies on maize. Section 5 concludes.


Footnotes:
  1. We are indebted to A. Harrison for her support. The discussion among participants at the NBER conference on Globalization and Poverty was very useful. We wish to specially thank our discussant, M. Slaughter, for his very useful comments and suggestions. Conversation withW. Easterly helped us clarify our understanding of some important issues; we thank him for his insights. Support from F. Yagci at the World Bank and the Zambia DTIS is greatly appreciated. All errors are our responsibility. The views expressed here are our own and do not necessarily correspond to those of the World Bank or its clients.
  2. MailStop MC3-303, The World Bank, 1818 H St., Washington DC 20433. email: .
  3. MailStop MC3-303, The World Bank, 1818 H St., Washington DC 20433. email: ; http://econ.worldbank.org/staff/gportohttp://econ.worldbank.org/staff/gporto.


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