Distribution of income is a result of simultaneous operation of several factors including the following:
1. The extent to which product and factor markets of the trading countries are competitive.
2. The comparative size of the trading economies.
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3. Effect of trade and shift in patterns of production on productivity of labour and capital in the two countries.
4. Pattern of ownership of factors of production.
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5. The institutional set up in the trading economies.
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6. Fiscal, monetary and other economic and social policies pursued by the authorities, and so on.
It should also be noted that models built for studying the effect of trade on income distribution are highly simplistic and far removed from reality.
The logic used by such models should therefore be considered as nothing but indicators of various possibilities. The reality is further complicated by the fact that a modern economy possesses not two but several factors of production; all of them are not fully employed; and there is a continuous change in production technology, institutional framework, and other relevant causal forces. Therefore, the long run impact of trade on income distribution is bound to the different from the short term one.
Several Possibilities:
Depending upon a host of causal forces, actual impact of trade on distribution of income can take several possible courses. Here, we shall mention only some of these, and would confine ourselves to only the labour-abundant country.
(i) Wage and Non-Wage Incomes:
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There is a strong possibility that when trade opens, wage rate relative to rate of interest would increase in a labour- abundant country. However, this inference is subject to some qualifications.
a. Though there will be an increase in the absolute total of wage income, it need not be accompanied by a reduction in interest income.
b. Not all categories of labour would be employed in the export sector. Therefore, while labour employed in the export sector will gain, labour employed in rest of the economy may not—it may even lose.
The net result depends upon several interacting forces including mobility of labour between alternative employments and labour laws of the country.
For example, it is possible that when trade opens, employers in the export sector may try to switch over to less labour-intensive techniques due to restrictive labour law?
As an example, for a very long period, Indian official policy encouraged use of capital-intensive technology (i) by providing tax incentives on capital investment and (ii) restricting the employers’ freedom in employing and removing their employees.
c. In most cases, official trade policy encourages exports on a selective basis. Consequently, workers employed in these industries are likely to gain more than others.
d. For encouraging certain exports, the authorities may also provide incentives in the form of concessional credit and lower taxes. Such a policy may be desirable in itself, but it encourages an over-use of capital and, therefore, an increase in the absolute income of capital owners.
e. Distribution of income at the household and individual levels does not depend only upon the respective rates at which factors of production are paid. It equally depends upon the ownership of the means of production. When capital and landed properties are concentrated in few, hands, income inequalities tend to persist.
f. Western authors generally assume that workers do not own any capital and therefore a reduction in interest rate leads to a fall in the income levels of only the capitalist (richer) sections.
This assumption, however, is more likely to be true in developing countries than in developed ones. It means to say that in developed countries, working classes have come to own a part of means of production and, therefore, when earnings of capital decrease, their incomes also register a decline.
g. It is also wrong to assume perfect mobility of labour between alternative employments even within the same country. This is because, like machinery and equipment, labour is also highly differentiated and specific.
Its supply cannot adjust itself quickly and effectively to changing demand pattern. As a result; while some sections of labour gain, others tend to lose.
(ii) Long Term Impact:
It should also be noted that long-term impact of trade on income distribution is more difficult to predict. This is because dynamism is an inherent feature of a modem economy.
Its population tastes and preferences are continuously undergoing a change. The process of its economic growth is accompanied with an ongoing transformation of its institutional set up, factor endowment and technology. Modern economies and their policies are also interlinked and interdependent.
(iii) Cost of Living and Quality of Life:
Another difficult but highly relevant aspect of income distribution is the impact of trade on the cost of living and quality of life of different sections of the community.
It is possible, for example, that while some sections earn more, their cost of living also goes up and their quality of life deteriorates. For example, economic growth (whether caused by trade or otherwise) is generally accompanied by concentration of population in urban areas.
And this, in turn, has its own ill-effects like slums, congestion, pollution, additional resource cost on roads, means of transport and commutation, and so on. All this tends to increase basic cost of living and cuts back on quality of life.