Paper abstract:

The relationship between trade and poverty has been on the academic and policy agenda for a long time. In spite of this, no consensus has been reached so far as to whether trade has an unambiguously positive effect on poverty. The purpose of the present study is to identify the effect of trade on the well-being of Kyrgyz farmers employing household survey data “Life in Kyrgyzstan” for 2012 and 2013. In doing so, the standard Rajan-Zingales (R. G. Rajan & Zingales, 1998) identification strategy (or Dean Yang’s identification strategy (Yang, 2008) as applied to migration) is employed. Specifically, by constructing a measure of demand shock for agricultural commodities produced and sold by the farm households and interacting it with a measure of natural trade openness, the production and consumption channels of the effect of trade on poverty are explored. Results suggest that trade has a big impact on Kyrgyz farmers. However, this effect crucially depends on the level of farmers’ integration into markets: households living close to oblast centers and/or the cities of Bishkek and Osh, on average, benefit from trade, while those living in very remote areas are not able to take advantage of this potential. Thus, a farm household that is the most integrated to trade (i.e., lives in the oblast center or in Bishkek or Osh), which is exposed to a positive 75th percentile of the foreign demand shock experiences a rise in its annual consumption by 5-13%, ceteris paribus. At the same time, a household living 75th percentile distance away from the economic center and subjected to the same level of shock is hurt, by a fall in its consumption by 11-34% per year. Therefore, policies to improve farmers’ integration into agricultural markets are crucial in ensuring that more households can benefit from trade. Among possible ways to achieve this are improving the state of the rural roads, agricultural technology, and access to markets.