Poverty, labor markets and trade liberalization in Indonesia

a r t i c l e i n f o We measure the effects of trade liberalization over the period of 1993–2002 on regional poverty levels in 259 Indonesian districts, and investigate the labor market mechanisms behind these effects. The identification strategy relies on combining information on initial regional labor and product market structure with the exogenous tariff reduction schedule over four three-year periods. We add to the literature on local labor market effects of trade policies by distinguishing between tariffs for output markets and for intermediate inputs, and finding that poverty reduced especially in districts with a greater sector exposure to input tariff liberalization. Among the potential channels behind this effect, we show that low-skilled work participation and middle-skilled wages were more responsive to reductions in import tariffs on intermediate goods than to reductions in import tariffs on final outputs. These results point towards increasing firm competitiveness as a driving factor behind the beneficial poverty effects. Trade liberalization has been widely expected to contribute substantially to poverty reduction in developing countries (e.g., the Doha Ministerial Declaration, WTO, 2001). Under a more open trade regime, rising demand for unskilled labor could benefit poor workers by increasing workers' real wages (Stolper and Samuelson, 1941) as well as creating more jobs in the formal economy. However, the growing body of micro-empirical evidence on the welfare implications of trade liberalization is not unequivocal. 1 Short-to medium-run labor market effects of liberalized trade seem to be very much context specific and depend, among other things, on the previous structure of protection (Attanasio et al., 2004), regional market access (Chiquiar, 2008) as well as the degree of market flexibility. For example, overregulated local labor markets that inhibited the adjustment to structural change could explain the unfavorable regional poverty effects of trade reform in India (Topalova, 2010). 2 By contrast, bilateral trade liberalization between the US and Vietnam led to clear reductions in Vietnamese rural poverty, potentially also due to higher labor market mobility (McCaig, 2011). In this latter case, poverty reduction resulted from large improvements in the access to the US market whereas the loss of import protection to local markets was negligible. Studies focusing on labor market and wage effects of tariff reductions present indirect evidence on potential effects of trade liberalization on poverty, again with mixed results. Reductions in protection and increased foreign competition generally seem to have increased, although with some …