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i
h
i
, where
i
h
is the share of
good i in total household expenditure. Household real disposable income is then:
r
h
=
w(p) v
h
(1+
h
)
+ T
h
[
\
|
)
j
h
(p) (7)
We can now find the effects of a variety of economic shocks on real household incomes. Define
the proportional change in each variable by a caret (e.g.,
r
h
= dr
h
/ r
h
, and so on). To reduce
clutter, assume
h
= 0. Expanding each price vector, the total change in real income for
household h is:
r
h
=
h
w
i
+
v
i
h
( )
i
i
h
+ 1
h
( )
T
h
p
j
j
h
j
i = 1, F; j = 1, , n (8)
where
i
h
is the contribution of factor i to a households total income from factors, and
h
is the
share of net household income from factor earnings. At constant prices and policies, an increase
in the household endowment of factor i raises real income by an amount proportional to the
growth of the endowment and its contribution to household income. Holding endowments
constant, a trade or trade policy shock alters some element(s) of p, and thus affects the household
both directly, and indirectly through general equilibrium changes in w. It may thus raise or
lower r
h
, depending on the magnitudes of the various price changes, the shares of factor in total
income, and expenditure shares on goods. Taxes and transfers may also change endogenously
due to altered public revenues.
3.3 Poverty changes
The real income information can be aggregated over groups of households to construct the
proportional change form of a distributionally sensitive poverty measure P
P
o
= ~o
h
(o, z)
r
h
z ~ r
h
[
\
|
)
j
h=1
q
_
r
h
for h = 1, , q poor households, (9)
where > 0 is the distributional sensitivity parameter, z is a poverty line, and the weights
h
(, z) = (z r
h
)
(z r
h
)
are -adjusted poverty gaps for household h relative to that for all
poor households (Coxhead and Warr 1995). Substituting for
r
h
from (8), equation (9) provides a
prediction of aggregate poverty change due to trade shocks or policy reforms. The subgroup
decomposability property of P
means that poverty changes can also be calculated for distinct
groups within the poor population.
11
These analytical tools support the examination of poverty data during episodes of trade
reform. Initial empirical analyses with Vietnamese data indicate the importance of a general
equilibrium approach. Minot and Goletti (2000) used subgroup data on rice farming households
distinguished by location and income and found differential effects of welfare changes due to
rice market liberalization. Litchfield et al. (2003) noted that Vietnams trade liberalization was
contemporaneous with huge expansion of products intensive in the use of labor and natural
resources (coffee, rice, handicrafts, processed foods and light manufactures) and a substantial
decline in poverty, which they found econometrically to be most intense among households
dependent on farming and unskilled labor incomes.
3.4 Factor markets
How price and policy changes affect real income for any given household will depend on its
endowments and consumption patterns as shown, but also on just which markets the household is
in, since factors and products may be distinguished by quality, distance, and other states of the
world, and arbitrage between these may work very imperfectly in a developing country context.
Several studies have identified the intersectoral mobility of unskilled labor as a key component
of the poverty alleviation effects of Vietnams reforms (e.g. Hertel et al. 2003, and for a China
study see Zhai et al. 2003), a result that is readily understood in theoretical terms by comparing a
short-run Ricardo-Viner specific factors model with the results from a long-run model with all
factors mobile. Resource (im)mobility may also have spatial or other dimensions, with
migration costs, ethnic or linguistic divisions, or other barriers to economy-wide labor market
clearing.
As noted above, most current AGE models make quite stark assumptions about the
operation of labor markets, and only a few attempt any systematic form of sensitivity analysis
with respect to labor market structure. In Vietnam as in many developing countries, household
labor allocations are made jointly with other resource use decisions; labor mobility away from
agricultural areas, for example is constrained by unwillingness to relinquish control over land,
and this limits intersectoral mobility and migration possiblities (Hertel and Zhai 2005). Some
groups are denied access to some labor markets for linguistic or cultural reasons. And in
Vietnam, a complex and rigid system of residence permits also raises the cost of relocating, in
addition to the usual transport and transactions costs (Le 2005).
It reasonable therefore to hypothesize (i) that full labor market integration is impeded by
these institutional and policy factors, and (ii) that these impediments affect the distribution of
gains and losses from global market shocks and domestic policy reforms. If these hypotheses are
supported in empirical work, then it will be necessary to incorporate explicit impediments to
intersectoral mobility and migration in the model. It is to be expected that different
specifications of labor markets will also lead to different outcomes in terms of the demand for
natural resources, poverty changes, and aggregate welfare.
3.5 Spatial resource use decisions
The model in Coxhead and Jayasuriya (2005) provides a starting point for the incorporation of
environmental phenomena. It captures the desired structural and policy characteristics of a
small, open developing economy in stylized form, and separates agriculture into two regions,
upland and lowland, each with specific economic and environmental characteristics. Land is
specific to regions; in Asia, lowland refers to fertile river deltas, which have highly developed
infrastructure and produce rice almost as a sole crop. Upland refers to sloping and often
12
mountainous land, relatively remote, with poor soils and infrastructure and less reliable yields
due to dependence on rainfall, typically used to grow a mix of staple foods and plantation crops.
While land is specific, however, capital and labor display higher degrees of interregional and
intersectoral mobility. To the upland-lowland model we add an aquaculture sector based on
coastal lagoons and estuaries and structured as for upland agriculture; in particular, we
hypothesize (iii) that that legal limitations on expansion of the total aquaculture area through
conversion of other coastal resources do not constrain decisions (Barbier and Cox 2005). Failure
to reject this hypothesis will imply another alteration in model structure.
Assume, for this exposition, that aggregate agricultural (or aquacultural) output in each
region is produced using region-specific land and labor, and that the urban/industrial region
produces a range of goods using capital and labor. Using K
r
to denote region-specific capital (in
agriculture, land; in aquaculture, impoundments), and assuming that at the upland and
aquacultural margins, K
r
is produced and maintained using labor according to K
r
= L
r
/
r
, where
r
> 0 is the unit labor requirement, we may define maximum revenue functions for each sector
or region:
Urban/Industrial (S): S(L
S
, K, p
S
) (10)
Lowland/Delta (Q): Q(L
Q
, K
Q
, p
Q
) (11)
Aquaculture (F): F(L
F
F
K
F
, K
F
, p
F
) (12)
Upland (R): R(L
R
R
K
R
, K
R
, p
R
), (13)
where p
r
is the relevant output price vector in each region. Total income in the economy is thus
given by the sum S + Q + F + R. Assume that labor is freely mobile among regions and is fixed
in total quantity:
L = L
S
+ L
Q
+ L
F
+ L
R
. (14)
This framework is suited to a wide range of analyses of changes associated with globalization.
These may be direct, since for tradables a change in producer price stems from changes in global
prices and trade policies as shown in section 3.1. They may also be indirect: for example, an
increase in investment in labor-intensive manufacturing, or a rise in the relative price of that
sectors output, raises labors marginal productivity and causes migration into the sector, both
from other manufacturing sectors and from agriculture. In the lowland agricultural region, land
area is fixed in the short-medium run, and the ability to release labor is limited by rice production
technology. In upland (coastal) regions, by contrast, total land (fishery) area is elastic due to
open access, so a change in labor costs can induce a much larger area response. This stylization
fits very closely with the realities of tropical Asia. In Thailand, for example, a boom in labor-
intensive manufacturing between 1988 and 1997 induced almost 20% of the farm labor force to
transfer to industrial jobs and brought agricultural expansion at the land frontier to an abrupt halt
(Coxhead and Jiraporn 1999). In the Philippines, rising labor costs due to expansion in labor-
intensive exportables sectors have been shown to contribute both to reduced upland land area and
also to land use substitutions from labor-intensive seasonal crops toward land-intensive
perennials such as orchards and agroforestry (Coxhead and Demeke 2004).
From this point, stylized stories of resource depletion and degradation are easy to
develop. On-site, land use choices driven by product and factor prices determine the allocation
of land or water resources across activities that are more or less environmentally damaging. In
13
upland and coastal regions, higher output prices and/or lower labor costs encourage both land
area expansion and intensification (that is, higher-frequency cultivation of existing area, for
example through a switch from perennial to annual crops, or open-capture fisheries to fish
farming). The former implies deforestation (including mangrove forest loss in the coastal area),
with associated environmental costs, and the latter, in the absence of offsetting technological or
management changes, implies more rapid degradation of existing resources.
In addition, off-site effects may occur when upstream land use decisions result in
deposition of eroded soil and agricultural chemicals into streams and rivers. Downstream, these
alter the productivity of land or aquaculture resources in ways that Coxhead and Jayasuriya
(2003) show are analogous to factor-specific technological regress, that is, they reduce the
effective (quality-adjusted) endowment of the resource. In coastal fisheries, for example, water
turbidity and chemical pollution caused by agricultural runoff reduces the productivity of the
existing resource, and rents fall accordingly; whether labor productivity also changes depends on
its capacity to migrate to other regions or sectors. If we index upland by r=3, lowland by r=2,
and coastal areas by r=1, then changes in effective resource stocks in downstream sectors due to
emissions upstream are measured by
%
K
r
= K
r
D
j
j >r