Trade, Poverty, and Inequality in India

Trade, Poverty, and Inequality in India
Name:
Institutional Affiliation:
Course:
Instructor:
Date:
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 theor...