Impact of Trade on Inequality - Annotated Bibliography Example

IMPACT OF TRADE ON INEQUALITY Annotated bibliography Viet, C. . The impact of trade facilitation on poverty and inequality: Evidence from low- and middle-income countries. The Journal of International Trade & Economic Development, 1-26. The author gives an insight into the existing inequality that arises from trade among countries. In the opinion of the author emphasis on trade without considering the socio-economic and political involvement of the local communities explains the emerging wage disparities across nations and within the population. Provision of evidence by a comparative analysis of low, medium and high income countries constitutes appropriate resolution approach. This work is relevant to the topic under consideration to increasing debate on globalization pressure on developing nations. However, critiques of this works points out at the limited explanation on the underlying complex societal aspects that necessitates this scenario. Graham, C. (2014). Assessing the Impact of Globalization on Poverty and Inequality: Using a New Lens on an Old Puzzle. Brookings Trade Forum, 131-163. Graham emphasizes the significance of trade but cautions against the increasing disadvantage of globalization to the developing economies. His ideas are justified from the factual assessment and evidence that characterize the surging socio-economic and political trend among the developing nations. The relevance of this work surrounds Poverty and inequality as central variables that the author highlight as derived from globalization. However, there is significant criticism in regard to inadequate quantitative analysis of data to improve the validity of the findings. Galiani, S., & Sanguinetti, P. (2013). The impact of trade liberalization on wage inequality: Evidence from Argentina. Journal of Development Economics, 497-513 This work points out the indisputable facts of wage inequality that emerge from the effect of globalization. By giving a case study of Argentina, the author gives an insight into the critical role of strong international trade policies that need to be effected to tame the emerging demerits of globalization especially among developing economies. The subject under consideration is impact of trade on income distribution inequality which makes the author to be relevant. Critiques arguments are based on author’s failure to recognize the marginal benefits of the same in improving the income level. Mahler, V., Jesuit, D., & Roscoe, D. (1999). Exploring the Impact of Trade and Investment on Income Inequality: A Cross-national Sectoral Analysis of the Developed Countries. Comparative Political Studies, 363-395. Income disparities are emphasized by the author in regard to the increasing debate on impacts of globalization. In essence, the author is focused on addressing real economic challenges that characterize developing countries in respect of globalization. The depth of analysis in this work makes it relevant to the topic under question. Criticism on this work constitutes inadequate explanation of the socio-political ideology that influences the outcome of the observation. Daumal, M. (2013). The Impact of Trade Openness on Regional Inequality: The Cases of India and Brazil. The International Trade Journal, 243-280. The author uses two countries on transition to developed economies to address the reality of regional inequality from open trade. The key factors emphasized by the author include comparative advantage between developed and developing nations in respect of the gains on international trade. Critical evaluation of the work hints at some level of information deficiency on qualitative data. Abstract Trade inequality has substantially changed in various regions of the world in the last few years, and this has been a heated debate among policy makers and academicians especially in developing countries. Fears of rising inequality also play a leading role in present debates on how globalization is impacting on our economies and wage inequality too. It is widely alleged that the trade openness produces a competitive environment which leads to quality products fronting to the economic growth. Empirical backing for the view that trade equality promotes economic growth has been established in various studies through trade does not seem to be a particularly robust predictor of economic growth. There is a link between trade equality and sound economic growth. After a momentary review of current trends in trade inequality, this paper presents new insights on the dynamic impact of trade liberalization on wage inequality. The paper will help in addressing the long run impact of the international trade alteration on the wage structure in many developing countries. Trade inequality can be considered to have both negative and positive impacts depending on the economic players in question, and this has been a concern worth addressing. In the recent past, there has been several of debate among policy makers and academicians on these issues. In developing countries, anti-globalization and processions are common anytime there is a World Trade Organization (WTO) forum. This suggests that all is not okay with globalization and issues with trade equality. As one feature of globalization, heated arguments have been thrown with regard to how much is the economic gains by the poor people in developing countries from openness to trade. Pro- globalization and fair trade policy makers argue that poor people in these countries gain sufficiently from the international trade while some others still remain skeptical and hold the view that disproportionate share of gain or benefits from international trade goes to the individuals who can’t really be termed as poor. Introduction In the three decades, one of the most robust trends has been complaining of rising inequality in many countries. This trend remains a fact in many developing countries and even few developed countries whether measured in wage, assets and income or even wage premium. Within many of these countries, the gap has been widening in the recent past. One of the possible explanations to support these facts could be the ever rising trade activities particularly globalization. Whether measured in terms of trade flows, capital flows or tariffs, globalization has risen remarkably. Globalization according to (Alms Heshmati, 2003) is referred to as open movement or transfer of capital, goods and services across the borders of different sovereign states. He added that it was a continuous process by which market economies at the west have effectively spread across the world. In line with this definition, it is clear that new changes in the global economic environment have resulted in far-reaching outcomes in the economic well- being of the people in all localities in the world (Galiani & Sanguinetti, 2013). It is also clear that Globalization has in the recent decades been accompanied by rising rates in inequality specifically in terms of income distribution. The available data on growth and income inequality have always contradicted the optimism of the advocates of globalization. The empirical facts show, in fact, that for most nations in the world in the last twenty years have resulted in rising trade inequality and slow economic growth. Trade openness can be termed as fast economic interaction between economies accelerated by liberalization of trading activities, capital flows, and investment. Studies in the past have shown that globalization or openness can be termed as a necessary but not a sufficient condition for successful growth and development in the world. In this line, openness has a direct connection among production outsourcing procedures and income inequality. Many policy makers and scholars have argued in the past that globalization is very likely to decrease absolute poverty provided that the person accepts the idea that the trade never affects inequality but foster country’s economic growth. However, the paper explores the concept that the trade will have a detrimental impact on the poor individuals if the gains of trade go to non- poor individuals. This argument is well reinforced by the fact that access to current technologies more often than not favor educated and skilled workforce than unskilled laborers. There has also existed the likelihood that trade inequality might fall due to a rising demand for unskilled labor (Mahler, Jesuit & Roscoe, 1999). Existence and presence of the wage gap between unskilled laborers and skilled laborers in some of the countries is unavoidable. Despite the fact that there exist a question mark with regard to the impact of trade openness and directness on income distribution and other inequalities, it is essential to realize the factors that result to it. It is worth noting that the levels and impact of inequalities in trade in any setting solely dependent on the players and information availability. This paper is arranged as follows in the sections below. One, it provides a statement of major contributions followed by a descriptive statistics of data on various aspects of trade inequality including a chart and a table. Next the paper gives a discussion and analysis before giving a conclusion based on critical analysis of facts and past studies on the subject of impact of trade on inequality. Statement of main contribution of equality in trade There exists a clear link between globalization and trade inequality in both developed and developing countries. Openness will lead to declining in inequality of income in the less developed economies and a rise in income in developed economies. According to many economic models, openness directly influences the real earnings of the poor, which would enable them to make loans that would enhance their investment and consequently reduce inequality at the end of it all. Globalization often results into expansion of industries in various sectors within a nation and reduction in productivity in other areas. This could influence wages and employment in several areas, which in turn have an effect in the distribution of income. Globalization may as well change the demand for male or female labor. For instance, if textile output grows because of openness, it may in turn raise the demand of the female workers as compared to male workers. If there is an overall discrimination in the level of skill among female and male workers, it brings about a larger demand of either unskilled or skilled labor that also influences the inequality of gender. Using a short review of income and openness distribution in many less developed countries which struggles with the challenges of economic and other structural changes, globalization and unequal distribution of income offers a direct relationship in understanding this disparity in trade. The economies in these countries are moving towards privatization, deregulation, free trade and liberalization policies. The countries are paying attention to competitive trade from the previous two decades by implementing import substitution policies that have huge tariff rates as well as nontariff barriers. There is a sharp rise in total trade of these countries in the recent past due to their liberalized approach towards trade by decreasing tariffs. Income inequalities in the countries have followed an unequal path over the last few decades. One of the most inspiring aspects of openness is the fact that many poor individuals in the less developed countries gain from it. Economists of pre openness viewed that poor people gained enough from global trade. Some others also viewed that a very big part of benefits that is unbalanced from global trade goes to people who can be defined as poor. Openness, therefore, is reducing absolute poverty by accepting that trade does not affect inequality but instead enhances economic growth. This shows why trade will have a negative influence on poor people since the benefits of openness goes to the rich people. This is largely contributed by the fact that the use of new technologies privileged mostly the skilled and trained workers rather than unskilled. Over the last few centuries, the world trade has become very unequal. Income within countries has been rising and fell drastically. Most often, it’s been rising in developing countries and at the same time it’s been falling in the industrialized and developed countries though this trend of events has reversed in various parts of the Organization for Economic Cooperation and Development. Therefore, there is no global trend in inequality within-country in the past two centuries. This means that virtually all the detected rise in the world income inequality has occurred due to the widening gaps between nations as opposed to the widening gaps within nations. In the meantime, the world economy has turned out to be more integrated. Thus, if the correlation meant causation, the above facts would simply imply that inequality between nations has been raised by globalization but inequality within nations has not been raised. The result of globalization on the disparity within countries has gone both ways not according to simple correlation between the perceived trends or according to some simple theory. From the economic record of inequality, we can draw the following conclusions concerning the influence of globalization: 1. The intense widening of income disparities between countries has most likely been reduced and not increased, by the globalization of factor and commodity markets, at least for the nations that integrated into the global economy. 2. Opening up to international business, and also international factor movements within the labor-filled countries in the past few decades lowered the inequality. This was especially witnessed where there was massive emigration. 3. Within countries where labor was limited, opening up to international factor movements and international trade increased inequality majorly owing to the fact that immigration was vast in this period. 4. All those intra-national and international effects considered shows that more globalization has resulted to less world inequality. 5. Under complete global integration, world incomes would continue to be unequal, just the way they are in any large integrated domestic economy. They would as well be less unequal in a completely integrated global economy than in a fully segmented one. This paper reaches these five conclusions by looking at four dimensions: the sources of globalization, components of world inequality, the extent to that separate countries actually globalized, and the time period involved historically. The major two components of world inequality are inequality within countries and between country average incomes. These two must be looked at separately. Inequality within nations requires awareness of the determinants of factor prices as well as their link to the distribution of income. Unlike this, inequality between countries needs attention to be paid on the determinants of incomes per capita. Intranational and international inequalities have varying consequences for policy responses therefore they should be handled separately. Changing world inequality generated by a changing spread of people between nations also has different consequences for policy, especially if brought about by world migration. Finally, the components of world inequality that really matters vary as to whether observers care about people in other nations as they care about themselves and their own citizens. This paper, therefore, takes the global stand even though it warns that national policies come from national attitudes pertaining intra-national globalization effects. Debates over globalization, indirectly presents an alternative in which barriers to trade and factor movement replace liberal policy. Yet in the past, globalization has been propelled mostly by forces that are not related to policy, for instance increasing potential gains from specialization, productivity improvements, and transport revolutions. All these may have very different results for the dispersal of global income compared with policy alterations. Similar globalization events had completely different effects on the countries that participated and those that did not participate. Globalization has different results in participating and non-participating nations. With other factors held constant, it is clear that there is income convergence among nations that integrate more completely into the global economy, but divergence between those that participate actively as well as those who remain separated from world markets. Among the participating nations in global markets, that is already advanced countries, regions that have new settlement, and the rest completely experienced different effects. The income distributions of these countries differed, gains from trade also differed and the impact of a cross-border factor flows as well. Past Studies There are various past literature examining and exploring the impact of globalization on income or trade and income inequality. This paper does not try to review the complete existing literature. Instead, it briefly summarizes past studies and gives a critical analysis and contribution to the discussion that is directly relevant for the past researchers work (Graham, 2014). First, the paper presents relevant studies that have assessed the impact of trade on income, then distribution of income or the impact of trade on income inequality. Through the earlier existing studies, the paper adds value to the discussion of the topic and looks at issues of inequality it trade in a unique perspective. Impact of trade on income In the past study conducted by Frankel and Romerin a seminal paper, they studied the effects of trade and income. The year used was 1985 and used sampled data from 150 countries. The study showed that the trade has statistically significant effect on income across countries. They applied instrumental variable (VI) technique and employed country’s geographical features such as countries’ distances from their trading colleagues as instruments of trade. Marta Noguer and Marc Siscart (2003) studied the link between trade and income again and concluded that the estimate stays positive and significant even after introducing the geographic controls of other studies. They have applied a much richer data set lacking an inculpation stage to get the estimates with greater precision. Their findings are remarkably robust to a broad array of institutional and geographical controls, to the use of slightly different instrument and across time. It is worth noting that while raising growth, trade affects income mostly through increased capital accumulation. T.N.Srinivasan and Bhagwati (1999) explored several research studies to see whether the revisionists studying the effects of trade openness on productivity are right or not. They hypothesized that there exists a positive relationship between globalization and growth performance opposed the studies with cross-country regressions. It can be analyzed that they pointed out to lack of good theoretical basis, appropriate econometric methodology and suitable data with cross nation regressions and advice that the predictions from these cross-country regressions can never be trusted for further analysis. Anderson (2005) indicated that increased openness impacts income disparities within developing countries by affecting asset, the amount of income distribution, also spatial and gendered inequalities. The research he did further points out that most time-series findings find that more openness has risen the demand for skilled workforce, but most cross-country research find that greater trade openness has had less impact on total income inequality. He stated that this discrepancy could be due to the fact that countries chosen for time series analysis don’t represent the developing world. Finally, he opines that the impact of openness on income disparity via the relative demand for skilled workforce has been counterweight by its impacts via other means. The above mentioned studies all contribute to this study and support the arguments on the impacts of inequalities on trade. From their studies yet is still to be explored. Their studies hence formed the basis for this paper’s data, analysis and discussion on the subject of impacts of inequality on trade. Data The paper followed Wikipedia; an encyclopedia that can be analyzed online at http://en.wikipedia.org/wiki/ through this it is possible to group the nations into developing countries and developed. The dependent variable is Gini coefficient, and it has been used as a measure of income inequality in countries participating in trade. The objective of the paper is to explore the impact of trade on inequality, and such data is essential in such analysis as it sources World Development Indicators such as those by the World Bank. Gini measures the rate at which income distribution among people or households in an economy diverges from an equal perfect distribution (Daumal, 2013). All countries that participate in trade globally value income distribution and this is the best measure in understanding inequality in global trade. In the Gini, the variable is determined between 0 till 1 with accounting for perfect equality in addition 1 is considered perfectly equal. The chart illustrates Gini coefficient. The variable’s Data has been prepared from the Deininger-Squire (1996) set of data that is available at the World Institute of Development Economics Research (WIDER) website. http://www.google.com/imgres?imgurl=http://upload.wikimedia.org/wikipedia/commons/b/ba/Economics_Gini_coefficient.png&imgrefurl=http://commons.wikimedia.org/wiki/File:Economics_Gini_coefficient.png&h=225&w=224&tbnid=UHvg039cvdRzIM:&zoom=1&tbnh=160&tbnw=159&usg=__gLJ-_LQMQOqOdlK-OzM6vmhNZ5w=&docid=95fdu5yw7xVYiM&itg=1&client=firefox-a&ved=0CCcQyjc&ei=bcd5VLLAFtfgas-LgbAH The paper has averaged the Gini coefficients for some years that had more than one evaluation. The descriptive variables used are: population of the countries and area; openness to trade; corruption indices; and a set of dummy variable for landlockedness. It used a dummy variable to explain for developed nations, and the dummy variable assumes the value of 1 if the nation is a developed and 0 otherwise. Descriptive statistics Table of definitions and descriptive statistics ofvariables Variable Definition Mean Standard Deviation Min Max Gini Measure of inequality stated in %, 1=Perfect inequality0=Perfect equality 37.48 10.06 21.20 63.05 Trade Trade globalization ( export-import)/GDP 69.27 64.47 13.24 403.09 PCGDP Per Capita income in dollars 11030.52 6915.48 1034.08 27894.92 Pop Population of nations measured (thousands) 88770.62 219490.33 2350.41 1215414.27 Area Area of the countries ( Sq.km) 1786968.35 3201303.91 692.70 9984670.00 CI Corruption Index statedin 0-6 scale (0=Least, 6=Most) 1.64 1.37 0 6 Democracy stated in 0-10 scale (0=Least, 6=Most) 7.43 3.66 0 10 Litsec Secondary school enrollment stated in percentage 80.29 29.98 16.89 152.69 Land lock Land lockedness of the nations ( 0=No, 1=Yes) 0.04 0.19 0 1 Developed Growth or Development of the nations (1= Developed, 0= developing) 0.52 0.50 0 1 Data set for investigating the distributional impacts of trade is an unbalanced panel of 44 countries in a given year periods for a total of 344 observations. Trade openness has a least of 13.24 % and highest at 15403.10 % with a given average of 65.35 %, and it shows that there are economies that are more open to trade than others. The average of corruption is 2.15 and democracy indices 4.34, which shows that on an average the nations are corrupt and non-democratic this includes the possibility or lack of possibility between trade link inequalities and the given set of variables. Standard deviation, the mean maximum and minimum of other variables are given too. The dependent variable for understanding income distributional impacts of trade is Gini coefficient. The topic Impact of trade on Inequality becomes an issue of considerable debate among policy makers and academicians, specifically among developing nations. Various studies have examined the impact of trade on inequality linking the inequality and income distribution. They have also been efforts to tie it to increasing globalization in the modern economic world but mostly with cross-sectional data. Critical analysis of this paper re-examines the effects of trade on income using a panel data set, as opposed to past studies. Various studies have tried to examine the effects of international trade on income disparities, and empirical evidence till now very conflicting. Arguments and assumptions that inter-country inequality has increased over the years is false as international inequality has decreased (Graham, 2014). Hence, it is imperative to understand the relationship between trade openness and inequality. This paper lets us know the impact of openness in trade on absolute poverty when merged with evidence on the relationship between trade openness and economic growth. For instance, if we recognize that trade openness or globalization increases economic growth, but has no impacts on the distribution of income, we can be sensibly sure that openness lower absolute poverty. In conclusion, globalization is still a force in the present business environment, and as such impacts the lives of individuals in every country of the world. This is due to the verity that multinational organizations continue to be the main avenues of doing business or trade in the world, owing to their vast pull of capital base, and in the process make globalization unavoidable in the world today (Viet,2013). But most essential is that, globalization has not answered the challenges of income inequality in totality as it has in its place increased income inequality in many countries. During the recent years, income distribution has become less equal than ever in many countries all over the globe. At the same period, it is notable that the international trade has intensified. The benefits of international trade have fiercely been debated in this light. Conclusive facts have not yet emerged in an arrangement that can enable one to take a strong position on whichever side of the debate. Empirical and critical analyzes of the relationship between trade and Income distribution turnout to be particularly problematic due to the endogenous nature of trade. This paper has tried to address the challenge by estimating the link between countries’ Gini coefficient of inequality ratio using instruments based on countries’ geographic features such as size and proximity. Finally, the paper has established that growth gives a channel through which trade sinks inequality. References Daumal, M. (2013). The Impact of Trade Openness on Regional Inequality: The Cases of India and Brazil. The International Trade Journal, 243-280. Galiani, S., & Sanguinetti, P. (2013). The impact of trade liberalization on wage inequality: Evidence from Argentina. Journal of Development Economics, 497-513 Graham, C. (2014). Assessing the Impact of Globalization on Poverty and Inequality: Using a New Lens on an Old Puzzle. Brookings Trade Forum, 131-163. Mahler, V., Jesuit, D., & Roscoe, D. (1999). Exploring the Impact of Trade and Investment on Income Inequality: A Cross-national Sectoral Analysis of the Developed Countries. Comparative Political Studies, 363-395. Viet, C. (2013). The impact of trade facilitation on poverty and inequality: Evidence from low- and middle-income countries. The Journal of International Trade & Economic Development, 1-26. Read More