Trade, Poverty, and Inequality in India

Trade, Poverty, and Inequality in India
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Trade, Poverty, and Inequality in India
Introduction
Globalization has had effects of free markets and thus increased trade across the world. Dreher (2006) argues that trade is responsible for driving and sustaining growth in a highly globalized world. Moreover, plausible theoretical claims have linked trade, poverty, and inequality, although the reality is much more complicated than postulated. This is because there are missing links on the three fronts in some economies (Khan & Bashir, 2012). Therefore, some studies show that globalization and the resultant international trade reduces poverty and inequality. However, other studies indicate that trade liberalization is a threat to employment standards of living among poor people, thus increasing the level of poverty and inequality in a nation (Khan & Bashir, 2012). Other than merely showing a positive or negative effect of free markets on poverty and inequality, more research suggests that there are varied situations where trade may reduce or increase the levels of poverty and inequality (Khan & Bashir, 2012). This paper addresses the complex links among trade, poverty, inequality with a specific focus on India.
Theories that Link Trade, Poverty, and Inequality
Existing literature on the association between trade, poverty, and inequality is presented through two major theory frameworks: the static and dynamic frameworks. The former concentrates on two main channels (employment and macroeconomic policies) as the two ways through which trade can directly influence poverty and inequality. On the other hand, the latter focuses on the trade-growth and growth-poverty/inequality relationships to explain the link between trade, poverty, and inequality. The following subheadings give further details into the two static and dynamic theory frameworks.
The Static Framework
Theoretical approaches under this framework include the Neoclassical Hecksher-Ohlin (H-O) model and the so-called New Trade Theory (NTT). To begin with, the H-O model predicts how trade will impact on developed countries in comparison to the developing ones. Accordingly, this model shows the comparative advantage that industrialized nations have over the less-industrialized ones on account of their varying resource endowments in their factors of production (Lal, 2017). It follows that countries tend to specialize in producing goods and services which are in line with their relatively abundant factors of production. Therefore, developed countries, with their relatively abundant capital are often noted to export capital-intensive goods and services; while they import labor-intensive ones from the less-developed countries where there’s relatively more abundant labor. In a version of the model where the two factors and two goods play out; there will be a likely shift from autarky to trade in both nations, due to a possible increase in price for the labor-intensive food. Based on the assumption that there’s full employment in the labor-intensive nation, the demand in labor will portend a rise in wages thus reducing poverty and inequality. As supported by the Stopher-Samuelson theorem (SST), international trade for a labor-intensive good will result in gains for labor and thus lowering the proportion of poor people in the developing countries.
Secondly, the NNT, which is another approach to explaining the static framework in the trade, poverty, and inequality nexus does so by comparing nations with similar resource endowments (Lal, 2017). This applies to cases where developed countries or developing countries engage in trade within their respective categories. According to Pettinger (2018), the NNT is based on the idea that patterns of international trade depend on the considerable economies of scale as well as network effects found in key industries; which are also likely to be found in the developed countries. Therefore, countries with lesser resource endowment may struggle to develop some types of industries due to their inability to acquire the same economies of scale possessed by the developed countries (Pettinger, 2018). This situation is not caused by any intrinsic comparative advantage enjoyed by the wealthier nations but primarily due to the economies of scale that the developed firms in the developed countries already have. For instance, neither Italy nor the UK has any comparative advantage in their production and sale of brand clothing labels. Still, the Italian and British fashion labels are more attractive to consumers, even from developing countries because of the economies of scale and dominance in the market for many years.
The Dynamic Framework
The dynamic theory framework as an approach to understanding trade, poverty, and inequality interactions considers trade as the channel by which higher levels of growth can be attained, thus reducing poverty and inequality (Lal, 2017). Consequently, two types of relationships emerge: Trade and growth, as well as growth and poverty/inequality. While trade has often been considered to be the driver for growth, there is contention concerning the net effect of trade openness on economic development (Lal, 2017). Theoretically, trade is the reason for the achievement of higher income levels and, thus, the reduction of poverty and inequality. Under the new growth theory brought to the fore by Romer (1986), trade openness has significant impacts on growth. As suggested by the theory, trade allows for the utilization of the capacity to increase production and consumption. It follows that trade openness ensures that domestic producers have markets for their goods; thus, they can operate at minimum possible scale while at the same time reaping from the benefits of increasing returns to scale. Due to the global increase in the volumes of trade, there have been doubts if trade results in economic growth regarding the direction the trade-growth relationship follows. Some arguments have been made to the effect that faster-growing economies tend to trade more, causing the trade-growth relationship to follows just one direction. In the foregoing, a nation’s structural and institutional conditions will determine the effect of trade openness on its growth.
As already noted, voluminous literature exists on the subject of trade and growth. Correspondingly, a great deal of literature also exists on the subject of growth and poverty/inequality. Moreover, an assertion has been made to the effect that since trade is distribution-neutral, and trade drives growth, then trade benefits poverty (Lal, 2017). On the contrary, both theoretical and empirical evidence suggests that there exists a more complex association. Therefore, the trickle-down effect from economic development to the alleviati...