Latin America in the 1990s
Edited by Rob Vos, Lance Taylor and Ricardo Paes de Barros
Chapter 2: Labour market adjustment, poverty and inequality during liberalization
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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