Why International Trade Will Increase Global Inequality

[Agnapostate]

I've recently completed reading Robin Hahnel's Panic Rules, and one of his appendices contains a simple but sound model indicating that free trade necessarily increases global inequality and deliver's the lion's share of efficiency gains to wealthier nations, as opposed to fair trade, which can eliminate both income inequality and inefficiency. Such insight is especially welcome when advocates of trade liberalization often resort to (mis)quoting Smith and Ricardo and babbling on about comparative advantage.

Hahnel's Models of International Trade

First, suppose that there are two varieties of countries, some in the "North" and some in the "South." We also assume that the international trade markets between Northern and Southern countries are perfectly competitive. (A concession to free market theory.) All countries have 1,000 citizens who must consume one unit of corn annually. There are two methods of corn production. One uses pure labor and the other uses a combination of labor and machines. There is one method of machine construction that requires both labor and machines. These are the technologies:

5 units of labor + 0 machines yields 10 units of corn
2 units of labor + 1 machine yields 10 units of corn
1 unit of labor + 2 machines yields 10 machines

Now, machines function for one year and must be replaced annually. Since machines are created from other machines, a certain number must be placed aside and utilized for the purpose of machine production rather than corn production, which will obviously result in greater long-term efficiency. Northern countries begin with 200 machines, whereas Southern countries begin with only 50 machines.

We will examine three models, a model in which Northern and Southern countries are not permitted to trade with each other, called the autarkic model, and two models in which trade is permitted but to different extents, the free trade and fair trade models. Recall that equality is measured through labor expenditures, as greater labor expenditures function as greater impositions on each respective population.

The Autarkic Model

Due to Northern countries' high surplus of machines, it is clear that making corn through the use of machines and labor will be far more productive than corn production through the sole use of labor. Corn production through the sole use of labor is entirely unnecessary in a Northern country, as a result of their machine supply. Let X(1) be the number of times that corn is produced through the sole use of labor, X(2) be the number of times corn is produced through a combination of machines and labor, and X(3) the number of times machines are produced using other machines. The most efficient production plan for a Northern country would be the following.

A Northern Country's Optimal Production Plan Under Autarky

X(1) = 0 using M(1) = 0 and L(1) = 0 to get 0 C
X(2) = 100 using M(2) = 100 and L(2) = 200 to get 1,000 C
X(3) = 12.5 using M(3) = 25 and L(3) = 12.5 to get 125 M

Such a plan necessitates the following in terms of machinery:

M(1) + M(2) + M(3) = 0 + 100 + 25 = 125 machines

This would replace the 125 machines used in the optimal production plan.

This is the amount of labor that would be necessary:

L(1) + L(2) + L(3) = 0 + 200 +12.5 = 212.5 units of labor

The 1,000 units of corn would thus be acquired. Now, this plan minimizes labor expenditures, but it only uses 125 of the 200 machines available for production purposes. And if trade is prohibited, and this is the most efficient manner of corn production, efficiency cannot be maximized inasmuch as 75 machines lie dormant.

Now, as for Southern countries, their 50 machines are not sufficient to produce 1,000 bushels of corn, especially considering that machines must be replaced. Since they must replace machines, the maximum amount of corn production through machine use must be X(2) = 40, and machine production must be X(3) = 5. But this yields only 400 bushels of corn, a 60% shortage. Hence, Southern countries must also resort to the less efficient method of corn production through the use of pure labor, so X(1) = 60. This would result in this plan:

A Southern Country's Optimal Production Plan Under Autarky

X(1) = 60 using M(1) = 0 and L(1) = 300 to get 600 C
X(2) = 40 using M(2) = 40 and L(2) = 80 to get 400 C
X(3) = 5 using M(3) = 10 and L(3) = 5 to get 50 M

600 C + 400 C thus yields the necessary 1,000 bushels of corn for consumption, and uses this in machine-based production.

M(1) + M(2) + M(3) = 0 + 40 + 10 = 50 machines

Hence, all machines are replaced, and the minimum expenditure of labor involved is this:

L(1) + L(2) + L(3) = 200 + 80 +5 = 385 units of labor.

Again, labor expenditures are the inequalities that must be measured, since both Northern and Southern countries have the same levels of corn consumption. Now, the degree of global inequality as measured through labor expenditures must be defined as the ratio of the number of average work days in Southern countries divided by the ratio of the number of average work days in Northern countries. If Northerners and Southerners have equivalent average labor amounts, the ration will be 1, but the ration and according degree of inequality will rise through greater labor expenditures by Southern workers than Northern workers. Hence, since Southerners work an average of 0.385 units of labor, whereas Northerners work an average of 0.2125 units of labor, the degree of inequality is measured as 0.385/0.2125 = 1.81. Now, the cause of this inequality is clearly different initial access to machine technology. But there is no method of rectifying this inequality since Northern and Southern countries are not permitted to trade with each other.

The Free Trade Model

The free trade model involves opening international trade for exchange of corn and machines and permitting trade conditions to be determined by the law of supply and demand in the international marketplace.

Machines are desired because they allow countries to produce corn more efficiently and easily. Hence, corn is the ultimate goal, and machines function as means to that end, which means that the number of corn bushels anyone would be willing to trade for machines can be calculated thusly: Assume that 17 units of labor existed. Without machines, only labor could be utilized in the process of corn production, which would mean that 34 C could be produced with 17 L. If, however, 10 machines were available, they could be utilized as a more efficient method of corn production, although the ten machines would obviously have to be replaced. 1 unit of labor and two machines is sufficient for this purpose. 16 units of labor and 8 machines are left to produce corn through the machine technology. 16 L and 8 M will produce 80 bushels of corn. Hence, if machines are available, this permits production of 80 - 34 = 46 more units of corn than pure labor, which amounts to 46/10 = 4.6 more units of corn per machine than would have been possible through pure labor.

Now, paying more than 4.6 units of corn for a machine is obviously inadvisable, since any country that did so would end up with less corn than its labor expenditures were worth. However, if machine prices were below 4.6 units of corn, countries would purchase them indefinitely since they would expend less labor per unit of corn by doing so. Hence, the equilibrium price of a machine, P(M), is 4.6 units of corn, and left to pure market forces, machines would sell for 4.6 units of corn. Now, let us examine the process of Northern and Southern countries' optimal production and trade plans under this scheme.

A Northern Country's Optimal Production Plan Under Free Trade

X(1) = 0 using M(1) = 0 and L(1) = 0 to get 0 C
X(2) = 14.815 using M(2) = 14.815 and L(2) = 29.63 to get 148.15 C
X(3) = 25 using M(3) = 50 and L(3) = 25 to get 250 M

Now, each Northern country uses 29.63 + 25 = 54.63 units of labor, 14.815 + 50 = 64.815 machines, and produces 148.15 units of corn and 250 machines.

A Northern Country's Optimal Trade Plan Under Free Trade

Export 250 - 64.815 = 185.185 M
Import 1,000 - 148.15 = 851.85 C

Now, since 185.185(4.6) = 851.85, each Northern country will have almost precisely enough machines to export in order to import a sufficient corn supply.*

Each Southern country can obtain 1,000 bushels of corn most efficiently with this production/trade scheme.

A Southern Country's Optimal Production Plan Under Free Trade

X(1) = 0 using M(1) = 0 and L(1) = 0 to get 0 C
X(2) = 185.185 using M(2) = 185.185 and L(2) = 370.37 to get 1851.85 C
X(3) = 0 using M(3) = 0 and L(3) = 25 to get 250 M

Now, each Southern country uses 370.37 units of labor, 185.185 machines, and produces 1851.85 units of corn.

A Southern Country's Optimal Trade Plan Under Free Trade

Export 1851.85 - 1,000 = 851.85 C
Import 185.185 M

Now, considering that 851.85/4.6 = 185.185, each Southern country will have almost precisely enough corn to export in order to import a sufficient machine supply, as with the Northern countries with the relevant goods reversed.

Here comes the clincher: Labor expenditures in terms of average work time are 0.37037 in Southern countries, while they are 0.05463 in Northern countries. Hence, the degree of global inequality in terms of labor expenditures have risen from 1.81 under autarky to 0.37037/0.05463 = 6.78 under free trade. The reason for this is that the vast majority of efficiency gains under the free trade model are distributed to Northern countries rather than Southern countries.

Increasing inequality is consistent with relevant research on the topic, such as Gini coefficient measurements of per capita income differences between countries. For instance, I have previously mentioned Walter Park and David Brat's research in A Global Kuznets Curve, which indicated that Gini coefficient measurements of GDP per capita increased during periods of neoliberal expansion.

This paper studies the inequality of nations, treating the country as the unit of analysis. First, measures of inequality are computed for 1960 to 1988. The international distribution of income has become more unequal over time. Secondly, the contribution of R&D investments and spillovers to global inequality is studied. Cross-country differences in R&D significantly account for the changes in the global distribution of income. National R&D investments have both a divergence and a convergence effect and, on net, the empirical results indicate that world R&D has a convergence effect. Controlling for R&D, the paper finds an inverted-U relationship between global inequality and global development.

Now, returning to the theoretical models, we have seen that under autarky, Northerners expend 212.5 units of labor, whereas Southerners expend 385 units of labor, which results in a total of 597.5 units of labor expended for the purpose of producing 2,000 units of corn. Under the free trade scheme, only 54.63 units of labor are expended in the North, while a lion's share of 370.73 units of labor are expended in the South, which brings a total of 425 units of labor to produce 2,000 units of corn. Recalling that all machines were replaced, free trade did indeed produce an efficiency gain of 597.5 - 425 = 172.5 units of labor saved in every Northern/Southern trade alliance. But Northern countries received 157.87 units of saved labor, reducing their work time from 212.5 to 54.63, whereas more unfortunate Southern countries only received 14.63 units of saved labor, which only reduced their average work time from 385 to 370.37.

Moreover, following the principle of charity, we gave the international free market every benefit of the doubt, by assuming that they reached their equilibrium price, for instance, by assuming that they were competitive, and by not assuming that the North held some monopolistic advantage, assumptions that would probably be too generous to the free market in the real world.

Clearly, the free market scheme suffers from some problems in that it imposes deleterious labor expenditures and conditions on the "lesser" countries, while efficiency gains are primarily enjoyed by the "greater" countries.

The Fair Trade Model

A solution is found through permitting Northern countries to trade machines to Southern countries in return for 0.5882 units of corn per machine, which has the effect of eliminating efficiency in the world economy, not negatively impacting Northern countries, and offering considerable benefit to Southern countries, whose labor expenditures would not be greater than those of Northern countries.

Since our terms of trade are P(M)/P(C) = 0.5882, this is the optimal production/trade scheme for Northern countries.

A Northern Country's Optimal Production Plan Under Free Trade

X(1) = 0 using M(1) = 0 and L(1) = 0 to get 0 C
X(2) = 93.75 using M(2) = 93.75 and L(2) = 187.5 to get 937.5 C
X(3) = 25 using M(3) = 50 and L(3) = 25 to get 250 M

Thus, each Northern country uses 187.5 + 25 = 212.5 units of labor, 93.75 + 50 = 143.75 machines, and produces 937.5 units of corn and 250 machines.

A Northern Country's Optimal Trade Plan Under Free Trade

Export 250 - 143.75 = 106.25 M
Import 1,000 - 937.5 = 62.5 C

Now, since 106.25(0.5882) = 62.5, each Northern country will have almost precisely enough machines to export in order to import a sufficient corn supply.

Continuing to use the formula P(M)/P(C) = 0.5882, a Southern country can maximize efficiency using this production plan.

A Southern Country's Optimal Production Plan Under Fair Trade

X(1) = 0 using M(1) = 0 and L(1) = 0 to get 0 C
X(2) = 106.25 using M(2) = 106.25 and L(2) = 212.5 to get 1062.5 C
X(3) = 0 using M(3) = 0 and L(3) = 0 to get 0 M

Each Southern country will use 212.5 units of labor, 106.25 machines, and will produce 1062.5 units of corn.

This is the most efficient trade scheme under fair trade.

A Southern Country's Optimal Trade Plan Under Fair Trade

Export 1062.5 - 1,000 = 62.5 C
Import 106.25 M

Naturally, as 62.5/(0.5882) = 106.25, each Southern country will have almost precisely enough corn to export in order to import a sufficient machine supply.

Fair trade has also permitted Southern countries to efficiently use the 75 additional machines that would have otherwise been dormant and unused in the North in an autarkic scheme. The same global efficiency gain is made as under free trade, 597.5 - 425 = 172.5 units of labor. But 100% of the efficiency gain is granted to the Southern countries, which reduces their labor expenditures from an average work time of 385 to 212.5, while not leaving the Northern countries any worse off than they were under autarky, as they also have an average work time of 212.5, reducing the ratio of global inequality from 1.81 under autarky and 6.78 under free trade to 1 under fair trade, eliminating inequality.

Hence, we find that the fair trade model is superior to either the autarkic or free trade models, since it has the effect of improving efficiency levels while not imposing negative social opportunity costs on countries in the same manner that the free trade model would.

There is obvious value in delivering greater efficiency gains to those in greatest need of it in the way of marginal utility. Northern countries with a large surplus in efficiency gains can do little with them in the way of necessities, and thus divert their additional assets to commodities, which provide far less utility than do necessities. Hence, if necessities are given to Southern countries before commodities are to Northern countries, this would be in line with acknowledging the diminishing rate of marginal utility that rising surpluses bring to the wealthy.

As Hahnel notes, the model can be used to calculate the effects of technical changes on global efficiency and international inequality, and leads one to the conclusion that one reason for the increase of global inequality is because technical change occurs more rapidly in capital-intensive sectors than labor-intensive sectors.

 

[Agnapostate]

It's not directly copied from him. It's a summary of the model.

 

[del]

It's not directly copied from him. It's a summary of the model.

of course.

 

[Agnapostate]

It's not directly copied from him. It's a summary of the model.

of course.

There are few precisely copied phrases in the summary, and no precisely copied sentences. Do you have any comments to make regarding the models and their influence on globalization?

 

[RodISHI]

5 units of labor + 0 machines yields 10 units of corn
2 units of labor + 1 machine yields 10 units of corn
1 unit of labor + 2 machines yields 10 machines

Where are the units for building that machine that replaces worker units? And who produses the fuel/oil/parts to operate these machines?

 

[Toro]

Perhaps I will get around to reading through five pages in the OP. However, simply because it is a model does not mean it is correct.

Empirically, we know that free trade does not necessarily create inequality. Sometimes it does and sometimes it does not.

I've posted this elsewhere but I will post it again here.

Although the growth benefits of trade are increasingly recognized, many analysts are legitimately concerned about the effects of trade liberalization on income distribution. In our research, however, we document that the growth benefits of increased trade are, on average, widely shared—we have found no evidence of a systematic tendency for inequality to increase when international trade increases (see Dollar and Kraay, 2001a). Chart 2 illustrates this point by plotting changes in a measure of inequality (the Gini coefficient, which ranges from 0 to 100, with a higher coefficient indicating greater inequality) on the vertical axis, and changes in trade volumes on the horizontal axis. This figure reflects the experiences of more than 100 developed and developing countries, with changes in trade and changes in inequality measured over periods of at least five years in order to capture the medium-to-long-run relationship between trade and inequality. Chart 2 exhibits a striking absence of any simple correlation between changes in trade and changes in inequality. In our other research, we have examined the validity of this simple result in several dimensions. We considered a wide variety of measures of openness, including direct measures of trade policy and international capital flows, as well as trade volumes themselves. We also searched for nonlinearities in this relationship, allowing for the possibility that the effects of trade on inequality are different in rich and poor countries and in countries with different factor endowments. The conclusion that emerges from this—that there is little evidence of a systematic tendency for inequality to either increase or decrease with increased trade—is consistent with the simple evidence presented in Chart 2.

This evidence is also consistent with the experiences of the post-1980 globalizers. While several of our globalizers have seen increases in inequality (most notably China, where the Gini coefficient increased from around 32 in the early 1980s to 40 in the mid-1990s), several others have seen decreases (for example, Malaysia, where the Gini coefficient fell from 51 to 48 during the same period). And, in many countries, large shifts in income distribution can arguably be linked to influences far removed from international trade. In China, for example, domestic liberalization, restrictions on internal migration, and agricultural policies have played a much larger role than increases in international trade. ...

Gap between rich and poor has narrowed

We have already seen that income inequality within countries is as likely to decrease as increase with increased trade. But is globalization leaving poor countries behind and widening the gap between the richest and poorest countries? Our evidence on the growth performance of the globalizers relative to the rich countries and the nonglobalizing developing countries suggests otherwise. The rapid growth of the globalizers relative to the rich countries means that the globalizers are narrowing the per capita income gap. Moreover, because most of the globalizers—especially China, India, and Bangladesh—were among the poorest countries in the world twenty years ago, their growth has been a force for narrowing worldwide inequality.

The top panel of Chart 3 provides a rough estimate of trends in worldwide inequality over the past forty years, using the mean log deviation measure of income inequality (the mean log deviation can be interpreted as the percentage difference between the income of a randomly selected "typical" individual and worldwide average income). To construct this figure, we used cross-country differences in real per capita GDP adjusted for differences in purchasing power for more than 100 countries as a measure of income differences between countries. To measure inequality within countries, we used the nearest available Gini coefficient for each five-year period for each country.

Worldwide interpersonal inequality has been quite stable over the past forty years, showing at most a weak downward trend that is unlikely to be statistically significant, given the immense difficulties of measurement inherent in such calculations. More interesting for our purposes is the effect of the rapid growth of the post-1980 globalizers on this inequality measure. To illustrate this, the top panel of Chart 3 first divides worldwide inequality into inequality between countries and inequality within countries. Consistent with the findings of other studies, most worldwide interpersonal income inequality can be attributed to the large differences in average incomes between countries, rather than to inequities in the distribution of income within countries. And since many of the globalizers were initially poor, their rapid growth over the past twenty years has contributed to reducing income inequality between countries. This can be seen in the bottom panel of Chart 3, which takes the between-country component of inequality and further subdivides it into the globalizers, the rich countries, and the rest of the world. Much of the decline in the between-country component of inequality can be seen to be due to the rapid growth of the globalizers, most notably China and India, whose economies' vast size has given them substantial weight in these calculations.

Finance & Development, September 2001 - Trade, Growth, and Poverty

And

News & Broadcast - Poverty Drops Below 1 Billion, says World Bank

 

[Agnapostate]

Where are the units for building that machine that replaces worker units? And who produses the fuel/oil/parts to operate these machines?

The fuel/oil parts are included in the labor units expended on machine production. I removed the machine building units from the pure labor units in the summary, didn't I?

Perhaps I will get around to reading through five pages in the OP. However, simply because it is a model does not mean it is correct.

Empirically, we know that free trade does not necessarily create inequality. Sometimes it does and sometimes it does not.

Really, now, you have to be suspicious of a guy whose name is "dollar."

In all seriousness, I will research your data. Your point about empiricists vs. ideologues is very true.

 

[Agnapostate]

Perhaps I will get around to reading through five pages in the OP. However, simply because it is a model does not mean it is correct.

Empirically, we know that free trade does not necessarily create inequality. Sometimes it does and sometimes it does not.

I've posted this elsewhere but I will post it again here.

Although the growth benefits of trade are increasingly recognized, many analysts are legitimately concerned about the effects of trade liberalization on income distribution. In our research, however, we document that the growth benefits of increased trade are, on average, widely shared—we have found no evidence of a systematic tendency for inequality to increase when international trade increases (see Dollar and Kraay, 2001a). Chart 2 illustrates this point by plotting changes in a measure of inequality (the Gini coefficient, which ranges from 0 to 100, with a higher coefficient indicating greater inequality) on the vertical axis, and changes in trade volumes on the horizontal axis. This figure reflects the experiences of more than 100 developed and developing countries, with changes in trade and changes in inequality measured over periods of at least five years in order to capture the medium-to-long-run relationship between trade and inequality. Chart 2 exhibits a striking absence of any simple correlation between changes in trade and changes in inequality. In our other research, we have examined the validity of this simple result in several dimensions. We considered a wide variety of measures of openness, including direct measures of trade policy and international capital flows, as well as trade volumes themselves. We also searched for nonlinearities in this relationship, allowing for the possibility that the effects of trade on inequality are different in rich and poor countries and in countries with different factor endowments. The conclusion that emerges from this—that there is little evidence of a systematic tendency for inequality to either increase or decrease with increased trade—is consistent with the simple evidence presented in Chart 2.

This evidence is also consistent with the experiences of the post-1980 globalizers. While several of our globalizers have seen increases in inequality (most notably China, where the Gini coefficient increased from around 32 in the early 1980s to 40 in the mid-1990s), several others have seen decreases (for example, Malaysia, where the Gini coefficient fell from 51 to 48 during the same period). And, in many countries, large shifts in income distribution can arguably be linked to influences far removed from international trade. In China, for example, domestic liberalization, restrictions on internal migration, and agricultural policies have played a much larger role than increases in international trade. ...

Gap between rich and poor has narrowed

We have already seen that income inequality within countries is as likely to decrease as increase with increased trade. But is globalization leaving poor countries behind and widening the gap between the richest and poorest countries? Our evidence on the growth performance of the globalizers relative to the rich countries and the nonglobalizing developing countries suggests otherwise. The rapid growth of the globalizers relative to the rich countries means that the globalizers are narrowing the per capita income gap. Moreover, because most of the globalizers—especially China, India, and Bangladesh—were among the poorest countries in the world twenty years ago, their growth has been a force for narrowing worldwide inequality.

The top panel of Chart 3 provides a rough estimate of trends in worldwide inequality over the past forty years, using the mean log deviation measure of income inequality (the mean log deviation can be interpreted as the percentage difference between the income of a randomly selected "typical" individual and worldwide average income). To construct this figure, we used cross-country differences in real per capita GDP adjusted for differences in purchasing power for more than 100 countries as a measure of income differences between countries. To measure inequality within countries, we used the nearest available Gini coefficient for each five-year period for each country.

Worldwide interpersonal inequality has been quite stable over the past forty years, showing at most a weak downward trend that is unlikely to be statistically significant, given the immense difficulties of measurement inherent in such calculations. More interesting for our purposes is the effect of the rapid growth of the post-1980 globalizers on this inequality measure. To illustrate this, the top panel of Chart 3 first divides worldwide inequality into inequality between countries and inequality within countries. Consistent with the findings of other studies, most worldwide interpersonal income inequality can be attributed to the large differences in average incomes between countries, rather than to inequities in the distribution of income within countries. And since many of the globalizers were initially poor, their rapid growth over the past twenty years has contributed to reducing income inequality between countries. This can be seen in the bottom panel of Chart 3, which takes the between-country component of inequality and further subdivides it into the globalizers, the rich countries, and the rest of the world. Much of the decline in the between-country component of inequality can be seen to be due to the rapid growth of the globalizers, most notably China and India, whose economies' vast size has given them substantial weight in these calculations.

Finance & Development, September 2001 - Trade, Growth, and Poverty

I'd question the veracity of your analysis if it involves extensive reliance on Dollar and Kraay, who have been subject to criticism due to numerous methodological concerns. For instance, Lubker et al.'s Growth and the Poor: A Comment on Dollar and Kraay notes the following in the abstract:

In a recent paper Dollar and Kraay come to sweeping conclusions about economic growth and the poor. On the basis of empirical work they assert that standard World Bank and IMF policy packages are good for the poor. This paper demonstrates that (i) the empirical work is based on theoretically unsound equations; (ii) the data are seriously flawed; and (iii) the policy variables are not defined appropriately, nor are they tested in a consistent manner. These problems imply that the policy conclusions of the authors are unsafe.

As for specific analysis of Trade, Growth, and Poverty, which you quoted from extensively, there's actually an extensive literature specifically devoted to critiquing Dollar and Kraay. For instance, a random sample would be Nye et al.'s Dollar and Kraay on "Trade, Growth, and Poverty": A Critique.

In their paper, “Trade Growth, and Poverty,” Dollar and Kraay claim to present evidence that trade liberalization leads to faster growth on average incomes, and that this growth in average incomes in turn increases the incomes of the poor “proportionately.” The paper suggests that one of the surest ways for less developed countries to alleviate poverty is therefore to pursue policies of trade liberalization. We argue, however, that the arguments and evidence presented by Dollar and Kraay are flawed and unconvincing.

Critical focus is also paid to the "post-1980 globalizers" identified by Dollar and Kraay in Trade, Growth, and Poverty, on the grounds that data regarding these "globalizers" was selectively incorporated, data on trade volume changes being specifically criticized on the grounds that such measurement cannot function as a means of determining trade policy, due to the weak connection between the two.

Dollar and Kraay do not present convincing evidence that increased trade liberalization leads to growth in average incomes or that growth in average incomes reduces poverty “one-for-one” in a sense that is relevant to policy selection. The authors’ strategy of identifying a group of “globalizers” that supposedly experienced both more trade liberalization and more growth is dogged by problems. The criteria adopted to select “globalizers” are deeply flawed. “Globalizers” selected by the authors on the basis of their reductions in average tariffs from the period 1985-89 to the period 1995-97 actually performed slightly worse in terms of increases in growth than non-globalizers over this period: it is only by selecting globalizes on the basis of changes in trade volumes (a suspect criterion, particularly because of its weak relationship to trade policy) or by undertaking an inappropriate comparison over mismatched time periods, that Dollar and Kraay come to their conclusions.

It's not an easy task to honestly defend the legacy of trade liberalization.

 

[roomy]

 

[Agnapostate]

Just when I thought things couldn't get any more profound...

 

[roomy]

Just when I thought things couldn't get any more profound...

Howdy liar, I am already wondering how long you'll be here this time

A few boring innocuous posts will give you a stay I suppose but will it satisfy your need for attention I wonder? I think not.

 

[Agnapostate]

Howdy liar, I am already wondering how long you'll be here this time

A few boring innocuous posts will give you a stay I suppose but will it satisfy your need for attention I wonder? I think not.

Get your dinky steroidic ass the fuck out of my thread, and drag it back to wherever you spew your anti-intellectual idiocy.

 

[Toro]

Critical focus is also paid to the "post-1980 globalizers" identified by Dollar and Kraay in Trade, Growth, and Poverty, on the grounds that data regarding these "globalizers" was selectively incorporated, data on trade volume changes being specifically criticized on the grounds that such measurement cannot function as a means of determining trade policy, due to the weak connection between the two.

In the book, [ame=http://www.amazon.com/Why-Globalization-Works-Martin-Wolf/dp/0300102526]Why Globalization Works[/ame], Martin Wolf dismisses this criticism, noting the extensive data used to compile trade patterns.

More importantly, other empirical research confirms this finding. The effects of trade on poverty alleviation has empirically been demonstrated by others

# In general, living standards in developing countries are not catching up with those in developed countries. But some developing countries are catching up. What distinguishes them is their openness to trade. The countries that are catching up with rich ones are those that are open to trade; and the more open they are, the faster they are converging.
# Poor people within a country generally gain from trade liberalization. The report concludes that "trade liberalization is generally a strongly positive contributor to poverty alleviatio

it allows people to exploit their productive potential, assists economic growth, curtails arbitrary policy interventions and helps to insulate against shocks". This concurs with a new World Bank study by Dollar and Kraay which, using data from 80 countries over four decades, confirms that openness boosts economic growth and that the incomes of the poor rise one-for-one with overall growth.
# Some people do lose in the short run from trade liberalization. Some are well-off, others not. The report argues that the plight of the losers should not be ignored, but that the right way to alleviate their hardship is through social safety nets and job retraining rather than by abandoning reforms that benefit most people.

Eldis - Display

And

News & Broadcast - Poverty Drops Below 1 Billion, says World Bank

This all confirms what standard economic theory tells us - that increasing trade increases specialization and increases wealth.

 

[Toro]

More

[T]he modern evidence against inward-looking or import substitution trade strategy is really overwhelming. In the 1960s and 1970s, several full-length studies of the trade and industrialization strategies of over a dozen major developing countries, including India, Ghana, Egypt, South Korea, the Philippines, Chile, Brazil, and Mexico, were undertaken by the Organization for Economic Cooperation and Development (OECD) and the National Bureau of Economic Research, the leading research institution in the United States. These studies were very substantial and examined several complexities that would be ignored in a simplistic regression analysis across a multitude of nations. ... The result was to overturn decisively the prevailing wisdom in favor of autarkic policies. Indeed, many of us had started with the presumption that inward-looking policies would be seen to be welfare-enhancing, but the results were strikingly in the opposite direction, supportive of outward orientation in trade and foreign direct investment. Why?

- The outward-oriented economies were better able to gain from trade.
- Economists today also appreciate that there are scale economies in production that can be exploited when trade expands markets.
- Then there are gains from increased competition. Restriction of trade often is the chief cause of domestic monopolies. Freer trade produces enhanced competition and gains therefrom.
- In order to maintain outward orientation, countries must create macroeconomic stability (chiefly, low inflation).
- Finally, direct foreign investment would also be lower in the presence of trade restrictions.

[ame=http://www.amazon.com/Defense-Globalization-Jagdish-Bhagwati/dp/0195170253]Amazon.com: In Defense of Globalization: Jagdish Bhagwati: Your Store[/ame]

 

[Toro]

More

From this paper by Jeffrey Sachs and Andrew Warner

http://www.earthinstitute.columbia.edu/sitefiles/File/about/director/pubs/brookings_q195.pdf

In the paper, they concluded that the growth of countries open to free trade were three to six times higher than more closed societies.

 

[Toro]

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For over a century social analysts have debated the connection between trade policy and economic performance. This controversy continues today, even as the world is experiencing an unprecedented period of trade liberalization, and in spite of numerous empirical studies that claim to have found a positive effect of openness on growth. Two issues have been at the core of these controversies: first, until recently theoretical models had been unable to link trade policy to faster equilibrium growth. And second, the empirical literature on the subject has been affected by serious data problems. In this paper I use a new comparative data set for 93 countries to analyze the robustness of the relationship between openness and TFP growth. I use nine alternative indexes of trade policy to investigate whether the evidence supports the view that, with other things given, TFP growth is faster in more open economies. The regressions reported here are robust to the use of openness indicator, estimation technique, time period and functional form, and suggest that more open countries have indeed experienced faster productivity growth. Although the use of instrumental variables goes a long way towards dealing with endogeneity, issues related to causality are still somewhat open, and will require time series analyses to be adequately addressed.

Openness, Productivity and Growth: What Do We Really Know?

 

[Toro]

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There is a growing consensus in empirical studies that greater openness to international trade has a positive effect on country per-capita income. (Figure 3. Trade openness in the figure is adjusted to remove the influence of geographical factors.) A study by Frankel and Romer (1999) estimates that increasing the ratio of trade to GDP by one percentage point raises per-capita income by between one-half and two percent. Numbers of other studies reach similar conclusions, though the estimated size and statistical significance of the effects vary. (See for example, Edwards (1998) or, for a more skeptical assessment, Rodrik (1999).)

The proposition that greater openness to international trade has a positive effect on country per-capita income is consistent with economic theories going back at least 200 years. The oldest and most widely agreed is that trade lets an economy make better use of its resources, by allowing imports of goods and services at a lower cost than they could be produced at home. In particular trade enables developing countries to import capital equipment and intermediate inputs that are critical to long run growth, but which would be expensive or impossible to produce domestically. From this perspective exports are the price the economy pays to get access to these valuable imports. Other possible benefits include more intense competition, which obliges local firms to operate more efficiently than under protection, and greater awareness of new foreign ideas and technologies.

What of the impact of freer trade on the incomes of the poor? As noted above, recent work suggests that higher average incomes in a country are generally associated one-for-one with higher incomes of the poor. The same work finds that this link applies to income increases caused by more trade: in other words, the impact of trade on the income of the poor is generally the same as that on per-capita incomes. Thus, for example, a 10 percent increase in the trade to GDP ratio could ultimately raise per-capita income by five percent (cautiously taking the lower bound of the estimates by Frankel and Romer), and one would in general also expect a five percent rise in the income of the poor.

http://www1.worldbank.org/economicpolicy/globalization/documents/AssessingGlobalizationP2.pdf

 

[Agnapostate]

Will you actually address the contents of the thread? For instance, what have you to say regarding A Global Kuznets Curve?

 

[Toro]

Will you actually address the contents of the thread? For instance, what have you to say regarding A Global Kuznets Curve?

Oh good. So we can both agree that globalization and free trade increases wealth for poor countries. That is what the empirical evidence suggests.

Now, we can move on to inequality.

There is no empirical evidence to suggest that the Kuznet Curve applies on a systematic basis. There is little empirical evidence that globalization has increased inequality. In some countries it has and in some cases it has not. Generally, rising inequality has been driven by the application of technology. Would you like me to post the empirical evidence on that as well?

 

[Toro]

OK, so here is the empirical evidence.

Many people argue that the pattern of world growth over the past 20 years has not been beneficial. They point out that globalisation-driven growth has gone hand in hand with a growth in inequality. This inequality is a worry in its own right (communities get broken up; the poor get left behind) and also a missed opportunity (emerging markets might have done better still if only their extra wealth had been distributed more fairly). Is this charge against globalisation true? And, if it is, does it follow that globalisation has been a failure because its benefits have been pinched by the rich?

The evidence that the rich have done best is certainly compelling. Inequality has risen in both rich and poor countries. It is thus a sharp break from the pattern established between 1950 and 1990, when there was a general decline in inequality, notably in East Asia, where the tigers managed to combine fast growth with relatively equal incomes.

But it is not so clear that globalisation—in the sense of opening up to trade and foreign investment—is to blame. Ukraine and Poland both opened themselves in the 1990s. Yet inequality rose in Poland and fell in Ukraine. Globalisation, it seems, sometimes increases inequality, sometimes reduces it.

A more plausible culprit for rising inequality seems to be technological progress (see chart below). This is associated with inequality in poor countries because in emerging markets the people best able to take advantage of new technology are those who already have an education and who are usually among the richest in society. The more technological progress, therefore, the better the well-off do.

But to limit technology to reduce inequality would be a cure worse than the disease. Technology in its broadest sense—the flow of new ideas—is the only way of getting growth rates up to 5-10% a year, the rate which enables poor countries to catch up with the West. Without it, growth would be dependent on labour and capital inputs, and growth would be just a few percent. To reduce technological progress—even supposing one could do it—would be to condemn poor countries to stay poor.

In fact, since the mid-1990s, the incomes of the poorest fifth have risen everywhere except, marginally, in Latin America, where they have been affected by the after-shocks of debt crises. In Asia, the real incomes of the poorest fifth rose 4% a year; in Africa, by 2% a year, faster than the rise for other income groups.

The result is that the number of very poor people in the world is falling fast—even though many critics continue to believe that the poor have not really benefited from growth. In 1990 those on $1 a day accounted for more than a quarter of the population of developing countries. By 2015, on current rates, the proportion of very poor people should have shrunk to 10%. Moreover, these monetary measures probably understate the real gains from things such as lower child mortality, safer water, literacy and other social achievements. A rich man appreciates his extra cash but this does not compare with what a poor family gains from seeing an infant survive childhood or learn to write.

The world's silver lining | Somewhere over the rainbow | Economist.com

International trade accounts for only a small share of growing income inequality and labor-market displacement in the United States. Lawrence deconstructs the gap in real blue-collar wages and labor productivity growth between 1981 and 2006 and estimates how much higher these wages might have been had income growth been distributed proportionately and how much of the gap is due to measurement and technical factors about which little can be done. While increased trade with developing countries may have played some part in causing greater inequality in the 1980s, surprisingly, over the past decade the impact of such trade on inequality has been relatively small. Many imports are no longer produced in the United States, and US goods and services that do compete with imports are not particularly intensive in unskilled labor. Rising income inequality and slow real wage growth since 2000 reflect strong profit growth, much of which may be cyclical, and dramatic income gains for the top 1 percent of wage earners, a development that is more closely related to asset-market performance and technological and institutional innovations rather than conventional trade in goods and services. The minor role of trade, therefore, suggests that any policy that focuses narrowly on trade to deal with wage inequality and job loss is likely to be ineffective. Instead, policymakers should (a) use the tax system to improve income distribution and (b) implement adjustment policies to deal more generally with worker and community dislocation.

The Custom-House: "Blue-Collar Blues"

Much of the growing wage inequality stems from increased inequality between firms rather than within firms, suggesting inequality is driven by changes in firm-level productivity related to new technology rather than to international trade or institutions. Trade protectionism or re-energising unions may do relatively little to reverse the increase in inequality. ...

It is well-known and entirely understandable that different firms have different productivity levels. A key finding in our work is that the productivity gap between firms has been widening. We look at two groups of firms: one at the top (90th level) and one at the bottom (10th level) of the productivity distribution. Between 1984 and 2001, the rate of growth in productivity has been 17% for firms at the top and only 8% for firms at the bottom. Productivity for firms in the middle has grown by 14%. Measuring productivity dispersion as the difference between the top (90th level) and the bottom (10th level) deciles, this 90-10 differential
increased by 33% between 1984 and 2001. ...

We also document that much of the increase in individual wage inequality in the UK occurred between firms within the same industry (between-firm component) instead of within firms (within-firm component). This is an important finding when looking for ‘culprits’ of wage inequality. It says that little of extra inequality has come from a change in the way firms treat their own workers. The main source is the change in firm-level productivity. This implies that understanding the evolution of productivity distribution between firms may be critical in understanding the evolution of wage distribution (we also show that the correlation between wages and productivity has become more important over time). ...

In terms of policy, this suggests that the causes of rising inequality are primarily structural and related to new technology rather than to trade or institutions. Thus greater trade protectionism or the re-energising of unions may do relatively little to reverse the increase in inequality. A better strategy would be to concentrate on raising the skill and education levels of the workforce, particularly the skills of those at the bottom of the ability distribution.

Do firm-level productivity differences explain wage inequality? | vox - Research-based policy analysis and commentary from leading economists

The U.S. wage structure evolved across the last century: narrowing from 1910 to 1950, fairly stable in the 1950s and 1960s, widening rapidly during the 1980s, and “polarizing” since the late 1980s. We document the spectacular rise of U.S. wage inequality after 1980 and place recent changes into a century-long historical perspective to understand the sources of change. The majority of the increase in wage inequality since 1980 can be accounted for by rising educational wage differentials, just as a substantial part of the decrease in wage inequality in the earlier era can be accounted for by decreasing educational wage differentials.

Although skill-biased technological change has generated rapid growth in the relative demand for more-educated workers for at least the past century, increases in the supply of skills, from rising educational attainment of the U.S. work force, more than kept pace for most of the twentieth century. Since 1980, however, a sharp decline in skill supply growth driven by a slowdown in the rise of educational attainment of successive U.S. born cohorts has been a major factor in the surge in educational wage differentials. Polarization set in during the late 1980s with employment shifts into high- and low-wage jobs at the expense of the middle leading to rapidly rising upper tail wage inequality but modestly falling lower tail wage inequality.

Long-Run Changes in the U.S. Wage Structure: Narrowing, Widening, Polarizing

Subir Lall, the IMF's deputy chief for research ... said it found that, overall, wealth increased through globalization. In the great majority of countries, the income of lower-income workers has risen in the past two decades, but at a slower pace than for higher-skilled workers. As a result, the gap between haves and have-nots has widened.

The policy lesson, Mr. Lall said, is the need for greater investment in education. "This would allow less-skilled and low-income groups to capitalize on the opportunities from" technology and globalization, the IMF report said. ...

The IMF researchers separated "globalization" into three components -- technology, foreign investment and trade -- and looked at how changes in each of the three corresponded with changes in income inequality globally. According to the results, technology and foreign investment deepened income inequality, while trade diminished it. Overall, globalization has contributed "moderately to net changes in income shares," the IMF found.

IMF Fuels Critics of Globalization - WSJ.com