Gains from trade

Standard trade theory recognizes that free trade raises aggregate productivity but also has distributional consequences; the problem is to identify those who have lost out


Photo: Bloomberg
Photo: Bloomberg

You know the world has changed when senior International Monetary Fund (IMF) officials draw attention to not just the benefits but also the costs of globalization. In the latest issue of the IMF’s quarterly journal, first deputy managing director David Lipton and chief economist Maurice Obstfeld have written in separate articles that trade increases productivity but the gains of this are not distributed equally. They call for redistributive policies to help those who have lost out.

Standard trade theory does recognize that free trade raises aggregate productivity but also has distributional consequences. The problem is to identify those who have lost out—not an easy task. How can policymakers know whether a worker has lost out because of trade or technology? The IMF has changed course on several issues since the North Atlantic financial crisis: on capital controls, fiscal stimulus and incomes policy. Such a deep rethink is welcome. The only issue is that it took pain in the developed world before the IMF re-examined its policy mantras.

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