Should-Read: Jeffrey Frankel: Does Trade Fuel Inequality?

Should-Read: Why hasn’t globalization reduced inequality in emerging markets over the past generation? Jeffrey Frankel wants to say that it is because the HO-SS theory is misleading and unhelpful for inequality issues. I think that is not right. HO-SS says economic integration will reduce inequality if it raises the relative demand for factors of production controlled by the poor. But the most important shift in relative factor abundance has been the ability to plug yourself into the world economy: that is controlled by the rich in emerging markets, and that has become much much scarcer relative to demand: Jeffrey Frankel: Does Trade Fuel Inequality?: “Trade has been among the most powerful drivers of… the convergence between the developed and developing worlds…

…The HO-SS theory, which dominated international economic thinking from the 1950s through 1970s, predicted that international trade would benefit the abundant factor of production (in rich countries, the owners of capital) and hurt the scarce factor of production (in rich countries, unskilled labor)…. Then… Paul Krugman and Elhanan Helpman introduced… imperfect competition and increasing returns… Marc Melitz… shift[ing] resources from low-productivity to high-productivity firms…. Not all of the HO-SS theory’s predictions have come true…. Pinelopi Goldberg and Nina Pavcnik…. “There is overwhelming evidence,” they write, “that less-skilled workers in developing countries “are generally not better off, at least not relative to workers with higher skill or education levels.”… Ten years later, inequality continues to worsen within developing countries, including the so-called BRICS…. This does not mean that the forces described by the HO-SS theory are irrelevant. But there is clearly more to current inequality trends than trade…. Inequality is clearly a serious problem that merits political attention. But focusing on trade is not the way to resolve it…