complementary policy aims (our “pillars”): (a) reducing distortions and strengthening the functioning of markets, (b) reducing trade costs, and (c) speeding up labor market adjustment. These policy objectives are highly complementary. The first is critical for enabling the more productive parts of the economy to grow and expanding the benefits arising from new export opportunities and greater market access. The second helps ensure that the export competitiveness of domestic firms is not hampered by excessive costs and unnecessary bureaucracy. The third facilitates the reallocation of workers toward more productive activities to maximize gains from openness to trade and ensure that adjustment costs are borne by society at large rather than by the few workers whose jobs are displaced. These three pillars draw on different types of policies that jointly address the key sources of high adjustment costs hampering the distribution of the gains from trade throughout the economy and exacerbating transitional unemployment following shocks, as shown in figure 4.1. The nature of the trade shock, regardless of whether it originates from trade policy reforms initiated by a government itself or from those initiated by a different country, is taken as a given, so the focus must remain on complementary policies that improve distributional outcomes.2 This chapter is structured around these pillars, starting with an exploration of each and concluding with a discussion on how to improve the “nuts and bolts” of pursuing and implementing trade policy reforms at the domestic level, as well as priorities for a global policy agenda that delivers benefits for the poor. Although chapter 4 draws on lessons from both advanced and developing countries, its focus is on low- and middle-income countries. This is because optimal policy responses depend on economic and political circumstances such as the level of the country’s development as well as the structure and complexity of its export basket. The scope and relative effectiveness of policy responses to trade reforms in low-income countries are therefore likely to be quite different. Additionally, the degree of liberalization differs widely: traditionally, agreements involving developing countries primarily focused on lowering trade barriers, whereas more complex agreements seeking to achieve regulatory harmonization are becoming standard for wealthier countries (Mattoo, Rocha, and Ruta 2020). A country’s development level and endowments are thus key in making trade policy choices, as are different complementary policies aimed at creating better trade-related outcomes.3
Complementary Policy Priorities for Inclusive Trade Pillar 1: Reduce Distortions and Strengthen the Functioning of Markets Improve the business environment There is a strong argument for addressing anticompetitive behavior in the context of trade reforms in order to increase the gains from trade. A recent World Bank report on
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The Distributional Impacts of Trade
