Trade Liberalization, Poverty and Efficient Equity

Even if trade liberalization results in the aggregate welfare gains over all households, it is possible that the poorest households could lose. Is it possible to undertake the reform in such a way that ensures that the poor will not lose? We illustrate two approaches that might be used to design a trade liberalization in Turkey that meets these equity goals. The first approach uses direct compensation to losers. The second approach uses limited policy reform, where exceptions to the across-the-board reform are chosen so as to meet the equity goal. In each case we map out some of the efficiency costs of attaining these equity goals, so as to inform policy makers about the least cost way of attaining them. u The views expressed are those of the authors and do not necessarily reflect those of the World Bank or its Executive Directors. Harrison is Dewey H. Johnson Professor of Economics, The Moore School of Business, University of South Carolina ([email protected]). Tarr is Lead Economist, Development Research Group, The World Bank ([email protected]). Rutherford is an Associate Professor, Department of Economics, University of Colorado ([email protected]). We are grateful for comments from participants at a conference on Poverty and the International Economy, organized by The World Bank and The Parliamentary Commission on Swedish Policy for Global Development, held in Stockholm, October 2000.