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Globalisation, COVID-19 and Income Distribution: A Theoretical Evaluation

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  • Asmita Das
  • Damayanti Sau
  • Ranjanendra Narayan Nag

Abstract

The article makes a theoretical attempt to explain how different interconnected measures of globalisation—service led growth, tariff reform, agricultural trade liberalisation and capital account liberalisation—affect the skilled–unskilled wage disparity, sector-wise performance, income distribution and aggregate welfare of the economy. We pay attention to land augmenting technological progress as an essential ingredient of inclusive growth and discuss effects of COVID-19 as a supply shock. In so-doing, we construct a three-sector general equilibrium framework with an export-oriented service sector, a tariff-protected import competing manufacturing sector and an export-oriented traded agricultural sector. We find that service-led growth and tariff liberalisation shifts the income distribution in favour of the landed gentry and skilled labour. Agricultural trade liberalisation and capital account liberalisation also debilitate the income distribution. Land augmenting technological progress adversely impacts the manufacturing sector but benefits the other sectors. Following the outbreak of the pandemic, a fall in labour endowment and rise in transaction costs were observed. A decrease in the endowment of skilled labour reduces the production in service sector and increases the production of the manufactured commodity. The results are reversed when the endowment of unskilled labour decreases. An increase in transaction produces unfair outcome from the perspective of income distribution. In this context it becomes imperative to mention that, the construction of the three-sector general equilibrium framework is not new, and that the effects of the COVID-19 pandemic cannot be reduced to just a supply shock. COVID-19 has elements of both supply shock and demand shock, but in this article, we address supply side dimensions of COVID shock in conjunction with the effects of lockdown. In addition, we also demonstrate the robustness of our results to an alternate assumption on the structure of the model. JEL Codes: D50, F66, J31

Suggested Citation

  • Asmita Das & Damayanti Sau & Ranjanendra Narayan Nag, 2024. "Globalisation, COVID-19 and Income Distribution: A Theoretical Evaluation," Foreign Trade Review, , vol. 59(3), pages 347-368, August.
    • Handle: RePEc:sae:fortra:v:59:y:2024:i:3:p:347-368
    DOI: 10.1177/00157325231158840
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    References listed on IDEAS

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    1. Sushobhan Mahata & Rohan Kanti Khan & Ranjanendra Narayan Nag, 2020. "Economic Recession, Informal Sector and Skilled–Unskilled Wage Disparity in a Developing Economy: A Trade-Theoretical Analysis," Foreign Trade Review, , vol. 55(2), pages 168-188, May.
    2. Yabuuchi, Shigemi & Chaudhuri, Sarbajit, 2007. "International migration of labour and skilled-unskilled wage inequality in a developing economy," Economic Modelling, Elsevier, vol. 24(1), pages 128-137, January.
    3. Pinelopi Koujianou Goldberg & Nina Pavcnik, 2007. "Distributional Effects of Globalization in Developing Countries," Journal of Economic Literature, American Economic Association, vol. 45(1), pages 39-82, March.
    4. Avik Chakrabarti, 2000. "Does Trade Cause Inequality?," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 25(2), pages 1-21, December.
    5. Bukhari, Mahnoor & Munir, Kashif, 2016. "Impact of Globalization on Income Inequality in Selected Asian Countries," MPRA Paper 74248, University Library of Munich, Germany.
    6. Chaudhuri, Sarbajit, 2014. "Do Developing Countries Possess any Built-in Mechanism that Copes with External Terms-of-trade Shocks?," MPRA Paper 57736, University Library of Munich, Germany.
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    More about this item

    Keywords

    General equilibrium; wage inequality; globalisation; capital account liberalisation; COVID-19;
    All these keywords.

    JEL classification:

    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
    • F66 - International Economics - - Economic Impacts of Globalization - - - Labor
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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