The Third World and Relative Gains from Global Trade: An Empirical Comparative Analysis of Developed Versus Developing Countries

I. Introduction

Proponents of free trade theory and trade liberalization maintain that despite drawbacks, the distribution of gains from trade is a win-win for all countries. In particular, developing countries that opt for trade openness are most likely to benefit, to generate growth, to experience a rise in standard of living and to create jobs.¹ For instance, in developing countries that are most open to foreign trade, the so-called “new globalizers,” nearly 120 million people have risen above the ranks of absolute poverty, and an impressive 13% decline in poverty rates has been observed. This is partly due to the competitive advantages in the manufacturing sector the developing countries have realized as a result of trade liberalization.² However, critics of free trade argue that the gains from international trade disproportionately accrue to the developed countries, often at the expense of developing states. The Economics Online, a leading digital sources for economic scholars, has noted that “trade can lead to over-specialization, with workers at risk of losing their jobs should world demand fall or when goods for domestic consumption can be produced more cheaply abroad. Jobs lost through such changes causes, at least in the short run, severe structural unemployment.”³ Since adjusting to these structural imbalances takes years and because developing states have a weak social safety net, massive numbers of workers and the working age population at large suffer in the interim.⁴

Existing literature offers rich theoretical analysis, and substantial global estimates of gains from trade.⁵ What is often lacking in the existing body of literature, though, is a broad-based cross-section time series study that empirically maps the relative gains from trade liberalization on a comparative basis across two large groups of countries:

DCs and LDCs. The study attempts to address this gap and in the process re-examine the competing theoretical perspectives, cited above, with help from fresh empirical evidence.

Accordingly, the central objective of this study is to address the following question: how are gains from trade liberalization distributed across DCs and LDCs? Put differently, has trade liberalization benefited both DCs and LDCs, or do gains from trade liberalization disproportionately accrue to one group? To answer the question, this study will obtain data that offer an empirical profile of the consequences of trade liberalization. To measure the distribution of gains from trade liberalization, or the consequences of international trade openness, we identify trends and the magnitudes of change in key factors like total income, per capita income, and net per capita income. In the interest of accuracy and consistency and to facilitate comparative analysis, we group countries into DCs and LDCs, a classification that is also used by the International Monetary Fund and World Bank, and the United Nations. Typically, these institutions divide countries into broad categories: DC (Developed Countries) and LDC (Less Developed Country), based on a set of characteristics, including Gross National Product (GNP) per capita, level of unemployment, literacy rates, energy consumption, unemployment, communications and physical infrastructure.⁶

This rest of the paper is organized as follows: A brief literature review clarifies the theoretical foundation of competing interpretations regarding the cost and benefit of international trade. Our main goal, however, is to explain how this study effectively bridges a gap in extant knowledge. Next, we present an overview of the study methodology. Thereafter, the paper focuses on the core objective: to quantitatively profile the economic consequences of trade liberalization using several key and widely acknowledged metrics. These include GDP growth, per capita income, and in particular, inflation-adjusted net per capita income, which account for the real rise in living standards in relation to trade liberalization. This section is followed by a summary of the findings. Finally, we highlight the theoretical and practical implications of the study.

Note that this study does not aim to measure the magnitude of trade liberalization or the degree of integration into the world economy for the two groups: DCs and LDCs. However, in order to best highlight the core theme, a brief...