Welfare gains from trade openness are dependent on whether trade results in a reallocation of resources towards or away from distorted sectors
Read “The role of trade in economic development” by David Atkin and Dave Donaldson here.
The question of whether trade helps or hinders economic development is a mainstay of economic debate. In this VoxDevTalk, David Atkin discusses his work with Dave Donaldson in which they evaluate the conditions through which openness to trade can increase aggregate welfare in developing countries. Their study builds on existing literature to focus on the departures from efficiency (distortions) and market failures that are most relevant to developing countries, including domestic taxation, crime, mark-ups, costly credit, tariffs, and weak regulatory environments. They quantify and measure the extent to which trade may ameliorate or exacerbate these distortions, which distortions are most critical, and how they may impact aggregate welfare. The study finds that the welfare gains from trade openness are dependent on whether trade results in a reallocation of resources towards or away from distorted sectors as well as changes in the magnitude or distribution of the distortions themselves.