adjustment costs, and workers may have greater motivation to be mobile (lower reservation wages). Another factor could be the sector-specific nature of the shock, which may allow workers to be more mobile across sectors in contrast to countries with more diversified economies and thus higher mobility costs and a greater need for emphasizing skills training for workers. In sum, the case of Bangladesh shows that trade remains an important driver of economic development that extends beyond firms and workers in export industries. It also highlights the need to better understand the nature of trade shocks to be able to fully reap the benefits, more carefully design policies that affect employment conditions, and ensure that the effects of trade are inclusive and economy-wide for workers and firms in the long term.
South Africa: How Apartheid’s Legacy Shapes the Impact of Trade Liberalization on Local Communities In the aftermath of the 1994 democratic elections, all homelands—territories reserved for black communities—were legally reintegrated into South Africa. In addition to significant institutional reforms to undo the structure of apartheid that marginalized racial groups, the 1994 democratic election led to an important shift in trade policy from export promotion with import controls to greater openness through liberalization. The newly elected government adopted an ambitious program of tariff liberalization as part of the Uruguay Round, and concluded free trade agreements with the European Union and the Southern Africa Development Community. The number of tariff lines fell from over 12,000 at the beginning of the 1990s to 6,420 in 2006 (Edwards et al. 2009). Figure 3.5 shows that the reduction in effectively applied tariffs was especially important in the manufacturing sector between 1990 and 2006. What were the medium-term to long-term effects on local labor markets of the sharp tariff reductions observed after the introduction of democracy? The case study “Long-Run Effects of Trade Liberalization on Local Labor Markets: Evidence from South Africa” by Bastos and Santos (forthcoming) draws on municipal-level data from South Africa for the period 1996–2011. Although homelands no longer exist, the study finds that differentials in welfare outcomes still correspond to the geographical areas that constituted the former homelands. Local labor markets more exposed to tariff cuts experienced slower growth in employment and income per capita, with effects increasing over time. Among municipalities, long-term adverse effects were stronger in those municipalities that included the former homelands and a higher share of the black population. Between 1996 and 2011, a 10 percent reduction in employment-weighted tariffs led to a fall in income per capita of 1.4 percent outside the former homelands, whereas it led to a 3.7 percent reduction in income per capita in municipalities that included at least one former homeland. This may reflect that the former homelands had little economic a ctivity beyond subsistence agriculture so workers whose jobs were affected Lessons from Recent Cases of Trade Reforms in Developing Countries 61
