Using Household Surveys and Econometrics

There are two key features that characterize this approach: the use of micro data and the use of statistical methods. Micro data typically involves household or labor surveys; but farm surveys and firm surveys are sometimes used. The defining characteristic of this approach is the attempt to econometrically estimate heterogeneous impacts of trade reforms at the individual (consumer, producer, worker, firm) level.
 
There are different mechanisms that play a role in the transmission of trade policies to the household. These mechanisms have to do with how national or foreign trade reforms transmit to the local economy, how these transmission channels are affected by the domestic environment (institutions, complementary policies), how households are exposed to trade, and how they react to the changed international scenario. A number of paper surveys this literature Surveys of the Literature. They provide an excellent staring point and a more comprehensive set of references. There are many papers that discuss the economics of the links between trade and poverty, with different degrees of generalization Theoretical Framework. They provide a platform to the econometric estimation.

There are two categories into which this literature can be divided. In the first category, there are papers that pursue an impact analysis, and those that allow for behavioral responses. In the second category, there are ex-ante and ex-post papers. These categories are not exclusive (for instance, there are ex-ante and ex-post impact analysis).

The first generation of papers that explored the trade-poverty link estimated first order effects. These are impact effects that do not allow households to respond to the trade shock. For example, consumers are not allowed to substitute away from more expensive goods, producers are not allowed to expand the output of more profitable activities, workers are not allowed to modify their labor supply. An important wave of empirical papers that estimate the impacts of trade on poverty and on the distribution of income is based on a two-step theoretical approach. The first step links trade policies or reforms with domestic prices. The second step links domestic prices with household real income (consumption, agricultural income, wages, etc.). Here you can find some key examples of this first order analysis First Order Effects in Consumption and Production.

A consequence of measuring first order effects is that the impacts of trade reforms on poverty are general small. Before drawing this strong conclusion, however, an attempt to measure second order effects is necessary. Estimating second order effects requires the measurement of household responses to price changes: how consumers adjust quantities purchased, how producers switch to higher-return activities, and how workers and firms adjust employment and wages. Here follows a list of some of the most representative work in this second generation papers Second Order Effects in Consumption and Production.

The latest generation of empirical models looks beyond first and second order effects. In these models, the role of trade is not only to bring about higher prices for exportable goods and lower prices of importable goods, but also to generate some entirely new markets and to eliminate some existing ones. The implementation of this idea requires the introduction of distortions in the modeling of the economy that introduce wide margins between different economic activities. Trade is therefore envisaged as generating new markets and complementary domestic policies are seen as mechanisms to boost the new trading opportunities. A listing of the most recent literature can be found here Creating Markets for the Poor.

Among these papers, you can find ex-ante and ex-post analysis. Ex-ante analysis attempts to predict the impacts of trade on the basis of the available data and key structural parameters. Ex-post analysis examines episodes of trade liberalization and their observed impacts. There are advantages and disadvantages of each of these approaches. Often times, ex-post studies are very informative about the effects of trade reforms Ex-Post. However, econometric identification is usually difficult and ex-ante studies may provide a better assessment of the impacts. In addition, sometimes we are interested in the impacts of policies that have not taken place (such as the Doha development round). In these cases, we can only rely on an ex-ante analysis to predict the impacts Ex-Ante.