Trade Exposure, Consumption Inequality, and Labor Markets: a Study of Peruvian Industries and Districts

WP/19/## TRADE EXPOSURE, CONSUMPTION INEQUALITY, AND LABOR MARKETS: A STUDY OF PERUVIAN INDUSTRIES AND DISTRICTS by Mumtaz Hussain, Yothin Jinjarak, Gonzalo Salinas IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management. © 2019 International Monetary Fund WP/##/## IMF Working Paper ############ Department Trade exposure, consumption inequality, and labor markets: A study of Peruvian industries and districts Prepared by Mumtaz Hussain, Yothin Jinjarak, Gonzalo Salinas1 Authorized for distribution by ######## June 2019 IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management. Abstract We study spillovers of trade exposure to consumption inequality and labor markets in Peru. Dependent variables are socioeconomic indicators measuring consumption per capita, unemployment, and informality. The policy variable of interest is tariff reduction of a district and its neighboring areas. The weighted tariff is constructed by combining the information of the number of workers in the district involved in economic activity relative to the total number of workers in the district, and the tariff linked to the economic activity. Controlling for education, migration, rural-urban differences, and initial conditions of socioeconomic development and tariff levels, we find a positive association between tariff reduction and consumption per capita, while the results for unemployment and informality are sensitive to empirical specifications. A 5.4% tariff reduction (equals to a sample standard deviation of weighted tariff changes in Peru from 2004-2015) is associated with 0.112% increase in consumption per capita, of which more than half is a result of regional spillovers of neighboring-districts' tariff changes. A (standard deviation) drop in tariffs is associated with 0.024% increase in the unemployment rate, the effects that are mostly due to direct district's tariff changes. The same tariff reduction is related to a decline in informality by 0.314%. Comparing the rural-area sample and the urban-area sample, we find the positive association 1 We thank Elin Baldárrago and Hien Nguyen for their help with data. 3 between tariff reduction and consumption (and to a lesser degree for unemployment) to be smaller for the rural areas, while the negative association between tariff reduction and informality to be more significant, suggesting a mixed policy outcomes on trade and inequality in the case of Peru. JEL Classification Numbers: F1,F13,F14,F16,J2,J46,O17,O24 Keywords: trade, inequality, workers, tariffs Authors’ E-Mail Addresses: [email protected]; [email protected]; [email protected] 4 Contents Page ABSTRACT .......................................................................................................................................... 2 I. INTRODUCTION ............................................................................................................................. 5 II. EMPIRICAL SPECIFICATION ......................................................................................................... 7 A. Models .............................................................................................................................................................. 8 B. Estimation procedure ............................................................................................................................... 10 C. Instruments .................................................................................................................................................. 10 D. Spillover effects .......................................................................................................................................... 10 III. DATA ANALYSIS ........................................................................................................................ 11 IV. DISCUSSION ............................................................................................................................... 22 A. Economic Significance ............................................................................................................................. 22 B. Informality ..................................................................................................................................................... 23 C. Case Studies ................................................................................................................................................. 23 V. CONCLUSIONS AND POLICY IMPLICATIONS ......................................................................... 24 5 I. INTRODUCTION We integrate three research areas, using economic geography and spatial estimation to analyse trade exposure and neighbourhood effects between districts within the country, and providing empirical evidence on the impact of tariff reduction on socioeconomic indicators. The impact of trade reform on the distributional outcomes, notably consumption, unemployment, and informality have been the focus of much recent research and discussion. (Topalova (2010); Autor, Dorn, and Hanson (2013); Dix-Caneiro and Kovak (2017); McCaig and Pavcnik (2018)). This study uses a case trade reform of Peru during the 2000s to understand further the distributional effects of international trade in developing countries. The empirical analysis uses a combination of socioeconomic indicators, tariff data, and geographic information to measure the spatial interaction of trade-induced economic adjustment across localities. The findings provide several insights on the direct and indirect effects of trade policies on economic activities and contribute to the discussion on the socioeconomic impacts of trade policy for the developing countries. The critical empirical innovation is to study how levels of socioeconomics in one district are affected by levels in neighbouring areas as well as tariff adjustment; that is, we simultaneously examine the direct and indirect, spatial effects of tariff reduction at the district level. Based on the sample from 2004-2015, the analysis allows for variation in the distributional consequences of international trade (both trade costs and tariff barriers) across districts within Peru dependent on their production activities, geographic location, market access, and neighbouring influences. Our measures of socioeconomics (the dependent variables) are four of the indicators frequently discussed in the policy formulation: income per capita, consumption per capita, unemployment rate, and informality rate. Spillovers of socioeconomic development between districts are estimated by using a spatially lagged dependent variable as a determinant. In our specification, the spatial lag is a weighted average of socioeconomic levels in neighbouring districts. Thus, socioeconomic development in each district is influenced by that of its neighbours: the spatial lag is endogenous. Also, it is possible that exogenous shocks affecting in one area have effects that spill over to other districts: this association is captured in a spatially correlated error term. Following Kelejian, Murrell, and Shepotylo (2013) we estimate the relationship by generalised spatial two-stage least squares (GS2SLS): an instrumental variable model that accounts the endogeneity of the spatially lagged socioeconomic development and for the spatially correlated 6 shocks. The instruments are the predetermined variables in our specification (geographic location, infrastructure, and market access) and their spatial lags. Our main findings suggest that (i) district-specific weighted tariff reduction increases consumption per capita, unemployment rate, and lowers informality rate; and (ii) the level of socioeconomic development in a district's neighbours has a significant effect on the district's socioeconomic outcomes. Because any omitted variable affecting socioeconomic indicators may also be spatially correlated (i.e. a missing variable is spatially correlated), the spatial lag of the socioeconomic (dependent) variable may partially represent the missing variable. To address the issue, we allow for the rural-urban distinction across districts and add spatial lags of determinants (district-specific weighted tariffs) - the spatial-Durbin specification. We also verify the findings specifying neighbouring strength in terms of the bordering contiguity and the inverse of the distance between districts. Section 2 reviews related studies on within-country variation in trade exposure that suggest a wide range of the effects of tariff reduction on consumption, unemployment, and informality. Section 3 describes data and reports estimates of trade exposure for the Peruvian districts. Section 4 discusses the economic significance and case studies. Section 5 provides the concluding remarks. Appendix A contains a detailed description of data, computing codes, tables and figures discussed in the paper. Appendix B provides the presentation slides for overviewing our study. Figure 1. Exports and Imports of Peru 7 II. EMPIRICAL SPECIFICATION In this section, we provide a generic model for within-country

Load more