Andean countries at a crossroads: Evaluating pro-poor trade integration options

Abstract

Andean countries are at a crossroads in external strategies and in a critical moment to re­evaluate trade and integration agendas as well as their impact on poverty. These twin ingredients are the centerpieces of development agendas today. Trade and integration continue to be an engine for growth and global competitiveness. Meanwhile, despite visible economic growth over decades, the bloc continues to face high and persistent poverty, and lags behind in Latin America in efforts to reduce poverty. In this paper, we evaluate a wide set of Andean trade and integration options and the impact of the Andean­US bilateral agreements on poverty and inequality. To this end, we apply a two­step, top­down approach in sequence. The first step is undertaken with a newly developed global, multi­region CGE model incorporating several innovations in database and modeling. The second stage is carried out with the microsimulation analysis, applying outputs simulated by the CGE model to individual households for three countries (Bolivia, Colombia and Peru). Simulation results indicate that the impact of trade agreements is unambiguously expansionary, although the gains are modest. While market opening will improve welfare, this policy instrument alone does not automatically guarantee export diversification, nor change the economic structure and reinforce technology­intensive industries. The impact of bilateral agreements is pro­poor, reducing poverty and narrowing inequality for signing countries. But the opposite is the case of non­signing country. The study shows that labor income gains via job creation particularly in rural areas are the primary sources of poverty reduction and inequality improvement. Trade and integration strategies are, however, not necessarily the panaceas to combat chronic poverty and reduce prevalent inequality. To tackle these issues, it is crucial to devise policy measures directly targeting the poor, in the combination with trade and integration approaches.