DISTRIBUTIONAL EFFECTS OF GLOBALIZATION IN DEVELOPING COUNTRIES -Goldberg & Pavcnik (2007)

Key finding

virtually all available measures of inequality (skill premium, wage inequality, income and sometimes consumption inequality) show rising inequality for developing nations in 80s-90s

• goes against HO model prediction

• in countries abundant in unskilled labor, trade liberalisation should raise the real wage of unskilled workers and reduce inequality

Inequality rose alongside greater openness towards trade - globalisation

• contrasts the East-Asian miracle (60s-70s)

Trade liberalisation

Most case‑study countries implemented drastic, unilateral tariff cuts in the mid‑1980s to early 1990s

NTBs were also heavily cut

Contrary to textbook intuition, unskilled‑labor‑intensive industries were often the most protected before reform and received the largest tariff cuts

• so liberalization hit low‑skill sectors hardest rather than boosting them

Skill premium

Rose significantly in all studied developing nations

• wage inequality / Gini coefficient moved in same direction

higher prices for skills (returns to education), explain much of the post-liberalisation rise in wage inequality

Within vs across sector reallocation

Adjustment to globalization is not via large sectoral reallocation, but via wages and within‑industry/firm changes

• A robust finding is little or no large‑scale L reallocation across sectors in response to trade reforms

Instead, the adjustment often occurs through changes in w and within‑industry shifts

• skill shares rise inside most industries,

• More productive firms gain market share within sectors

• suggesting within‑industry skill upgrading rather than classic across‑industry shifts

Limited sectoral mobility due to L-market rigidities

• caste system in India

• against HO assumption of perfect within‑country factor mobility

HO distribution predictions

Trade increase relative price of skilled good in skill-intensive country

Trade increases inequality in skill-intensive country (developed) and decreases it in the unskill-intensive country (developing)

Trade increases inequality via across-sector reallocations of labor/production: from the scarce to the abundant sectors

Channels of globalisation - beyond tariff reduction

outsourcing and trade in intermediate inputs

• key mechanisms that raise demand for skilled labor in both North and South

• In Mexico, U.S. firms’ use of maquiladoras

• HK use China

K flows and skill‑complementary capital

• FDI flows rose with globalisation

• Can rise D for skilled L

Skill‑biased technological change, often interacting with trade

• simultaneous rise in the relative wage and relative employment of skilled workers within industries - skill based tech change

• trade liberalisation or intensified F competition induces firms to adopt new, skill‑biased technologies

• Colombia - evidence for Colombia that demand for skilled workers rose most in industries with the largest tariff cuts.

Exchange‑rate shocks and export surges

• Large ER movements substantially changed X incentives

• may overshadow tariff changes

• X booms associated with quality upgrading and increased skill demand