Trade liberalization and income distribution: Three essays with reference to the case of Mexico and the North American Free Trade Agreement (NAFTA)
Abstract (Summary)This dissertation explores the effect of trade liberalization on income distribution under conditions which depart in one or more ways from the Heckscher-Ohlin model. Each essay was written with Mexico in mind, but the results are stated in terms as general as possible. The first essay shows that adding underemployment to a static model of trade liberalization, under the particular specification chosen, creates a buffer against the change in average labor income which would otherwise occur consequent on a change in the terms of trade in the Stolper-Samuelson model. The second essay asserts that in the Mexico/U.S. case a factor intensity reversal may exist between corn and manufactures, so that if the cost of production of corn in Mexico is higher than its cost of production in the U. S. at the prevailing exchange rate (which was true until December 1994), opening up trade should cause the wage-rental ratio to fall in both countries. The third essay applies a Kaldorian model recently formalized by Peter Skott to examine whether trade liberalization will place Mexico on a path to further industrialization or to de-industrialization, where industrialization is defined as increasing non-agricultural employment as a share of the whole labor force. In this dual economy model, a falling wage share of industrial output ordinarily increases the rate of accumulation enough so that sooner or later a process of industrialization takes hold. However, for a range of plausible parameter values a country will fall into a "de-industrialization trap": due to rising agricultural income which is the reservation wage for industrial workers, the profit share of industrial output begins to fall before the industrial sector reaches the point of expansion as a proportion of the labor force. In Mexico, the drastic reduction of the wage share of industrial output effected during the 1980s through devaluation, wage repression and reduced support for agricultural development was necessary to create the conditions for successful long run industrialization. Given the wage reductions required so that trade liberalization would bring long run industrialization, trade liberalization may not have benefited the majority of Mexicans.
School Location:USA - Massachusetts
Source Type:Master's Thesis
Date of Publication:01/01/1995