Who gains from trade is not as straightforward as such a seemingly simple question might suggest. Economic growth through international trade liberalisation has seen extreme poverty falling over the last two hundred years (Ortiz-Ospina, 2017), despite rapid increases in the global population. Based on this alone, it could be argued that trade liberalisation benefits everyone. An argument that economists such as Jagdish Bhagwati asserts. But, according to economist Amartya Sen, this isn’t entirely true.
The most common theories among leading ‘trade enthusiast’ economists, such as Bhagwati, assert that nations which follow the principles of comparative advantage – specialising in their most abundant resource – will experience greater economic growth across the board. Jobs will be created, government revenue will increase, and “transmission of technology and knowledge which follow liberalisation will improve living conditions and longevity for the majority of citizens, including the poor (Nita Rudra, 2016)”. They believe that trade liberalisation drives production growth and efficiency, and wealth creation. Any wealth redistribution efforts should occur only after achieving the high revenues that trade liberalisation generates. Much of the available empirical data appears to support this view, but it can be argued – as Sen does – that this data is flawed by the omission of key social indices.
Because of these measurement omissions, Sen questions the relationship between trade liberalisation and poverty reduction. He argues that the data too often ignores the contingencies that can tilt the balance of political and economic power in favour of wealthy elites, to the detriment of the poor. Sen is not anti-trade liberalisation. He understands that global trade integration has been beneficial in general, and that to retreat altogether from globalisation would have a dramatic negative social impact. Sen’s argument is rooted in the uneven effects of trade, most especially in those countries which suffer the greatest inequality.
Using the Gini Index as designed by Italian statistician Corrado Gini, economists are able to measure “the extent to which the distribution of income (or, in some cases, consumption expenditure) among individuals or households within an economy deviates from a perfectly equal distribution (Foundation, n.d.)”. When the Index of Social and Economic Rights Fulfilment (SERF Index) is also included, a much clearer picture emerges regarding the socio-political effects of trade on different trade beneficiaries, according to social class strata.
Inequalities within nations, based on the above indices, are measured by distribution of income, access to health services and education, housing, employment, electricity consumption, “power distance” (Hofstede, n.d.), and the economic effects this has. These effects are often most visible when viewing a population’s data on infant mortality and life expectancy.
In nations that have the greatest inequality across these measures, it is powerful wealthy elites that benefit most from trade. In the most unequal societies, elite capture of power will develop in a way “that crystallises inequality in formal and informal institutions so that economic and political inequality become mutually reinforcing over time” (Nita Rudra, 2016). The twenty percent or so of a population that sits in the middle classes will also benefit. Some will see improvements in their standard of living that far exceeds what would have been expected only a few decades ago. The poor, however, are unlikely to see much – if any – change at all. Some may even fall further back economically, as the industries in which they eke out their meagre earnings become obsolete, often due to technological progress (such as automation) and with shifts in consumer demands.
Nations that do not suffer such extreme socio-economic stratification, and have a higher Power Distance Index (PDI) rating, will have more equitable gains from trade, including for those at the lower end of their domestic economic scales. These nations provide positive support for Sen’s argument that the benefits of trade, to the greatest number of people within a country, are contingent upon factors that include more equal wealth distribution, and investment by governments in ‘public goods’ such as physical infrastructure and social reform.
In conclusion, while trade is not a zero-sum game, there are still winners and losers to varying degrees, depending on conditionalities that impact wealth distribution, and access to political power and its supporting institutions. Gains from trade are uneven. This is likely to always be so, but the degree to which it is can be mediated by “fair trade”, not “free trade”.
References
Foundation, L. P., n.d. GINI index (World Bank estimate). [Online]
Available at: https://landportal.org/book/indicator/wb-sipovgini
[Accessed 21 March 2018].
Hofstede, G., n.d. Hofstede Insights: Dimensions of National Culture. [Online]
Available at: https://www.hofstede-insights.com/models/national-culture/
[Accessed 22 March 2018].
Nita Rudra, D. C. T., 2016. Trade, Politics, and the Poor: Is Sen Right and Bagwhati Wrong?. [Online]
Available at: https://link.springer.com/article/10.1007/s12116-016-9231-9
[Accessed 20 March 2017].
Ortiz-Ospina, M. R. a. E., 2017. Our World In Data. [Online]
Available at: https://ourworldindata.org/wp-content/uploads/2013/05/World-Poverty-Since-1820.png
[Accessed 21 March 2018].