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THE IMPACT OF TRADE LIBERALIZATION 65


would be a small but negative impact on mean household consumption and a small increase in inequality, as in the case of Jordan in the study by Feraboli and Trimborn (2008). Heterogeneity in consumption behavior and in income sources has diverse impacts on households. For example, rural households have twice the budget share for cereals as urban households; also, the share of income from production accounts for a quarter of consumption in urban areas (the rest is labor earnings, transfers, and savings), while the share is 87 percent in rural areas, and about one-third of this is from cereals. The household survey also shows that, at the national level, 16 percent of households are net producers of cereals, while in rural areas the proportion is 36 percent. The majority of the rural poor produce cereals for home con- sumption, and over one-third of the poorest quintile tend to produce more than they consume. These households will be worse off from a fall in cereal prices. At the national level, production losses outweigh consumption gains and the poverty rate increases overall, but the impact is felt entirely in rural areas, where losses to net producers of cereals outweigh the gains to net consumers among the poor (Ravallion and Lokshin 2004). In a recent study of labor markets in Morocco and Tunisia, Dennis (2006b) argued that the ability of MENA countries to respond to trade liberalization is impeded by regulations that make factor markets inflexible. He cites the legal constraints on dismissing workers, the high level of legally mandated severance pay, the restrictions on the use of temporary labor, the high minimum capital requirements for starting a new business, and lengthy bank- ruptcy procedures. He found that Morocco and Tunisia have the least flex- ible labor markets among the 11 developing countries studied. To examine this issue Dennis used a CGE model to simulate the impact of a unilateral 50 percent reduction in import barriers in Morocco and Tunisia with high and low factor market flexibility. Factor market flexibility is simulated by making capital mobile and by doubling the elasticity of substitution between fac- tors of production. Dennis found that flexible factor markets would increase the welfare gains from unilateral trade liberalization by a factor of three in Morocco and by a factor of six in Tunisia.


Summary


Most studies of global trade liberalization indicate that reducing agricultural subsidies and removing import barriers will increase world agricultural prices. The prices of agricultural commodities for which the markets are distorted (including wheat, rice, sugar, and dairy) would rise between 2 and 20 per- cent, with higher estimates in the case of sugar.


Almost all the MENA countries are net agricultural importers, so there is clearly some basis for concern that these countries will lose as a result of


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