Globalization and developing countries: introduction

Citation

Mitra, D. and Ranjan, P. (2013), "Globalization and developing countries: introduction", Indian Growth and Development Review, Vol. 6 No. 1. https://doi.org/10.1108/igdr.2013.35006aaa.001

Globalization and developing countries: introduction

Article Type: Guest editorial From: Indian Growth and Development Review, Volume 6, Issue 1

This special issue of the Indian Growth and Development Review on “Globalization and developing countries” consists of seven articles on fairly diverse issues. Our call for papers covered all aspects of economic globalization, namely international trade including offshoring, international factor mobility (migration and capital mobility including FDI) and their impact on welfare, factor incomes, income distribution, employment and institutions in developing countries. We were open to receiving and considering for publication both theoretical and empirical pieces which would span research articles, policy-oriented think pieces, analytical survey papers, and writings on pedagogy. The set of papers finally appearing in this special issue consists of those on the comparison of economic reforms and growth experiences of China and India, the cross-country determinants of service exports with a focus on India, the relationship between trade and technology upgrading, the relationship between international trade and “inclusive growth”, trade and wage and income inequality and finally the impact of trade on child labor. All papers we received first went through a preliminary screening by us (the guest editors). If the paper passed the first round of screening, it went through a regular refereeing process. As guest editors, based on inputs from referees, we made the decision regarding accepting, rejecting or offering the opportunity to revise and resubmit.

The first article in this special issue is by Arvind Panagariya and Asha Sundaram. The authors look at the reform experiences of China and India, the two largest and the fastest growing emerging economies of the world. The authors argue that economic growth in these two giant economies has been fueled by economic reforms, primarily through what the authors call “external liberalization.” While India has had some deep trade reforms during the last two decades (the last few years being the exception), China has been ahead of India in this respect. It is only in the 1990s and 2000s that India has considerably closed the gap. However, India still remains quite a bit behind China in merchandise exports (both in levels and growth rates) and in foreign direct investment. While both countries have similar factor endowments, unlike China, India does not specialize and export and import according to its comparative advantage. Production and exports have been more capital intensive in India than what one would expect at its level of development. The authors attribute this feature of the Indian economy to poor infrastructure and stringent labor regulations (that make it hard for employers to fire workers and therefore, lead to a reluctance in hiring them). In addition, they also discuss the recent policy paralysis that has prevented the launch of some important second-stage reforms. However, for many reasons discussed in their paper, the authors remain optimistic about the Indian economy. They believe that after the somewhat slower growth in the last two years, the economy will turn around and in the long run do much better. They are, however, against India’s recent tendency to overuse antidumping policies and to sign preferential trading arrangements (as opposed to unilateral trade liberalization or a multilateral approach), especially with small countries.

The next article in this special issue by Barry Eichengreen and Poonam Gupta is on the important topic of trade in services, with their focus being on India. Despite the fact that a large proportion of any country’s GDP comes from services, empirical trade economists have traditionally focused their energies on studying the volumes and patterns of trade in goods only. This was mainly due to the fact that services were by and large non-tradable. However, due to recent advancements in telecommunication technology many more services have become tradable, and as a consequence, the share of services in international trade has increased significantly over the last couple of decades.

In their paper, Eichengreen and Gupta study the determinants of trade in services using a cross-country data set. Among the key determinants of a country’s comparative advantage in tradable services are its level of development as measured by per capita income, telecommunication infrastructure, inward FDI, and merchandise trade. Even though they use cross-country data, the focus of their paper is the case of India which has performed much better with regard to service exports compared to merchandise exports. Their dummy for India is significant in the cross-country regressions suggesting that India is a definite outlier when it comes to service exports. The authors provide a rich historical background of the evolution of India’s services sector. They also provide a detailed discussion of the policies undertaken in the 1980s and 1990s which may have contributed to the takeoff of the service sector in India.

Our special issue next focuses on the impact of globalization on economic development. This topic is of great interest to academics and policymakers, particularly in developing countries. One of the channels through which globalization can affect economic development is by allowing countries to upgrade their technology and enhance productivity. In their paper in this special issue, Jesse Mora and Nirvikar Singh try to understand the role of trade in technology upgrading and its impact on GDP per capita. Using a time series data from ten Asian countries they study the evolution of their export and import patterns and how they correlate with the growth in their per capita incomes as well as FDI flows. In particular, following Hausmann et al. (2007) they construct an index of sophistication of a country’s export basket, separately for intermediate goods and non-intermediate goods. This index is based on the idea that if a good is exported more by a rich country it embodies its higher productivity and therefore, is more sophisticated. They extend this methodology to constructing an index of the sophistication of imports as well. Among the notable results, they find a positive correlation between the sophistication of non-intermediate good exports and GDP per capita. On the import front, however, the correlation between the sophistication of intermediate imports and GDP per capita is stronger, suggesting the importance of intermediate imports in technology upgrading. That is, countries that have increased the sophistication of their intermediate goods imports have also become richer. It also suggests that imports of sophisticated intermediates may increase the sophistication of exports of non-intermediates. Looking at the role of FDI, they find that it is strongly positively associated with the sophistication of exports but not to that extent with that of imports.

We next move to some papers on trade, income distribution and the inclusiveness of trade-generated growth. We know that the literature on the impact of international trade on growth is very extensive and is an area that has attracted some of the best minds. However, a more pertinent development question today is whether the growth generated by trade is “inclusive” or not. Even though to many of us “inclusive growth” refers to the kind of growth that does not make inequality worse and is at the same time poverty reducing, the recent definitions of inclusive growth emphasize the creation of productive job opportunities across a wide spectrum of households and firms. Daniel Lederman provides us with a framework for welfare analysis at the household and firm levels, based on the “dual” approach. This framework is intended to help policy analysts think about related policy issues.

Lederman discusses the positive impact of trade liberalization on the welfare of net consumers of imported products through a reduction in their prices. He also emphasizes the possible effects of trade on income sources, taking into account adjustment costs and skills. In this context, he emphasizes the role of adjustment assistance and education policy. Next, Lederman argues that the analysis of the impact of trade reforms on the profitability of firms should go much beyond looking at changes in output prices caused by trade liberalization. The impact on prices of factor and non-factor inputs and on productivity should be taken into account. This would mean incorporating scale effects and innovation into the analysis. Finally, Lederman discusses the availability of data for studying the channels mentioned above as well as the policy issues related to this analysis.

The article by Prachi Mishra and Deb Kusum Das in this special issue is on the related topic of trade and wage inequality. The vast empirical literature on trade and wage inequality has been somewhat inconclusive in that different results have been obtained for different countries and over different time spans. The standard approach has been to look at skilled and unskilled (or high-skilled and low-skilled) labor, often proxied in the data by nonproduction and production workers, respectively. Mishra and Das follow a different approach to study wage inequality in India using employment-unemployment survey data from the National Sample Survey Organization (NSSO). For each three-digit industry they partition the sample of workers they study into high-, low- and medium-skilled workers, who are, respectively, those with only primary education, with middle to secondary education and with higher-secondary education or higher. To study the impact of trade liberalization on the wages of these three skill classes, the authors use “mandated wage regressions.” These regressions estimate zero profit conditions where percentage changes in domestic prices or tariffs are regressed on factor shares. The coefficients of these factor shares give us the percentage changes in the respective factor prices.

For the period 1987-2000, Mishra and Das find that the wage rate of medium-skilled workers is estimated to have increased by 37 percent, while in the case of low-skilled workers their wage rate has fallen by 28 percent and there is a 19 percent fall in the case of high-skilled workers. In other words, the relative wage of medium-skilled workers relative to high-skilled workers has risen. This result, as explained by the authors, is consistent with the Stolper-Samuelson theorem as relative to high-skilled workers India is abundant in medium-skilled workers. The result, that the wages of medium-skilled workers relative to low-skilled workers have also risen, seems to be a puzzle, which is not consistent with the Stolper-Samuelson prediction. However, this empirical result is explained by the authors as the result of the fact that tariffs on the relatively low-skilled labor intensive goods went down much more than on other goods. Thus, this paper shows that dividing workers into just two groups might give us results that are quite hard to explain or generate results showing no change in wage inequality at all.

The next article in this special issue also falls within the broad topic of globalization and inequality. This article by Yiagadeesen Samy and Jean Daudelin argues in favor of combining the standard trade approach with Kuznets’ insights, based on structural change, to study the relationship between growth and inequality. Kuznets has argued that the relationship between per capita real income and inequality is inverse-U shaped. The level of inequality increases with industrialization, which is the key element of the first phase of development. This happens because inequality in industry is higher than in the rest of the economy. According to Kuznets, growth in the next phase, however, is not accompanied by the expansion in the share of the industrial sector. In this second stage of development, Kuznets argues that growth starts trickling down in that we get a rise in the incomes of people in the lower quantiles of the income distribution within the industrial sector. Daudelin and Samy argue that globalization-led growth can destroy this U-shaped relationship. The reason is that in developing countries globalization can reduce the share of industry (in many cases their comparative disadvantage sector) in the economy.

Daudelin and Samy observe that the recent growth driven by globalization has increased income inequality in Asian countries like China and India, contradicting the predictions of a two-factor Heckscher-Ohlin model (where skilled and unskilled labor are the two factors of production). On the other hand, inequality, though still quite high, has been falling in Brazil and many other Latin American countries. They also observe that while globalization and growth have been accompanied by industrialization in Asia, that has not been the case in Latin America. Using census data across more than 5,000 municipalities in Brazil, Daudelin and Samy find that the cross-sectional relationship between inequality and per capita real income has changed between 1991 and 2000 from the standard Kuznets’ inverted-U shape to a U. The authors of this article argue that this change in the shape of the inequality-income relationship is driven by globalization. Globalization has been accompanied by growth in Brazil and at the same time has led to deindustrialization, based on its comparative advantage. Note that the cross-sectional variation seen across districts is being seen as a manifestation of the dynamic variation in the theoretical discussion above, i.e. the various districts are at different points in their development process and in their evolution in response to globalization.

The final paper in this special issue is on the controversial issue of the consequence of globalization for child labor. As we know quite well, the jury is still out on the subject of international trade and child labor. The theoretical papers on the relationship between trade liberalization and child labor find offsetting forces leaving the net result theoretically ambiguous. This makes it imperative to resolve the issue empirically. Eugene Beaulieu and Debayan Pakrashi contribute to this literature by studying the importance of WTO membership in determining the incidence of child labor. Using a panel data set of 94 countries between 1980 and 1999, they find that the incidence of child labor decreases after a country’s accession to the WTO. Interestingly, the relationship survives even after controlling for the volume of trade. Also, the volume of trade itself is not significantly related to the incidence of child labor. This raises an interesting puzzle. If the WTO membership does not affect child labor through increasing the volume of trade, then what is the mechanism through which this happens? The authors provide some conjectures.

Thus, we have articles on several interesting topics related to globalization and development in this special issue. We are happy that quite a few well-known scholars in the fields of International Economics and Development Economics have contributed. We thank several anonymous referees for their timely and detailed reviews, without which we would not have been able to come out with this special issue. We thank Sarah Roughley at Emerald for help at every step in the preparation of this issue. And finally, we thank Professor Satya Das and Professor Chetan Ghate for inviting us to edit this special issue.

Devashish Mitra, Priya RanjanGuest Editors