Timing of international market openings and shrinking middle‐income class

• Published date: 01 November 2021
• Author: Tatsuya Asami
• Date: 01 November 2021
• DOI: http://doi.org/10.1111/rode.12801

Rev Dev Econ. 2021;25:2275–2297.

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2275

wileyonlinelibrary.com/journal/rode

Received: 22 May 2020

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Revised: 14 April 2021

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Accepted: 15 May 2021

DOI: 10.1111/rode.12801

REGULAR ARTICLE

Timing of international market openings and

shrinking middle- income class

TatsuyaAsami

This is an open access article under the terms of the Creat ive Commo ns Attri bution License, which permits use, distribution and reproduction

in any medium, provided the original work is properly cited.

© 2021 The Authors. Review of Development Economics published by John Wiley & Sons Ltd.

†Present address: Tatsuya Asami, Institute of Social and Economic Research, Osaka University, Ibaraki, Japan.

Graduate School of Economics, Kobe

University, Kobe, Japan

Correspondence

Tatsuya Asami, Graduate School of

Economics, Kobe University, Rokkodai-

cho 2- 1, Nada- ku, Kobe 657- 8501, Japan.

Email: asami@iser.osaka-u.ac.jp

Abstract

This study analyzes the dynamic effects of international

market openings on income distribution in a simple one-

period model with bequest motive individuals. Existing re-

lated studies have discussed this issue in closed or small

open economies by assuming initial differences in wealth

distribution. This study departs from previous studies by as-

suming heterogeneity in ability in terms of skilled labor and

focusing on the bequest (wealth) distribution at the time of

market openings. We show that the impact of market open-

ings depends on the level of economic development. If the

markets open after the economy is well developed, indi-

viduals with middle abilities will get education and work

as skilled labor in the long run. If the market opens before-

hand, however, the individuals will not get education and

their incomes will be equal to the incomes of individuals

with low abilities. This study illustrates that early market

opening may lead to a shrinking of the middle- income class.

KEYWORDS

economic development, education, income distribution, market

opening

JEL CLASSIFICATION

F63; I25; O15

2276

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ASAMI

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INTRODUCTION

How do international market openings (e.g. international trade) affect income distribution within

countries from the viewpoint of economic development? Many studies have analyzed such market

openings and income distribution in dynamic macroeconomic models. A large proportion of these

have focused solely on market openings from steady states. However, market openings sometimes

start before economies reach steady states. For example, Japan achieved rapid economic growth from

1955 to 1973. The Kennedy Round, which promoted international trade,1 took place between 1964

and 1967, when the Japanese economy was still growing fast.

The goal of our study is to analyze the relationship between the timing of international market

openings and income distribution. Japan experienced an international market opening as a result of the

Kennedy Round after the first half of the period of rapid economic growth. At that time, Japan has a

large middle- income class.2 If Japan had experienced the market opening before the beginning of the

rapid economic growth, would this income class have existed?

The timing of market openings determines development levels of economies at the beginning of

market openings. Our study focuses on education as a key component of economic development.3

Furthermore, our study also focuses on credit (borrowing) constraints for education. Brown

etal.(2012) empirically show that financial aid for individuals facing borrowing constraints increases

their educational attainments. Banerjee and Duflo (2008) point out that the middle classes in develop-

ing countries are much poorer than those in developed countries.4 These findings imply that individ-

uals have difficulty in getting education when the economy is less developed and income per capita is

low. If the economy experiences market openings at the low level of economic development, how will

income distribution be affected in the long run?

To examine this research question, our study develops a dynamic model with bequest motive in-

dividuals. This model assumes warm- glow giving as developed by Andreoni (1989). Parents leave

bequests to their children and the children can get education by using these bequests and borrowing.

It is also assumed that individuals are heterogeneous in their ability. If individuals get education, they

can work as skilled labor, and their efficiency units depend on their abilities. In these settings, indi-

viduals with low abilities do not get education, individuals with high abilities get education without

borrowing, and individuals with middle abilities get education with borrowing. We refer to the last

group as the middle- income class since their incomes fall between those of individuals with low and

high abilities.

The market openings we consider are international trade and capital movement. The timing of

market openings especially affects the middle- income class in the long run. If the openings occur after

the economy is well developed, individuals in this class can get education with only small amounts of

borrowing to earn middle incomes, and then their offspring can also earn middle incomes in the long

run. If the openings occur too early, some of them cannot get education and their incomes are equal to

the incomes of individuals with low abilities. They then fall into a poverty trap, and the middle- income

class shrinks.

The paper most relevant to this work is that by Galor and Zeira (1993). They analytically show that

there are multiple steady states in the presence of credit constraints. There are two major differences

between their study and ours. The first is that their analysis focuses only on a small open economy,

but our analysis examines both closed and small open economies. It is necessary to analyze the tran-

sition path of the closed economy for examining the income (wealth) distribution at the beginning of

market openings. This income (wealth) distribution is essential for effectively analyzing the impacts

of the timing of international openings on subsequent income distribution. The second difference is

that their analysis assumes heterogeneity in initial wealth, but our analysis assumes heterogeneity in