Monday, May 19, 2008

Free Trade, Inequality and Poverty

With what appears to be rather unfavorable trade winds coming from the Americans, it would be useful to consider the impact of trade on American poverty (the impact of trade on poverty in developing countries not generally being in dispute). From Freakonomics:

When people talk about inequality, they tend to focus exclusively on the income part of the equation. According to all our measures, the gap in income between the rich and the poor has been growing. What Broda and Romalis quite convincingly demonstrate, however, is that the prices of goods that poor people tend to consume have fallen sharply relative to the prices of goods that rich people consume. Consequently, when you measure the true buying power of the rich and the poor, inequality grew only one-third as fast as economists previously thought it did — or maybe didn’t grow at all.
And that's thanks to free trade and globalization (New Yorker, h/t Economist):
The very people who suffer most from free trade are often, paradoxically, among its biggest beneficiaries. The reason for this is simple: free trade with poorer countries has a huge positive impact on the buying power of middle- and lower-income consumers—a much bigger impact than it does on the buying power of wealthier consumers. The less you make, the bigger the percentage of your spending that goes to manufactured goods—clothes, shoes, and the like—whose prices are often directly affected by free trade. The wealthier you are, the more you tend to spend on services—education, leisure, and so on—that are less subject to competition from abroad.
Of course the key reasons that the Economist suggests for the fears over trade don't much have to do with liberalization at all: "One source of trade-related angst is that America's educational system has done a poor job shifting workers toward industries that have done best at capturing the gains from liberalisation." Unfortunately, as the Wall Street Journal suggests, this time may be different if Obama becomes President. Unlike previous Democrats he may not be able to rely on an ability to say one thing and do another - in this case, promote free trade to the benefit of the poor both abroad and at home.

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