Equity and Trade Policy

Joseph Francois and Hugo Rojas-Romagosa

No 20070501, IIDE Discussion Papers from Institue for International and Development Economics

Abstract: We develop a dual approach to analyzing general equilibrium relationships between trade policy and household (as distinct from functional) income distribution, highlighting how general equilibrium distributional aspects of social welfare related to import protection may be examined alongside corresponding efficiency aspects in a dual framework. This includes the introduction of a social welfare function into the dual GE system that is explicitly separable between mean income and income dispersion. This then follows through to the government ob jective function. For government, this is manifested not only in special interest politics, but also through the direct impact of inequality on a governmentÕs ob jective function. We find that equity considerations may serve to counter lobbying interests in both capital-rich and capital-poor countries, though with an opposite marginal impact on the final policy outcome. We also identify a protectionist bias on the part of welfare maximizing governments in capital-rich countries. Our dual framework also offers a possible empirical framework for decomposition of policy-induced price changes into household inequality for a broad class of models.

Keywords: Trade and inequality; Sen welfare functions; duality; political economy of equity (search for similar items in EconPapers)
JEL-codes: D31 D72 F13 O15 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2007-05
New Economics Papers: this item is included in nep-dev, nep-int and nep-pol
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