Trade liberalization, export quality, and three dimensions of wage inequality*

• Published date: 01 November 2021
• Author: Shrimoyee Ganguly,Rajat Acharyya
• Date: 01 November 2021
• DOI: http://doi.org/10.1111/rode.12808

Rev Dev Econ. 2021;25:2157–2179. wileyonlinelibrary.com/journal/rode

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2157

© 2021 John Wiley & Sons Ltd

Received: 11 April 2020

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Revised: 24 February 2021

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Accepted: 10 June 2021

DOI: 10.1111/rode.12808

REGULAR ARTICLE

Trade liberalization, export quality, and three

dimensions of wage inequality*

ShrimoyeeGanguly

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RajatAcharyya

*An earlier version of this paper was presented at the Annual Conference on Economic Growth and Development at the

Indian Statistical Institute, Delhi (December 2019).

Department of Economics, Jadavpur

University, Kolkata, India

Correspondence

Shrimoyee Ganguly, Department of

Economics, Jadavpur University, Kolkata,

India.

Emails: sssganguly@gmail.com;

shrimoyeeganguly.rs@jadavpuruniversity.

in

Funding information

Travel support from the Government

of India under the RUSA 2.0 program

for Economics Department, Jadavpur

University, is gratefully acknowledged.

Abstract

In the context of quality content of export baskets becoming

the most important determinant of export growth for devel-

oping countries, we show that reduction in tariff on final

import goods asymmetrically affects the quality of skill-

based export goods that differ with respect to the relative

skill intensity of their higher- quality varieties. This offers

a plausible explanation for asymmetric quality variations

across product groups observed for Brazil and India since

the 1980s. On the contrary, tariff- reduction- induced quality

variations, regardless of their asymmetry, accentuate wage

inequality in all dimensions by depressing the informal un-

skilled wage through displacement of unskilled workers

from the formal sector and the consequent informalization

of the economy. This suggests that tariff reductions accen-

tuating wage inequality, as shown in the existing literature,

may be underestimated if induced variations in the qual-

ity of export goods are unaccounted for. A quality- content

production subsidy or a subsidy targeting the use of skilled

labor, given to producers of the export good whose qual-

ity is downgraded as a consequence of tariff reduction, can

be used as a concurrent policy to mitigate such effect. The

wage inequality will also decline to some extent following

such subsidies. A proportional factor income tax may be a

quality- neutral way to finance the subsidies.

2158

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GANGULY ANd ACHARYYA

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INTRODUCTION

Over the past decade there has been a paradigm shift in export- promoting strategies of a large number

of developing countries that have adopted outward- oriented development policies since the 1990s.

Such paradigm shift has been motivated largely by recent empirical observations, suggesting that

export- led growth is stronger for countries that not only have export baskets well diversified but also

contain high- quality goods (Agosin,2007; Hausman et al., 2007; Hesse,2008; Rodrik,2006).1 These

observations on the relationship between export and growth have both demand and supply dimen-

sions. On the demand side, with the increase in their incomes, buyers in richer countries are now

preferring higher- quality goods than inexpensive low- quality varieties. Cross- country estimates of

Hallak (2006), for example, reveal that rich countries import relatively more from countries producing

high- quality goods. On the supply side, the exports of most of the developing countries are charac-

terized by low quality. Schott (2004), for example, found that export unit values, which are used as

proxy for quality of exports, increase systematically with per- capita income and relative endowments

of physical and human capital of the exporting countries. Even the developing countries like Brazil,

China, India, and South Africa, which have well- diversified export baskets, are no exceptions to this

low- quality phenomenon. The availability of specific types of skilled labor has made these countries

exporters of skill- based products like chemicals, software, office equipment, transport equipment,

and scientific instruments, alongside low- skill or unskilled- intensive products like agricultural goods,

cotton textiles, and leather manufacture. But, despite such diverse export patterns, the low quality

of skill- based goods is severely constraining their export prospects in the advanced richer countries

(Baldwin & Harrigan,2011; Hallak,2006; Manova & Zhang,2012; Sutton,2001). As the developing

countries face this quality constraint on export growth, quality upgrading and product innovation

have become the primary focus of export- promotion strategies in these countries and in many other

outward- oriented countries.

Since the late 1980s many developing countries, including India, have implemented a host of trade

reforms, primarily significant reductions in import tariff rates, as part of their globalization efforts

and subsequently for meeting the requirements for accession to the World Trade Organization (WTO)

membership. Such liberal trade policies are often conceived of as indirect export- promotion strate-

gies by shifting scarce resources from the erstwhile- protected import- competing sectors to the export

sectors and thereby increasing export volumes. But, in the aforementioned context of quality content

of export baskets becoming the most important determinant of export growth and export- led g rowth,

the more pertinent issue that arises is whether tariff reductions can incentivize quality upgrading of

exports, without which these policies can hardly promote exports. The issue also gains relevance in the

face of strong and robust evidence on more intensive use of domestic inputs like skilled labor and capi-

tal in producing higher- quality export goods (Brambilla et al.,2012, 2014; Brambilla & Porto,2016),2

in contrast to quality upgrading requiring more intensive use of high- quality imported input. In such a

context, if tariff reductions increase the cost of these scarce domestic inputs through their reallocation

KEYWORDS

export quality, informalization, subsidies, tariff reduction, wage

inequality

JEL CLASSIFICATION

F16; J31; J4