Trade Liberalization , Poverty and Inequality Nexus : A Case Study of India

Hecksher-Ohlin model predicts that gains to trade should flow to abundant factors, which suggests that in developing countries, unskilled labor would benefit most from trade liberalization. The rising skill-premium in the US is often cited in support of standard trade theory. However, these predictions have been challenged by Cunat and Maffezzoli (2001) and Kremer and Maskin (2003). According to them, trade liberalization could reduce the wages of unskilled labor even in a labor abundant country, thereby widening the gap between the rich and the poor. Moreover, even if global economic integration induces faster economic growth in the long-run and substantial reduction in poverty, the adjustment might be costly with the burden falling disproportionately on the poor (Banergee and Newman 2004). Due to such ambiguity the question of how trade liberalization affects poverty and inequality remains largely an empirical one.