Economic liberalisation and income distribution: theory and evidence in Mexico: Gerardo Angeles- Castro
Since the 1980s a number of developing countries, especially in the Meso-south American subcontinent, have adopted an economic model that places special emphasis on market forces. The set of policies involved in this development paradigm can be summarised as deregulation, privatisation, liberalisation of markets, and macroeconomic discipline. This prescription is intended to create preconditions for the expansion of trade and flow of investment across countries and finds theoretical support in familiar neoclassical theory (Jones and Barry, 1988: 30-33; Corden, 1993), which claims that trade, investment, and the market mechanism in general boost growth and facilitate development. Proponents of the model maintain that improvements in income distribution can be achieved for two main reasons. First, emphasis on outward-looking growth fosters exports, employment, and output, and thus provides additional resources for redistribution. Second, economic liberalisation facilitates the operation of market forces and the price mechanism, which allows resources to be allocated more efficiently. The basis for tracing distributional effects of market liberalism in developing countries is the SST (FitzGerald, 1996: 32; Litwin, 1998: 3). Within this twofactor (capital and labour) neoclassical model, liberalisation of foreign trade increases demand for the abundant factor, as exports and imports adjust according to the orthodox principle of comparative advantages, and redirects demand away from the scarce factor. This mechanism increases the return of the factor
which is relatively most used in the export sector and which is also more abundant – this factor is conventionally assumed to be low-wage, unskilled labour in developing countries – and leads towards factor price equalisation; by the same token income distribution improves.