Employment, Income Distribution and Economic Growth in Seven Small Open Economies

Abstract

[Excerpt] Resurgent interest has been manifested among development economists in trickle-down, i.e., the view that the more rapid the rate of economic growth, the more rapid the improvement in employment and income distribution. Throughout this paper, the term ‘income distribution’ will refer to the location and dispersion of the pattern of incomes, i.e., to ‘absolute incomes and poverty’ and to ‘relative income inequality’. Empirical evidence supports trickle-down in some cases, but the evidence is contrary to trickle-down in others. These data indicate: A high rate of economic growth is neither necessary nor sufficient for inequality to decline. A high rate of economic growth is neither necessary nor sufficient for poverty to decline. Inequality change and poverty change need not go in the same direction in a given country. In particular, poverty may decrease while inequality increases. The evidence in the preceding paragraph makes clear that changes in poverty and inequality depend upon more than the rate of economic growth. A good working hypothesis is that the character of economic growth also matters. While many aspects of the character of economic growth may be explored, the two that I examine in this paper are the trade orientation of a country (whether export- oriented or internally-oriented) and the wage policy pursued (whether public policy promotes market-clearing wage rates or higher-than-market-clearing wages). I contend in this paper that the effects of trade policy and wage policy are interrelated and present evidence from seven small open economies—Barbados, Hong Kong, Jamaica, Korea, Singapore, Taiwan and Trinidad and Tobago—to support this view.