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Basic Questions
• Trade has undergone a notable transformation:
without much understanding about its impacts and dev outcome
• Does trade benefits all? How much and how long?
Trade & Inequality: • Does trade create/raise/expand/reduce inequality?
• Can it be managed to achieve dev/welfare goals?
– In industrialized countries probably yes
Development & Welfare Aspects
– Some developing countries experienced increases,
Understanding Causes & Impacts others decreases in inequality after trade reform
• Nature & pattern of trade, trade reforms, FDI and technological
change, non-trade issues explain differences in trade
performance & its development impacts

– But trade is not the main driver of inequality !

Trade & inequality: Theory & Empirics

Why Trade Matters?
(from Development/Welfare Aspects)
• Trade creates interdependence & specialization -
what about the benefits for participating nations???
• Trade is source of potential gains (Expands markets,
business & economic activities….growth….investment…)
– Access to items not available domestically
– Access to lower cost products
– Access to greater product variety
• Trade improves welfare (overall standard of living)
- Resource use efficiency (productivity & allocation)
- Resource mobility, (generation of employment & income)
- Variety of goods & services (options/choices)
• Is trade always beneficial? Is it sustainable?
• Evidence to challenge the theoretical prediction of positive
impact of trade
– Neoclassical theory: impact of trade on wage inequality
between occupations and sectors,
– Recent theories of firm heterogeneity: impact of trade on
wage dispersion within occupations and sectors.
• Helpman et al. (2010, 2017): sizable effects of trade on wage inequality
– Using linked employer-employee data for Brazil, wage inequality arises within sector-
occupations and for workers with similar observable characteristics; wage dispersion
between firms is related to firm employment size and trade participation.
• Baldwin, (2012), Basco and Mestieri (2019): global unbundling of
production: facilitated the emergence of global supply chains,“
– effects on within-country inequality of trade in intermediates
– without unbundling (an equilibrium in which only varieties can be traded),
– with unbundling (an equilibrium where intermediate inputs can be traded)

Why Trade Matters? Fundamental of Trade

• Trade largely deals with relations among nations (Cause, Pattern & Consequences of Trade)
(Production, Consumption, Exchange) • Cause/Basis of Trade: why countries do engage in trade?

• Pattern of Trade: why different countries exports and imports

(Interdependence Economic/Business/other gains) different goods & services
(Gains/Welfare/Choices/Standard of Living)
• Gains from Trade: who gain/lose from trade, how much & why
How trade enhances welfare? (Trade-Dev Inter-links)
• Conventional Trade Models: different factor endowment,
• Major Issues: Different nations have production technology, tastes and preferences, prices among countries
– different economic & trade conditions • New Trade Models: trade in homogenous & heterogeneous
– different policies that influence each other. products, imperfect comp. Economies of scale, differentiated product
– different conditions & relations among nations but it remain same for all
parts/sections within a nation. • Changing Trade Policy: instruments, strategic trade, trade
negotiation/ agreements,
• Dev. Policy Challenge:
Intra-nation & inter-nation trade may lead to different economic & dev.
outcomes: development policy issues – assessment & distribution of gains
from trade????

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Understanding Trade Inequality: Dev Performance of Trade & its Outcome:

Perspectives
• Rapid Trade growth: instrumental in the development process
• Trade Model & Theory: Classical & Modern of many countries
– Basis/ Cause of Int. Trade: • Faster Eco Growth: reduction in income gaps and lower levels
– Gains from Int. Trade of inequality between countries
– Pattern of Int. Trade • Global trade integration: contributed to economic gains at
– Impacts of Int. Trade country levels & convergence between developed & developing nations

• Trade Policy: Rationale & Effects: • Distribution of income: increasing within-country income
inequality
– Free Trade v/s Protectionism
• Rising within country inequality results in: reaction
– Trade & Economic Integration against globalization, international trade and multilateral trading system
– Trade Negotiations
• Trade Align with SDG: despite of inequality outcome trade
• Trade & Development Issues: Poverty & Inequality remains a catalyst for economic growth and development (SDG-10)
• Poverty Reduction: trade has contributed to lift millions of
people out of poverty

Trade & Inequality: theory & evidence Trade Growth (volume)

• Growing inequality with trade
– theoretical prediction of positive impact of trade on income
distribution has been challenged
– empirical findings on the impact of trade on inequalities are
evident (task for the next class)
• Trade openness (developing countries) contributed to
– narrowing the dev gap vis-à-vis developed countries.
– impacts on income gap between developing countries are not
clear
– impacts of increased trade or trade liberalization on within-country
inequalities are mixed
– in some case trade liberalization has improved & worsen wage-
inequality
– mixed patterns are found for regional inequalities
• Role of Trade & dev Policy:

Why only trade to be accounted for?

(Gains from Trade) Trade Growth (value)
• Is Trade always gainful?: comparative advantage,
expansion of market, production, consumption, employment,
income…development and national welfare of trading countries
• Benefits from Trade: depend on market conditions, trade
policy, post-trade income distribution, sustainability
• Trade, Market Conditions & Dev: if prices fail to signal
true comp. advantage (market imperfections, externalities in
production & consumption) trade may not be welfare improving for all
• Trade Re-distributes Incomes: int. factor movement –
gain/ loss from trade (wage & income inequality),
• Trade Creates both Winners & Losers: role of state &
compensation policy may or may not improve welfare of the nation

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World Trade: Key Trends & Impacts

Trends:
• Growing world trade & interdependence
• Faster growth of world trade > world output & ppn.
(world trade increased 20 times and world output 7 times in during 1950-2002)
• World export grew faster than world GDP Trade & Inequality
• Increasing Share of Trade in GDP (45% India)
• Decline share of primary/agriculture product
• Dominance of services sector Understanding Causes & Impacts
Impacts: from Development Prospective
• Growth Driver: Increasing interdependence among nations
• Decline of trade and investment barriers
• Harmonization of tariff reduction
• Faster movements of resources/factors, products, services

Volume of world trade and production,1950-02 Dev. Issues of Trade & Inequality
(Welfare/Gains from Trade)
• Trade & welfare/gains for trading nations: comparative
advantage –trade leads to expansion of market, production, consumption,
employment, income…raises national welfare - but trade does not
assure equal distribution/gains
• Does Trade benefit all?: depend market conditions and
determined by nature & pattern of post-trade income distribution
• Market Conditions determines the welfare: if prices fail
due to market imperfections, externalities in production & consumption,
trade may not welfare improving for all
• Trade re-distributes incomes: int. factor movement - some
may gain some may lose from trade – wage & income inequality
• Trade Creates both Winners & Losers: role of state & dev
policy need to ensure welfare improvement at least > autarchy

Growth of World Trade & GDP (%) Trade & Inequality:

outcome, factors & policy options
• Mixed outcome of trade beyond theoretical prediction
– Growth & trade (performance & policy) interlinks
– Inequality between & within countries, sector & groups
• Role of other factors for inequality than trade
– labor market conditions,
– inflow of capital,
– policy reforms
• Dev policy to deal with inequality
– promote human resource development – to improve
quality of labour & labour market functioning
– policies on income redistribution – to provide safety net
and reduce adjustment cost due to trade liberalization
– Tax reforms (progressive and distributive)

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Trade–GDP Ratios
Trade and Inequality
What do we know about inequality?
– It is on the increase in many countries (but not all).
In relative terms:
• Capital owners are likely to get better off
• Many skilled workers get better off, but not all
• Low skilled workers are likely to get worse off
• Casualization/contractualization of labour

– Technological change is the main driver of this

phenomenon

GDP per Capita Growth Rates for Developed and

Relative Factor–Price Equalization Developing Countries

Inequality with Growth & Trade Trade–GDP Ratios and Gini Index for Selected East
Asian Countries
Liberalization
• Drivers of growing trade–GDP ratios
– trade and FDI liberalization,
– reduction in transportation costs
– technological progress
– deregulation
– Improved transportation services
• Globalization of Production, Markets, Finance
• Mixed outcome of trade on inequality: DCs& LDCs
– Convergence:
– Divergence:
– Development agenda
• Changing Trade Policy:

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Economic convergence in the World

Trade Inequality: Causes & Impacts
• Free Trade: Case for free trade is robust: distributional
outcomes, makes the free-trade argument compelling

• Trade openness & economic prosperity: LDCs

v/s DCs, “miracle” countries v/s “debacle” countries (Pangariya, 2011)

• Trade can be a only facilitating device: gains

from trade depend on openness, responding to market opportunities

• Growth & Trade Policy: China & India reverse their

protectionist policies, DCs low growth with new protectionism

• Trade and Poverty: trade liberalization has pulled 200

million people in India and 300 million in China out of poverty

• Unequal & Weaker global growth: 2008-9, post-

crisis, 2015-17…Covid-19 pandemic, post-covid-19

Trade Induced Inequalities: Trends & Type Changes in income across global citizens:
• Forms of Inequalities: income, wage, asset, regional, Elephant curve 1980-2016
gender, generational inequalities etc.
• Inter-countries Inequalities: between
developing and developed countries
• Intra-country Inequalities: within-country
income inequality – sub national and sectoral level
• Major component of income inequality: asset,
employment, public policy (trade)
• Measuring Inequality: across regions, groups, periods
– ToT: primary products vis-à-vis industrial products tend to worsen
ToT over time (Prebisch–Singer Hypothesis)
– Basis, Gains and Pattern of Trade: changing
• Causes & impacts of inequality: role of dev policy

Income inequality, (Theil Index), Relative and Absolute Global Inequality

(global, between and within countries) (1975-2010)

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Factor abundance in a three-factor country model:

Trade & Inequality: theory & evidence (The Leamer Triangle - 2000)
• Growing inequality with trade
– theoretical prediction of positive impact of trade on
income distribution has been challenged
– Evidence of empirical findings on the impact of trade
on inequalities evident
• Trade openness by developing countries contributed to
– Convergence - narrowing dev gap across countries.
– impacts on income gap between developing countries
are not clear
– impacts of increased trade liberalization on within-
country inequalities are mixed
– in some case trade liberalization improved & worsen
wage-inequality
– mixed patterns are also found for regional inequalities

Trade & Inequality: Impacts of Trade on Inequality & Dev

outcome, factors & policy options
• Mixed outcome of trade beyond theoretical prediction
– Growth & trade (performance & policy) interlinks
– Inequality between & within countries, sector & groups
• Role of other factors for inequality than trade
– labor market conditions,
– inflow of capital,
– policy reforms
• Dev policy to deal with inequality
– promote human resource development – to improve
quality of labour & labour market functioning
– policies on income redistribution – to provide safety net
and reduce adjustment cost due to trade liberalization
– Tax reforms (progressive and distributive)
• Impacts of trade (globalization) induced inequalities on Dev:
– Widen/reduce the gap between developing and developed
countries
– Improve/worsen inequalities in income, wages, and regional
income disparities within countries
– Trade openness: narrowing the development gap LDCs vis-à-
vis DCs – but its impacts on income gaps between
developing countries are not clear
– Trade liberalization on wage-inequality & regional inequality
 Other factors: labor market conditions, inflow of capital, policy
reforms, domestic policy may lead to inequalities
• Discriminatory educational systems that discriminate the poor and
labor market regulations - limit the mobility of labor - result in widening
wage/income inequality
• Rising protectionism accentuates inequality - market access issues

Trade & Income Inequality (Within Country)

Does trade models explain it? Market Access & Inequality
• Heckscher-Ohlin model: prediction of lower inequality in low-
income countries (redistributive predictions of factor incomes) failed
• Market access conditions: high-income countries affects
• China and India: with abundant unskilled labour, have experienced
inequality in low-income countries
an increase in income inequality
• Latin America: increase in inequality with trade openness • Fair Trade: fairer distribution of gains along international
(Argentina, Bolivia, Venezuela) value chains
• Non-Trade Factors for Income Inequality: • Trade Policy: trade policies and market access on
– worker and firm heterogeneity within-country income inequality in low-income countries
– skill-biased technological progress
• Trade Models do not adequately reflect the real world:
– complementarity between tech progress & skilled labour
– substitutability and complementarities between labour, capital and
natural resources
• Leamer Triangle: to visualize the location of each country in terms
of labour, capital and natural resources abundance

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Dev. Issues of Trade & Inequality

Trariffs & NTMs in High Income Countries (Welfare/Gains from Trade)
• Is Trade always gainful?: comparative advantage – argued
for trade leads to expansion of market, production, consumption
employment, income…raises national welfare of all trading countries -
but trade does not assure equal distribution
• Does Trade benefit all?: depend market conditions and
determined by nature & pattern of post-trade income distribution
• Market Conditions Determines the Welfare: if prices
fail to signal true comparative advantage due to (market imperfections,
externalities in production & consumption) trade may not welfare
improving for all
• Trade re-distributes incomes: int. factor movement - some
may gain some may lose from trade – wage & income inequality
• Trade Creates both Winners & Losers: role of state &
dev policy need to ensure welfare improvement at least > autarchy

Trade Effects on Inequality Issues of Growth, Trade & Dev Agenda

• Diverse effects: effect of trade on inequality has been
diverse at workers, firms and countries levels • Trade & Growth:
• Why trade led to inequality?: – Gains from Factor-Endowment based Trade
– fragmentation of production processes across countries, – Gains from specialization & Exchange:
– uneven sharing of profits across value chains – Gains from Economies of Scale:
– rules governing market access and entry conditions • Trade & Dev
(non-tariff measures limits trade) – Gains from Trade through increased Product and Input
– increase of market concentration Variety
– wage gap between the formal and informal sectors – Expansion of choice & freedom
– gains from trade often captured by larger firms • Trade Policy
(economies of scale and high entry costs prohibit others) – Competitive Trade Policy: IS policy, low quality with high
– product requirements, productive capacity, quality costs, Effects of Openness,
infrastructure, exports constraints – Political economy of trade intervention and trade negotiations
• Expansive & inclusive trade to reduce inequality:

Trade Effects on Inequality International Trade Agreement and Development

• Why trade led to inequality?:
– trade are often highly localized and long-lasting,
(geographical inequality within countries)
– economic activity often clustered geographically for trade
– trade affect inequality by promoting structural change –
(income inequalities within many LDCs)
– infrastructure, trade facilitation, capacity to exports
– Focus on small firms: in entering export markets, diversifying
product and market portfolios
– Trade policymaking with objective to gain market access and
targeting productivity can lead to inequality
– multilateral cooperation on reducing global inequalities
• More & inclusive trade Policy: HR (improve labour rights,
workers skills), trade policy (TAs, integration in world markets, trade
facilitation measures), local conditions (working conditions, gender,
facilitate small firms), special & different treatment for LDCs

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The need for a development round Trade and Inequality

What do we know about inequality?
(I) Past rounds have been unfair
•The Uruguay Round agenda focussed on the interests of
rich countries; it included
– Services - but not unskilled labor intensive services;
– Subsidies - but not agricultural subsidies;
– Intellectual property rights;
•Most of its projected benefits accrued to the rich countries
– 70% of gains to developed countries
– The 48 Least Developed Countries were actually left worse off
– It is on the increase in many countries (but not all).
In relative terms:
• Capital owners are likely to get better off
• Many skilled workers get better off, but not all
• Low skilled workers are likely to get worse off
• Casualization/contractualization
– Technological change is the main driver of this
phenomenon

The need for a development round Trade and Inequality

• How does trade affect inequality?
(II) The trading system is unbalanced
• The system is stacked against poor countries – Low skilled workers in industrialized countries
– The average OECD tariff on goods from poor countries is 4 times higher lose from trade with low wage countries
than on goods from other OECD countries
– Rich countries cost poor countries three times more in trade restrictions
than their total development assistance to them. – Trade in general (also among industrialized
• There has been little progress on agricultural issues countries) increases competition among
– OECD countries continue to subsidise agriculture by 48% of total farm
production, just 3% lower than 1986; and maintain high tariffs
workers => possible loss in bargaining power
• Intellectual property rights disadvantage poor countries
– Exacerbate north-south knowledge gap; and restrict technology transfer
– Do not protect indigenous knowledge

Explaining the Failures Trade & Jobs

• Does trade create jobs ?
• Trade liberalization has not been asymmetric • Does trade destroy jobs?
• But even theory is qualified in its support of trade
liberalization
– With imperfect risk markets, trade liberalization may be  Trade does both things !
Pareto Inferior (Newbery-Stiglitz, 1982)
 Many other policies/events
– With growth, argument for trade liberalization even weaker
• Most of growth is related to technological progress create or destroy jobs
(Solow, 1957)
• Market failures are pervasive (Arrow, Stiglitz)  Net employment effects have
• Historically, most successful countries developed behind differed across countries
some protectionist barriers

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Trade & Inequality: A case of Ecuador

Trade and Jobs • Trade dynamics in Ecuador: race between the export channel
and the import channel - Dynamics of trade-related economic activity
Trade appears to create and destroy jobs in all in Ecuador:
sectors involved in trade – Commodities out, machinery in: Ecuador’s exports, oil (54%), fruits
(11%) seafood products (10 %), flowers (4 %). Ecuador’s imports are mostly
Mnf. products, including machinery (21%), chemicals (14%), vehicles (13%).
• Good news ?
– composition of imports and exports (commodities out, Mnf. goods in)
Reallocation easier within than across sectors — turns out to be crucial to the relationship between trade and greater
income inequality in Ecuador
• Bad news?
– Demand for skilled workers: Firms that employ well-educated, better-
A wider range of jobs are at risk and more paid worker also tend to be the ones benefitting from trade more
difficult for policy makers to predict which jobs because it allows their firms to buy Mnf. goods more cheaply and
are at risk flourish, in turn bolstering demand for more extensively educated
workers
– “It’s all about whether trade increases demand for your services,”
– richest individuals tend to be employed by firms that directly import a
lot, or tend to be employed by firms that are buying a lot of goods from
other Ecuadorian firms that import a lot

Trade and income Key Learning Points

• Standard trade theories would anticipate that opening up
Ecuador to trade would bolster the country’s relatively
• Does trade raise income?
larger portion of lower-skilled workers – it seems missing
Average income is likely to rise • some trade theories incorporate the idea of “perfect
substitution,” that like goods will be traded among countries
• Does trade raise wages ?
— with level wages resulting. But not in Ecuador, at least.
Average wages are likely to rise, but • ‘perfect substitution’ across countries would create strong
little evidence on this issue pressure to equalize wages in the two countries,” -
“Because both nations are making the same good in the
• Does every worker’s wage rise? same way, they can’t pay their workers differently.”
Probably not, but depends on the However, “earlier thinkers [economists] didn’t think it was
literally true, yet it’s still a question of how strong that force
country is – not found strong in case of Ecuador.

Trade & Inequality: A case of Ecuador Trade & Inequality:summary

• Trade can worsen income inequality: widens the
income gap in individual countries
– Ecuador: “earnings inequality is higher in Ecuador than it would be
in the absence of trade,” - trade generates income gains that are
about 7% greater for those at the 90th income percentile, compared
to those of median income, and up to 11 % greater for the top
percentile of income in Ecuador (Adao R. et. al. 2022 QJE).
– Ecuadorian exports, mostly commodities and raw goods, tend to help
the middle class or those less well-off, while the country’s import
activities generally help the already well-off — and overall, importing
has a bigger effect.
– “Trade in Ecuador tends to be something that is good for the richest,
relative to the middle class,”
– “It’s pretty neutral in terms of the middle class relative to the poorest.
– The [largest benefits] are found both among those who have founded
businesses, as well as those who are well off and work as
employees. So, it’s both a labor and capital effect at the top.”
• Impacts of globalization (trade) on inequalities: from
development perspectives
– Widen/reduce the gap between developing and developed countries
– Improve/worsen inequalities in income, wages, and regional income
disparities within countries
– Trade openness: narrowing the development gap LDCs vis-à-vis DCs
– but its impacts on income gaps between developing countries are
not clear
– Trade liberalization on wage-inequality & regional inequality
 Trade and many other factors affect inequality: labor
market conditions, inflow of capital, policy reforms, which
influence inequalities
– Discriminatory educational systems that discriminate against the poor
and labor market regulations that limit the mobility of labor - result in
widening wage/income inequality
– Rising protectionism may accentuate inequality - market access

9

Unequal World & Rising Global Elite
- Unequal rise in Pvt. wealth
within countries & at world level
- 50% of world poor “barely
owns any wealth” at just 2% &
the richest 10% owns 76%,
- Top 1% took 38% of all
additional wealth accumulated,
the bottom 50% got just 2%
since mid-1990s,
- Wealth of the richest people
on earth has grown at 6 to 9%
per year since 1995, whereas
average wealth has grown at
3.2% per year.
- The richest 10% currently
takes 52% of global income,
and the poorest earns just 8%
- This increase was
exacerbated during the COVID
pandemic
15:54
Global Inequality
Inequality:
Inequality in India
• India: a poor & very unequal country, with an affluent elite
– Average annual national income of the Indian adult population is Rs 2,04,200 in
2021.
. – The bottom 50% earned Rs 53,610, while the top 10% earned over 20 times
more (Rs 11,66,520),
– top 10% holds 57% of total national income, including 22% held by the top 1%,
while the bottom 50% holds just 13% in 2021
• India’s middle class is relatively poor:
– Their average wealth of Rs 7,23,930, or 29.5% of total national income,
– top 10% & 1% own 65% (Rs 63,54,070) & 33% (Rs 3,24,49,360), respectively.
• Wealth inequality > Income Inequality
– average household wealth is Rs 9,83,010, of which the bottom 50% owns Rs
66,280, a mere 6%.
• A drop in global income during 2020: (impact of India)
– (half of the dip in rich countries, half in low-income& emerging countries)
– primarily due to the impact of “South & SE Asia, & more precisely” India.
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