Economic Liberalization, Distribution and Poverty

Economic Liberalization, Distribution and Poverty

Latin America in the 1990s

Edited by Rob Vos, Lance Taylor and Ricardo Paes de Barros

Since the late 1980s, almost all Latin American countries have undergone a series of far-reaching economic reforms, particularly in the areas of financial and capital account liberalization and trade. This book provides a comparative and analytical framework for assessing the impact of these reforms upon 16 countries in Latin America and the Caribbean, including: Argentina, Brazil, Chile, Colombia, Ecuador, El Salvador, Mexico, and Peru.

Chapter 2: Labour market adjustment, poverty and inequality during liberalization

Enrique Ganuza, Ricardo Paes de Barros and Rob Vos

Subjects: development studies, development economics, economics and finance, development economics

Extract

2. Labour market adjustment, poverty and inequality during liberalization Enrique Ganuza, Ricardo Paes de Barros and Rob Vos 2.1 INTRODUCTION Trade and financial liberalization aims at improving economic efficiency and is thus expected to promote growth. In developing countries, economic growth is seen as a pivotal mechanism to reduce poverty. Attempts at economic liberalization are rarely justified when it comes to obtaining a more equitable income distribution. However, the traditional theory of international trade predicts through the Stolper–Samuelson theorem that trade liberalization improves income distribution, since remuneration of the relatively abundant productive factor (assuming this is unskilled labour) should improve with respect to the scarce factor (say, capital and/or skilled labour). Several recent empirical studies have found an opposite trend, that is, inequality between labour and other factors seems to have increased in favour of skilled workers and capital income in many parts of the world, and most particularly in Latin America and the Caribbean (see Chapter 1). This difference between theory and practice has been explained by several factors, one of which is that in the 1980s, and especially the 1990s, many developing countries embarked upon macroeconomic adjustment processes and started a wide range of drastic economic reforms, trade liberalization being only one of them. As discussed in Chapter 1, the effects of balance of payment capital account liberalization on poverty and income distribution are not very clear. These effects seem to be heavily influenced by the degree of access to capital inflows and...

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