Trade (Global Inequality)

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t the pattern of variation in trade performance among countries. We might ask, for example, if low-income countries benefit more (less) from the expansion of world trade than high-income countries and if large low-income countries benefit more (less) than small low-income countries.
There are some reasons to think that low-income economies have more to gain from trade than high-income economies. First, trade should enable the low-income countries to increase the rate of investment through two mechanisms. In so far as there are diminishing returns to factor inputs, trade should induce capital flows from high-income (capital-abundant) to low-income (capital-scarce) countries. Moreover, trade could relax the foreign exchange constraint (27) which limits investment in many developing countries. (28) Second, trade should facilitate technology diffusion ® & D spillovers) thereby reinforcing the Gerschenkronian advantage of low-income countries. (29)
It is also possible to think of circumstances in which large low-income countries have more to gain from trade than small low-income countries. If, for example, trade expands in goods whose production involves increasing returns to scale, then large countries should have an advantage in so far as their large domestic markets facilitate the realisation of scale economies. (30) To the extent that this is so, larger countries can also be expected to attract more foreign capital than smaller countries. It is to be noted in this context that the expansion of trade in the last two decades has basically involved the expansion of trade in manufactures. (31) As increasing returns to scale are much more commonly found in manufacturing than in agriculture or services, it is possible that large low-income countries gained more from the expansion of trade in the last two decades than small low-income countries.
But low-income countries -large and small - may also have more to lose from trade than high-inco...