After the Brexit referendum and the US election, commentators on all sides have sparred over who are the winners and losers when it comes to trade. Most economists agree that more trade on the whole is good, but that its impact can vary dramatically. The relationship between trade and inequality is then less obvious.
For starters, the impacts of trade on inequality may be very different on industrialized and emerging economies. In the former, where the supply of skilled labor is more abundant, trade may well push wages for those near the bottom further down – think of more unskilled jobs being shipped overseas where unskilled labor is cheaper. But in emerging economies, where unskilled labor is more abundant, the demand for less skilled workers may rise with the exact opposite effect. According to this view, trade should lower inequality in emerging economies. On the other hand, new trade theories focusing on the productivity of different types of firms, might support a rise in inequality just as in richer nations.
So what happened in Latin America? In the great trade liberalization of the 1990s, wages in protected industries, many of which were intensive in low-skilled employment, adjusted downwards to survive foreign competition. New, high-paying jobs were created too. An interesting case study is the impact of NAFTA on Mexico. The introduction of the free trade agreement destroyed some low-value-added manufacturing jobs in previously protected industries. But it created better paying jobs by linking Mexican firms to their upstream North American counterparts. Moreover, it boosted exports, likely producing generally positive impacts; there was a boost to wages and a significant reduction in poverty.
The 2000s were different. Commodity exporters, particularly in South America, benefited from the unprecedented China boom. China grew at an average rate of more than 10% per annum for 10 years becoming the second largest global economy― akin to adding an economy around the size of Argentina every year! Changes across and within industries in Latin America in favor of low-skilled workers at a time when the region had acquired more skills created shortages of low-skilled laborers, and increased their wages. But clearly there was a lot more going on than changes in trade that favored reductions in inequality. Some countries took advantage of the fast growth to modify labor market regulations (increasing and tightening enforcement of minimum wages) and others deepened safety nets such as conditional cash transfers.
The relationship between trade, poverty and inequality is complex and likely to be different in Latin America and the Caribbean than in the United States and the U.K. Changes in trade are always likely to produce winners and losers at a microeconomic level. Governments can implement policies to compensate the losers and ensure that those that end up unemployed have alternatives. They can provide programs, for example, for workers to acquire necessary skills. The IDB’s forthcoming flagship, Better Learning: Public Policy for Skills Development, reviews what public policies work, and do not work, to boost skills in the workforce. Higher growth may produce rewards for many people in many nations. But its potentially negative impacts on the few who do not benefit should be alleviated.
The forthcoming 2017 IDB Latin American and Caribbean macroeconomic report considers the positives and negatives of trade integration in the region. It also contains a concrete proposal on how the region should move forward and find a route to higher growth in a new and very uncertain global trading environment. Sign up here to receive an email when the report is available for downloading.