The impact of trade liberalization upon inequality in developing countries - A review of theory and evidence-

The examination of the impact of trade reform and globalization is ultimately concerned with two fundamental goals: improving the average level of income per capita and achieving greater equality in the distribution of income. Trade liberalization is a key aspect of the broader topic of globalization", but is more clearly defined and more clearly linked to economic theory and policy. This study examines the evidence for developing countries over the last two decades concerning the impact of trade reform upon the distribution of wages. 2 Recent studies of the impact of trade upon distribution emerged as an attempt to understand the rapid growth in the relative wages of more versus less educated workers in the United States beginning in the 1970´s that could not be explained by changes in the relative supply of skill. This spawned an large, still expanding empirical and theoretic literature focusing on developing countries that subsequently led to examination of the same issues in developing countries. The principal theoretic reference point for the recent literature on trade and distribution is the Hecksher-Ohlin-Samuelson (or Hecksher-Ohlin-Viner, henceforth "HOS/HOV") model and related Stolper-Samuelson and Rybczinski theorems. The Stolper-Samuelson theorem as applied to production with skilled and unskilled labor leads to opposite predictions for the impact of trade liberalization on distribution for "Northern" countries with a comparative advantage in skilled labor versus "Southern" countries with a compative advantage in unskilled labor. In the North the Stolper-Samuelson theorem predicts that trade liberalization leads to a rise in relative wages, while leading to a fall in relative wages in the South. Consequently, for unchanging distributions of human capital within countries over time, trade liberalization would worsen the distribution of wages in the North while improving the distribution of wages in the South. This prediction of the Stolper-Samuelson theorem has been invoked by institutions such as the World Bank and International Monetary Fund to justify trade liberalization in the South, arguing that trade liberalization leads to both greater economic growth and better distribution of wages in the South. The remainder of this paper is organized into six sections: Sections II and III examine what the impact of trade liberalization and globalization has been. Section II presents the theoretic and methodological basis for studies concerning what the impact of liberalization upon distribution has been, while Section III summarizes and evaluates the empirical evidence. Sections IV and V examine the reasons for the empirical findings in Section III, or why trade liberalization has had the documented impacts upon distribution. Section IV summarizes the theoretic and methodological bases for these studies, while Section V summarizes and evaluates the relevant empirical literature. Section VI concludes."