11/18/2015 IGIDR, 2012 Finite Change – Implication for Trade Theory, Policy and Development Sugata Marjit Centre for Studies in Social Sciences Calcutta, India Biswajit Mandal Visva-Bharati University, Santiniketan, India Prepared for Silver Jubilee Celebration Lecture at the IGIDR

11/18/2015 IGIDR, 2012 Finite Change – Implication for Trade Theory, Policy and Development contd… What is Finite Change in Trade Theory? Why it is interesting and of non-trivial consequence? Fundamental and Derived outcomes.

11/18/2015 IGIDR, 2012 Finite Change – Implication for Trade Theory, Policy and Development contd… Fundamental  A Reinterpretation of the Factor Price Equalization result of Samuelson.  Pattern of Specialization and Factor Price Equalization.  Why broader interpretation of HOS theorem may invalidate FPE result under ideal conditions.  Such assertion has close link with the idea of finite change.

11/18/2015 IGIDR, 2012 Finite Change – Implication for Trade Theory, Policy and Development contd… Jones (1974): A small country with potential to produce many goods with two factors – capital (K) and labor (L). As the endowment ratio of a country moves from a high to a low value, pattern of specialization changes. May be through a process of growth, technical progress and accumulation of capital.

11/18/2015 IGIDR, 2012 Finite Change – Implication for Trade Theory, Policy and Development contd…

11/18/2015 IGIDR, 2012 Finite Change – Implication for Trade Theory, Policy and Development contd…

11/18/2015 IGIDR, 2012 Finite Change – Implication for Trade Theory, Policy and Development contd… Consider n goods > m factor case in each country under autarky. Identical technology etc except Endowments (HOS). No factor intensity reversal of any kind. Post Trade: each country specializes in “m” goods. But different sets of “m” goods. FPE will not hold.

11/18/2015 IGIDR, 2012 Finite Change – Implication for Trade Theory, Policy and Development contd… Trade forces finite change. Similarly trade in factors can enforce finite change. Some literature:  Ethier (1985), Jones and Marjit (1992), Choi and Marjit (1998), Findaly and Jones (2000), Marjit and Kar (2005, 2011, 2012), Mandal and Marjit (2012) etc.  Dixit-Stiglitz-Krugman models usually “add” sectors through trade.  More recent – Melitz-Antras-Eaton-Kortum-Helpman etc. argue of productivity shift through exit of bad firms – not closure of activities as such.

11/18/2015 IGIDR, 2012 Finite Change – Implication for Trade Theory, Policy and Development contd… Jones and Marjit (1992)  A closed economy environment where there are n industries and within each industry there are varieties of goods.  Within an industry, there are variety of goods produced using labor and a common type of capital. Thus labor is mobile across industries and within an industry across varieties. Capital is specific to an industry but mobile across varieties within the industry. In a closed economy, positive demands for all goods guarantee positive output for all varieties.  Once we allow for trade: For each industry only one variety will survive or for one of the industries two varieties will survive and the rest will produce only one variety.  Large shocks to the system will lead to vanishing varieties. Thus we shall have either a pure specific factor model or a system where (n-1) sectors will have a specific factor structure and the residual a 2X2 HOS framework.

11/18/2015 IGIDR, 2012 Finite Change – Implication for Trade Theory, Policy and Development contd… Some interesting implications  Findlay-Jones (2000):  What does labor-saving technological progress do to wages?  Trade and labor economists differ, why?  They can agree if trade leads to finite change.

11/18/2015 IGIDR, 2012 Finite Change – Implication for Trade Theory, Policy and Development contd…  Choi - Marjit (1998): Tariff-Quota non-equivalence in competitive models We may let 3 to shut down. But if we wish to protect 3 through a tariff or quota, the outcome may be drastically different – WHY?

11/18/2015 IGIDR, 2012 Finite Change – Implication for Trade Theory, Policy and Development contd…

11/18/2015 IGIDR, 2012 Finite Change – Implication for Trade Theory, Policy and Development contd…  Factor Movement : Marjit and Kar (2005, 2011, 2012) Factor flows and wage-distribution Which sectors survive as factors become internationally mobile. Emigration and capital mobility

11/18/2015 IGIDR, 2012 Finite Change – Implication for Trade Theory, Policy and Development contd… Capital Mobility and Two-sided wage gap (South Vs North) In South, in North. They may specialize in two different subsets (X, Y) in South (Y, Z) in North rises in both countries.

11/18/2015 IGIDR, 2012 Finite Change – Implication for Trade Theory, Policy and Development contd… Argument is intricate in the sense that countries are otherwise similar  Critical point is that the mixed sector has to be labor- intensive, so that can actually raise in the North through viability of Z. In the south exactly opposite happens.  Finite change or large shocks (Jones, 2008) are induced by price changes that lead to closure of sectors/industries.  They may have completely different implications in general equilibrium from situation where we continue to be within the cone of diversification.

11/18/2015 IGIDR, 2012 Finite Change – Implication for Trade Theory, Policy and Development contd…  Capital mobility and Corruption: Mandal and Marjit (2012) Which sector(s) survive (s) as capital becomes internationally mobile. If Z is “labor” intensive implying a low cost share of capital, the cost will exceed and Z will vanish. This is trivially true if This is ensured if the following condition is satisfied

11/18/2015 IGIDR, 2012 Finite Change – Implication for Trade Theory, Policy and Development contd…  Critical problems of growth is continuous adjustments needed to accommodate contracting and vanishing sectors. Comparison of two growth paths done only in terms of the rates is incomplete.  The idea of inclusive or exclusive growth is also related to the idea of finite change.  Jones (2004) we can not move resources so quickly from contracting to expanding sectors, people lose occupations.  Marjit and Kar (2011, OUP) on West Bengal and Maharashtra example. The Informal Sector in Gen.eqm. Does the trick.  Therefore in theory also, the issue of finite change should be far more important than local changes.

11/18/2015 IGIDR, 2012.