Worldwide, there is a push towards greater openness in trade between countries. What effect does this have on international income inequality? Current wisdom suggests that openness to trade is a necessary condition for developing countries to catch up with developed countries. But recent studies by Institute of Development Studies researchers challenge this view. They suggest that the effects of greater trade openness on the supply of skilled labour might cause the international income gap to widen in the long run.

The World Bank promotes the argument that the removal of barriers to trade facilitates the narrowing of the income gap between developed and developing countries, as trade speeds the transfer of more advanced technology to poorer countries. Supporters of this view cite examples of how freer trade between specific groups of countries, such as the European Union, has narrowed the income gap between members. Others argue that trade between unequal partners causes international income inequality to worsen as it shifts the structure of production towards (for the richer partner) and away from (for the poorer partner) sectors of greater growth potential. Observers point to the success (prior to more recent setbacks) of East Asia's 'tiger' economies in catching up through the protection of key sectors of their economies until these were mature enough to compete in the global marketplace.

The IDS research report outlined here examines the relationship between greater trade openness and developed-developing country skill levels which adds a new perspective to the debate over free trade and international income inequality. Trade leads developed countries to specialise in skill-intensive goods and developing countries in labour-intensive goods which boosts the demand for (and wages of) skilled workers in developed countries, and depresses it in developing countries. If over time, supplies of skilled and unskilled labour respond to the changes in wages, the initial gap in skill supplies between developed and developing countries will widen.

To test this hypothesis, statistical analysis was conducted using indicators for openness of trade, school and college enrolment figures (a proxy for skill levels), and data relating to national land assets, from 90 countries for the period 1960 to 1990. The findings indicated that:

• greater openness to trade tends to cause divergence of secondary and tertiary enrollment rates between more educated and less-educated countries
• It also tends to cause divergence between land-scarce and land-abundant countries, with land-abundance depressing enrolment rates.

As skilled labour is an essential determinant of economic growth, these findings suggest that greater openness to trade might widen the international income gap in the long run, by causing developing countries to specialise in goods of low skill intensity. The implications for policy are as follows:

• There is no specific optimal trade policy suitable to all circumstances.
• Rather, the most effective choice of policy will vary from country to country, depending on whatever strategy is most likely to promote skill accumulation in the long run
• factors such as the initial stock of skills, national land stocks and location can all affect this equation.

Source(s):
Skill, Trade and International Inequality. IDS Working Paper # 47, A. Wood & C. Ridão-Cano (1996)

Funded by: UK Department for International Development 1995-1996

id21 Research Highlight: 1998-Feb-12

Further Information:
A. Wood
IDS
University of Sussex
Brighton
BN1 9RE
UK

Tel: +44 (0) 1273 606261
Fax: +44 (0) 1273 621202
Contact the contributor: a.j.b.wood@sussex.ac.uk

Institute of Development Studies (IDS), UK