Poverty reduction and agricultural change in Peru: the role of trade

Abstract: In the last decades Peru, one of the top performing countries in Latin America, experienced a dramatic reduction in poverty. The set of structural reforms implemented by Peru during the mid-90s included trade liberalisation which implied a drastic reduction of tariffs on highly protected sectors, and particularly, in agriculture where most poor Peruvians work, and Free Trade Agreements. How relatively free trade has affected the poor in the country remains a gap in economic literature. Studies addressing the role of trade on individual welfare tend to focus exclusively on income labour distribution and inequality while few use data collected before the most comprehensive liberalisation process took place in Peru. Using microdata, this study inquires on whether trade helped reduced poverty, considering how the poor engage in different economic activities and industries. The main finding is that, regardless of the economic sector, exports markedly reduces the probability of being poor. In the formal agriculture sector, data suggests that higher wages and more employment benefitted the poor. Similarly, tariff cuts were a driver of poverty reduction. However, the impact of imports depends on how the poor engage the labour market. During the period under study, those in the informal sector were more likely to be hurt by the reduction of some forms of protection and increasing imports. Further research is required to determine if that condition is outweighed by gains from trade or in some cases static.