Globalization and All That CH 6

Abhijit V. Banerjee, MIT, January

2003
In simple terms, the High Trade theory suggests that when countries trade more with each
other, it can impact inequality within those countries.

According to the Samuelson-Stolper Theorem, when countries specialize in producing goods

based on what they're good at (their comparative advantage), it should theoretically benefit
everyone. For example, if a country has lots of labour but little capital, it would specialize in labour-
intensive goods, which should boost wages for workers there.

Historically, in the 19th and early 20th centuries, when trade increased, inequality decreased in many
places. For instance, during 1870-1913, the ratio of wages of unskilled workers to the output
produced by an average worker went up in countries where wages were low and went down where
wages were highest. However, from 1921-1938, there was a reversal, possibly due to the Great
Depression.

After World War II, trade resumed and barriers were lowered globally. This benefited low-skilled
workers in some countries like Korea, Singapore, and Taiwan, but blue-collar workers in Mexico lost
15% of their wages, whereas white-collar workers gained in the same proportion. In Argentina, the
ratio of wages for those with a college degree to that of the average unskilled worker doubled for
men and trebled for women. In India, during the post-liberalization years (1991-2000), inequality
rose, particularly in urban areas. During 1980-1998, income share of the poorest quintile went down
from 8% to 7% and income share of the richest quintile went up from 30% to about 45% in China.

Overall, while trade can theoretically reduce inequality by boosting wages in poorer countries, the
reality is more complex, and the effects can vary widely depending on factors like government
policies and global economic trends.

When countries start trading with each other, there are other things happening at the same time
that also affect how money is shared among people. These things happen quickly and can't be mixed
up with long-term stuff like how technology changes or what people think is fair.

In the 1800s and early 1900s, when countries traded more, they also started to share money more
evenly among their people. But in the last part of the 1900s, things went the other way, and money
started to get shared less evenly.
Feenstra and Hanson, in 1997, looked at Mexico and found something interesting. They saw that
when foreign companies started putting money into Mexico, it changed how money was shared
there. These companies didn't change the way they did things to use less skilled workers. Instead,
they needed more skilled workers to do the job. So, when more money came from outside, the
people with more skills got paid more. This shows that foreign investment can make the rich-poor
gap bigger because it makes skilled workers more valuable.