Globalisation, COVID-19 and Income Distribution: A Theoretical Evaluation
| Published date | 01 August 2024 |
| DOI | http://doi.org/10.1177/00157325231158840 |
| Author | Asmita Das,Damayanti Sau,Ranjanendra Narayan Nag |
| Date | 01 August 2024 |
Globalisation, COVID-19
and Income Distribution:
A Theoretical
Evaluation
Asmita Das1, Damayanti Sau1
and Ranjanendra Narayan Nag2
Abstract
The article makes a theoretical attempt to explain how different interconnected
measures of globalisation—service led growth, tariff reform, agricultural trade
liberalisation and capital account liberalisation—affect the skilled–unskilled wage
disparity, sector-wise performance, income distribution and aggregate welfare of
the economy. We pay attention to land augmenting technological progress as an
essential ingredient of inclusive growth and discuss effects of COVID-19 as a supply
shock. In so-doing, we construct a three-sector general equilibrium framework with
an export-oriented service sector, a tariff-protected import competing manufactur-
ing sector and an export-oriented traded agricultural sector. We find that service-
led growth and tariff liberalisation shifts the income distribution in favour of the
landed gentry and skilled labour. Agricultural trade liberalisation and capital account
liberalisation also debilitate the income distribution. Land augmenting technological
progress adversely impacts the manufacturing sector but benefits the other sectors.
Following the outbreak of the pandemic, a fall in labour endowment and rise in trans-
action costs were observed. A decrease in the endowment of skilled labour reduces
the production in service sector and increases the production of the manufactured
commodity. The results are reversed when the endowment of unskilled labour
decreases. An increase in transaction produces unfair outcome from the perspective
of income distribution. In this context it becomes imperative to mention that, the
construction of the three-sector general equilibrium framework is not new, and that
the effects of the COVID-19 pandemic cannot be reduced to just a supply shock.
COVID-19 has elements of both supply shock and demand shock, but in this article,
we address supply side dimensions of COVID shock in conjunction with the effects
of lockdown. In addition, we also demonstrate the robustness of our results to an
alternate assumption on the structure of the model.
Original Article
Foreign Trade Review
59(3) 347–368, 2024
© 2023 Indian Institute of
Foreign Trade
Article reuse guidelines:
in.sagepub.com/journals-permissions-india
DOI: 10.1177/00157325231158840
journals.sagepub.com/home/ftr
1 Department of Economics, University of Calcutta, Kolkata, West Bengal, India
2 Department of Economics, St. Xavier’s College (Autonomous), Kolkata, West Bengal, India
Corresponding author:
Asmita Das, Department of Economics, University of Calcutta, Kolkata, West Bengal 700073, India.
E-mail: asmitatitlidas@gmail.com
348 Foreign Trade Review 59(3)
JEL Codes: D50, F66, J31
Keywords
General equilibrium, wage inequality, globalisation, capital account liberalisation,
COVID-19
Introduction
Globalisation has generated different opportunities for developing countries to close
the gap with the richer countries (Bukhari & Munir, 2016). International movement
of commodities and labour and free flow of knowledge facilitate this process of
global integration. Liberalisation entails the elimination of protection of domestic
industries, as well as the integration of both the domestic and the global market. The
implementation of liberalisation policies in developing countries, however, has
adversely impacted the income distribution situation because of the significant rise
in income inequality in these countries. In this article, our main concern is income
inequality in developing countries. Income inequality is just not the skilled–unskilled
wage gap, but it also captures the income distribution within different sections of the
economy. Analysis of wage gap in developing economies is critical because reduced
inequality shows that the economy is moving towards a system with a set of institu-
tional arrangements that can lower wage inequality.
Given this backdrop, we make a theoretical attempt to address these issues in
terms of a three-sector general equilibrium model that accounts for some specific
features of a small developing economy. We use this structure to analyse how dif-
ferent measures of liberalisation like, service-led growth, reduction of tariff in the
manufacturing sector which is import competing, agricultural trade liberalisation
and capital account liberalisation, and inclusive growth measures like land aug-
menting technological progress in the agricultural sector, affect the performance
of the various sectors in an economy, the skilled–unskilled wage gap, income
distribution and aggregate welfare of the economy. We also analyse the effects of
COVID-19 as adverse supply shocks like decline in endowment of skilled and
unskilled labour and increase in transaction costs.
Although there is evidence that globalisation and inequality are increasing at the
same time in most emerging nations, establishing a causal link between the two
trends has been difficult (Goldberg & Pavnick, 2007). Moreover, trade causes
income inequality but is not entirely responsible for the same. Efforts undertaken by
economists over the years, has led to the creation of extensive literature in this con-
text. These works do not always echo the same ideas but explain the basic relation.
The unexplained aspect regarding this topic attracts further research. Our article
also investigates the premises of this relationship between trade openness and
income inequality in a developing economy. We consider a few of them relevant
to our article. Chakrabarti (2000) finds that increased trade involvement considera-
bly lowers income disparity. There is no substantial negative association found
between trade and inequality since nations with more equitable income distributions
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