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Traditional measures of trade diversification only take into account contemporaneous export baskets. These measures fail to capture a country’s ability to respond to shocks by allocating factors of production into activities for which it has already paid the fixed costs associated with exporting. This paper corrects for the shortcoming of traditional measures of diversification by introducing a novel measure of trade diversification—latent diversification—and proposes a proxy to measure latent diversification, which is calculated by taking into account the entire history of a country’s exports. The paper shows that the observed gaps between traditional measures of diversification and the proposed proxy of latent diversification are sizeable; countries hold latent export baskets that are, on average, three times as large as their average contemporaneous export basket, and these gaps are largest for poor and small countries. Moreover, latent diversification is an important determinant of volatility—more diversified latent export baskets are associated with lower terms of trade volatility and, subsequently, lower GDP per capita volatility, even after controlling for the degree of contemporaneous export diversification and other trade and country characteristics. The latter result, together with the disproportionately large latent baskets relative to contemporaneous baskets observed in poor and small countries, suggests that latent diversification is an important vehicle toward stability in countries that face barriers in building diversified contemporaneous export baskets.

This paper analyzes the economic effects of agricultural price and merchandise trade policies around the world as of 2004 on global markets, net farm incomes, and national and regional economic welfare and poverty, using the global economy wide Linkage model, new estimates of agricultural price distortions for developing countries, and poverty elasticity's approach. It addresses two questions: to what extent are policies as of 2004 still reducing rewards from farming in developing countries and thereby adding to inequality across countries in farm household incomes? Are they depressing value added more in primary agriculture than in the rest of the economy of developing countries, and earnings of unskilled workers more than of owners of other factors of production, thereby potentially contributing to inequality and poverty within developing countries (given that farm incomes are well below non-farm incomes in most developing countries and that agriculture there is intensive in the use of unskilled labor)? Results are presented for the key countries and regions of the world and for the world as a whole. They reveal that, by moving to free markets, income inequality between countries will be reduced at least slightly, all but one-sixth of the gains to developing countries will come from agricultural policy reform, unskilled workers in developing countries the majority of whom work on farms will benefit most from reform, net farm incomes in developing countries will rise by 6 percent compared with 2 percent for non-agricultural value added, and the number of people surviving on less than US$1 a day will drop 3 percent globally.

Using the most recent estimates of agricultural price distortions, this chapter studies the economic, poverty, and income inequality impacts of both global and domestic trade reform in Argentina, with a special focus on export taxes. Argentina offers an interesting case study as the only large agricultural exporter that has, at many points in its history, applied export taxes to several of its agricultural products. The chapter combines results from a global economy-wide model (World Bank's linkage model), a national computable general equilibrium (CGE) model, and micro-simulations. The results suggest that liberalization of world trade (including subsidies and import taxes, but not export taxes), both for agricultural and non-agricultural goods, reduces poverty and inequality in Argentina. However, if only agricultural goods are included, indicators for poverty and inequality do not improve and even deteriorate somewhat. This is particularly the case if export taxes are eliminated. The chapter discusses the possible reasons for those results, offers some caveats, and suggests some lines for further research.

Although Mozambique has considerable agricultural potential, rural poverty remains extremely high. This paper examines the extent to which global and domestic price distortions affect agricultural production and national poverty. The author develops a computable general equilibrium (CGE) and micro-simulation model of Mozambique that is linked to the results of a global model. This framework is used to examine the effects of eliminating global and national price distortions. Model results indicate that agriculture is adversely affected by current trade distortions due to policies in the rest of the world. While a removal of all merchandise trade distortions will reduce import prices, it will also raise agricultural production and reduce poverty. By contrast, removing only agricultural price distortions abroad will have little effect on Mozambique's agricultural sector. Model results indicate that Mozambique's own distortions are also biased against agriculture, with producers of processed agricultural products enjoying high protection levels. Removing these distortions causes a significant expansion of agricultural Gross Domestic Product (GDP) and a reduction in both poverty and inequality. The findings therefore suggest that removing own-country and rest-of-world distortions will have positive implications for agriculture and for the overall economy in Mozambique, and in particular it will reduce its poverty and inequality.

The volume on agricultural price distortions, inequality and poverty begins with a global study that uses the World Bank's linkage model to examine the economic impacts in various countries, regions and the world as a whole of agricultural and trade policies as of 2004. It does so by shocking that model with the removal of all agricultural price-distorting domestic and border policies with, and without, the removal of trade policies affecting all other goods. That pair of shocks is also employed in another global study in that volume to examine the inequality and poverty implications of those price-distorting policies for more than 100 countries. Then for ten national studies reported in that volume, the Linkage model again is used, but only to provide an exogenous set of shocks to the national economy wide model employed by the authors of each developing country case study. The effects of that shock on a national economy are then compared with the effects of own-country liberalization using the same national model and the same agricultural protection rates for that country as in the global Linkage model. In this appendix the authors describe the main assumptions adopted to generate the border price and export demand shocks from agricultural and trade policy reforms by the rest of the world, and how that is communicated to the national models.

This chapter begins with a brief summary of the long history of national distortions to agricultural markets. It then outlines the methodology used to generate annual indicators of the extent of government interventions in markets, details of which are provided in Anderson and appendix A. A description of the economies under study and their economic growth and structural changes over recent decades is then briefly presented as a preface to the main section of the chapter, in which the nominal rates of assistance and consumer tax equivalents (NRA and CTE) estimates are summarized across regions and over the decades since the 1950s. These estimates are discussed in far more detail in the regional chapters that follow. A summary is also provided of an additional set of indicators of agricultural price distortions presented in chapter eleven that are based on the trade restrictiveness index first developed by Anderson and Neary (2005). In chapter twelve the focus shifts from countries to commodities, and all the various distortion indicators are used to provide a sense of how distorted are each of the key farm commodity markets globally. Then chapter thirteen uses the study's NRA and CTE estimates to provide a new set of results from a global economy-wide model that attempts to quantify the impacts on global markets, net farm incomes and welfare of the reforms since the early 1980s and of the policies still in place as of 2004. The chapter concludes by drawing on the lessons learned to speculate on the prospects for further reducing the disarray in world agricultural markets.

How hospitable will the global environment be for economic growth in the developing world as we come out of the present financial crisis? The answer depends on how well the author manage the following tension. On the one hand, global macro stability requires that we prevent external imbalances from getting too large. On the other hand, growth in poor nations requires that the world economy be able to absorb a rapid increase in the supply of tradable produced in the developing world. It is possible to render these two requirements compatible, but doing so requires greater use of explicit industrial policies in developing countries, which have the potential of encouraging of modern tradable activities without spilling over into trade surpluses. The 'price' to be paid for greater discipline on real exchange rates and external imbalances is greater use (and permissiveness) towards industrial polices.

Earnings from farming in many developing countries have been depressed by a pro-urban bias in own-country policies as well as by governments of richer countries favoring their farmers with import barriers and subsidies. Both sets of policies, which reduce national and global economic welfare and contribute to global inequality and poverty, have been undergoing reform since the 1980s. Using the linkage model of the global economy and modifications to the pre-release of version 7 of the Global Trade Analysis Project (GTAP) protection database for 2004, this paper seeks to compare the effect of those reforms to date with those that would come from removing remaining agricultural and trade policies. Two sets of results are thus presented: one showing the effects of policy reforms between 1980-84 and 2004, the other showing what the removal of remaining distortions as of 2004 could be. Both sets of results indicate improvements in the real value of agricultural output and exports, the real returns to farm land and unskilled labor, and real net farm incomes in most developing country regions despite the adverse effect on the international terms of trade for some developing countries that are net food importers or are enjoying preferential access to agricultural markets of high-income countries. Landowners in those high-income countries still offering their farmers price supports could readily afford to compensate them from the benefits of removing remaining agricultural protectionism.

Export diversification can lead to higher growth. Developing countries should diversify their exports since this can, for example, help them to overcome export instability or the negative impact of terms of trade in primary products. The process of economic development is typically a process of structural transformation where countries move from producing "poor-country goods" to "rich-country goods." Export diversification does play an important role in this process. The author also provides robust empirical evidence of a positive effect of export diversification on per capita income growth. This effect is potentially nonlinear with developing countries benefiting from diversifying their exports in contrast to the most advanced countries that perform better with export specialization.