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Equity and Trade Policy

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  • Joseph Francois

    ()
    (Johannes Kepler University (Linz))

  • Hugo Rojas-Romagosa

    ()
    (CPB (the Hague))

Abstract

We develop a dual approach to analyzing general equilibrium relationships between trade policy and household (as distinct from functional) income distribution, highlighting how general equilibrium distributional aspects of social welfare related to import protection may be examined alongside corresponding efficiency aspects in a dual framework. This includes the introduction of a social welfare function into the dual GE system that is explicitly separable between mean income and income dispersion. This then follows through to the government ob jective function. For government, this is manifested not only in special interest politics, but also through the direct impact of inequality on a governmentÕs ob jective function. We find that equity considerations may serve to counter lobbying interests in both capital-rich and capital-poor countries, though with an opposite marginal impact on the final policy outcome. We also identify a protectionist bias on the part of welfare maximizing governments in capital-rich countries. Our dual framework also offers a possible empirical framework for decomposition of policy-induced price changes into household inequality for a broad class of models.

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Bibliographic Info

Paper provided by Institue for International and Development Economics in its series IIDE Discussion Papers with number 20070501.

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Length: 36 pages
Date of creation: May 2007
Date of revision:
Handle: RePEc:lnz:wpaper:20070501

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Keywords: Trade and inequality; Sen welfare functions; duality; political economy of equity;

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References

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  1. Helpman, E., 1995. "Politics and Trade Policy," Papers 30-95, Tel Aviv - the Sackler Institute of Economic Studies.
  2. Ronald W. Jones, 1965. "The Structure of Simple General Equilibrium Models," Journal of Political Economy, University of Chicago Press, vol. 73, pages 557.
  3. Bourguignon, F. & Morrisson, C., 1990. "Income distribution, development and foreign trade : A cross-sectional analysis," European Economic Review, Elsevier, vol. 34(6), pages 1113-1132, September.
  4. Antonio Spilimbergo & Juan Luis Londoño & Miguel Székely, 1997. "Income Distribution, Factor Endowments, and Trade Openness," Research Department Publications 4088, Inter-American Development Bank, Research Department.
  5. J. Francois & H. Rojas-Romagosa, 2004. "Trade Policy and the Household Distribution of Income," Tinbergen Institute Discussion Papers 04-051/2, Tinbergen Institute, revised 15 Jun 2004.
  6. Sen, Amartya, 1974. "Informational bases of alternative welfare approaches : Aggregation and income distribution," Journal of Public Economics, Elsevier, vol. 3(4), pages 387-403, November.
  7. Matthew Higgins & Jeffrey G. Williamson, 1999. "Explaining Inequality the World Round: Cohort Size, Kuznets Curves, andOpenness," NBER Working Papers 7224, National Bureau of Economic Research, Inc.
  8. John C. Harsanyi, 1953. "Cardinal Utility in Welfare Economics and in the Theory of Risk-taking," Journal of Political Economy, University of Chicago Press, vol. 61, pages 434.
  9. Fernandez, Raquel & Rodrik, Dani, 1991. "Resistance to Reform: Status Quo Bias in the Presence of Individual-Specific Uncertainty," American Economic Review, American Economic Association, vol. 81(5), pages 1146-55, December.
  10. Dutt, Pushan & Mitra, Devashish, 2002. "Endogenous trade policy through majority voting: an empirical investigation," Journal of International Economics, Elsevier, vol. 58(1), pages 107-133, October.
  11. Barro, Robert J, 2000. " Inequality and Growth in a Panel of Countries," Journal of Economic Growth, Springer, vol. 5(1), pages 5-32, March.
  12. Mayer, Wolfgang, 1984. "Endogenous Tariff Formation," American Economic Review, American Economic Association, vol. 74(5), pages 970-85, December.
  13. Francois, Joseph & Rojas-Romagosa, Hugo, 2005. "Equity, welfare, and the setting of trade policy in general equilibrium," Policy Research Working Paper Series 3731, The World Bank.
  14. Galor, Oded, 1994. "Tariffs, Income Distribution and Welfare in a Small Overlapping-Generations Economy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(1), pages 173-92, February.
  15. Baldwin, Robert E, 1989. "The Political Economy of Trade Policy," Journal of Economic Perspectives, American Economic Association, vol. 3(4), pages 119-35, Fall.
  16. Joseph Francois & Hugo Rojas-Romagosa, 2005. "Household Inequality, Welfare, and the Setting of Trade Policy," The Institute for International Integration Studies Discussion Paper Series iiisdp81, IIIS.
  17. John C. Harsanyi, 1955. "Cardinal Welfare, Individualistic Ethics, and Interpersonal Comparisons of Utility," Journal of Political Economy, University of Chicago Press, vol. 63, pages 309.
  18. J. David Richardson, 1995. "Income Inequality and Trade: How to Think, What to Conclude," Journal of Economic Perspectives, American Economic Association, vol. 9(3), pages 33-55, Summer.
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