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Trade Liberalization and Income Distribution

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  • Donald R. Davis

Abstract

Empirical work relating trade liberalization and income distributed has iden- tified an important anomaly. The Stolper-Samuelson theorem predict trade liberalization will shift income toward a country's abundant factor. For developing countries, this suggests liberalization will principally benefit the abundant unskilled labor. Yet extensive empirical studies have identified many cases with a contrary result. This paper develops a simple theoretical explanation for this anomaly. It shows that countries which are labor abundant in a global sense may see wages decline with liberalization if they are capital abundant in a local sense. The current absence of empirical work that would allow us to identify the relevant local abundance implies that virtually all assertions regarding anticipated distributional consequences of trade liberalization are without foundation. There may likewise be important implications for industrialized countries that border developing countries undertaking trade liberalization, particularly in regard to the incentives for migration.

Suggested Citation

  • Donald R. Davis, 1996. "Trade Liberalization and Income Distribution," NBER Working Papers 5693, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:5693
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    More about this item

    JEL classification:

    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • O19 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations

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