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Journal of Monetary Economics 53 (2006) 911–916

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Discussion

Comment on: ‘‘Globalization, returns toaccumulation and the world distribution of output’’

Jonathan Eaton�

New York University, NY 10003, USA

Received 12 May 2006; accepted 30 May 2006

Available online 12 July 2006

1. Introduction

Paul Beaudry and Fabrice Collard (BC) expose open economies as the culprits behindthe ‘‘twin peaks,’’ the emerging bimodal cross-country distribution of income during1978–1998. They attribute the phenomenon to greater openness interacting with afactor–market distortion.

2. Openness and growth: a look at the numbers

How did the experience of individual countries contribute to BC’s finding? Tables 1 and 2list the 75 countries reported in BC’s Appendix B. Sorting the countries by the opennessmeasure for 1978, I created a group of 38 open and 37 closed economies. The tables reportthe openness measure (OPEN) and GDP per worker (YPW) in 1978 and 1998, and YPWin 1998 relative to its 1978 value (GROWTH). For each group, the countries appear inascending order of 1978 YPW.

I then divided each group into three subgroups with approximately equal numbers ofmembers according to 1978 YPW. Table 3 reports the growth in GDP per worker and inthe openness measure for each subgroup.

Consistent with BC, among the open, income growth was higher among the rich thanamong the poor, with the opposite for the closed group. While growth was only slightlyhigher among the closed poor than among the open poor, removing the Tigers, Malaysia,

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Table 1

Open economies

Country Open 78 YPW 78 Open 98 YPW 98 Growth

Poor

Lesotho 104.7 0.14 134.2 0.11 1.10

Sri Lanka 74.3 0.21 78.4 0.24 1.71

Papua New Guinea 87.4 0.34 95.6 0.21 0.90

Egypt 58.8 0.37 42.6 0.44 1.74

Honduras 75.7 0.38 100.5 0.23 0.91

Botswana 91.1 0.40 68.7 0.69 2.53

Jamaica 77.9 0.43 95.3 0.25 0.86

Guyana 126.2 0.46 204.8 0.30 0.97

Bolivia 67.5 0.49 52.7 0.23 0.68

Malaysia 92.5 0.56 209.4 0.88 2.33

Republic of Korea 61.5 0.61 86.0 1.06 2.54

Taiwan 98.2 0.64 94.6 1.30 3.00

Middle

Panama 92.8 0.66 80.8 0.53 1.19

Fiji 89.7 0.66 130.7 0.48 1.06

Tunisia 69.7 0.67 89.3 0.62 1.37

Nicaragua 65.7 0.71 117.3 0.18 0.38

Cyprus 105.3 0.73 99.5 1.14 2.32

Jordan 115.6 0.74 108.5 0.55 1.10

El Salvador 69.8 0.74 62.2 0.45 0.90

Costa Rica 64.2 0.80 97.2 0.46 0.85

Hong Kong 172.3 0.91 256.1 1.60 2.60

Barbados 126.4 0.98 109.9 1.05 1.59

Singapore 356.5 1.06 290.9 1.44 2.00

South Africa 57.4 1.10 50.6 0.73 0.98

Trinidad and Tobago 83.7 1.25 101.5 0.77 0.92

Rich

Ireland 103.8 1.28 161.8 1.84 2.13

Finland 55.1 1.37 68.8 1.48 1.60

Israel 125.6 1.42 72.5 1.43 1.49

UK 55.2 1.49 54.3 1.43 1.42

Sweden 54.2 1.61 81.1 1.42 1.30

Austria 64.6 1.62 87.7 1.60 1.46

Norway 72.6 1.63 73.0 1.78 1.62

Iceland 68.3 1.64 74.9 1.42 1.28

Denmark 56.3 1.72 68.8 1.60 1.38

Belgium 106.2 1.91 146.1 1.78 1.38

Netherlands 88.6 2.06 116.5 1.64 1.18

Luxembourg 183.1 2.09 235.4 3.09 2.19

Switzerland 64.1 2.11 76.6 1.53 1.07

J. Eaton / Journal of Monetary Economics 53 (2006) 911–916912

Korea, and Taiwan, from the ranks of the open poor lowers their growth factor to 1.27.While this number is much lower it nevertheless exceeds growth among the closed rich.Even with the Tigers removed, BC’s result appears to reflect spectacular growth among theopen rich and the sluggish performance of the closed rich.Note also the trends in openness. It grew in all six groups, but most remarkably among

the closed poor, nearly doubling. (Removing the Tigers from the open poor group lowers

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Table 2

Closed economies

Country Open 78 YPW 78 Open 98 YPW 98 Growth

Poor

China 9.3 0.10 38.4 0.25 3.17

Nepal 26.0 0.13 56.8 0.15 1.52

Mozambique 47.1 0.13 36.8 0.10 0.88

India 13.3 0.17 25.6 0.27 1.91

Bangladesh 17.5 0.20 31.7 0.30 1.89

Pakistan 27.7 0.21 36.5 0.32 1.85

Indonesia 42.7 0.26 96.2 0.41 1.95

Thailand 44.0 0.30 99.7 0.55 2.29

Romania 46.3 0.42 55.0 0.41 1.20

Philippines 45.7 0.49 109.8 0.37 0.94

Dominican Republic 41.5 0.56 69.9 0.68 1.49

Morocco 46.2 0.58 59.8 0.56 1.19

Middle

Syria 46.1 0.61 61.4 0.77 1.56

Turkey 11.9 0.62 52.2 0.73 1.46

Paraguay 40.6 0.69 73.5 0.54 0.97

Guatemala 48.7 0.75 43.9 0.61 1.01

Colombia 30.9 0.77 36.2 0.56 0.91

Ecuador 48.4 0.77 57.4 0.57 0.92

Chile 44.5 0.83 57.8 1.17 1.73

Peru 40.8 0.90 31.8 0.48 0.65

Brazil 14.5 0.92 17.3 0.85 1.13

Iran 45.3 1.03 34.0 0.85 1.02

Uruguay 40.0 1.05 40.5 1.05 1.24

Portugal 45.7 1.12 70.3 1.50 1.67

Namibia 49.4 1.13 100.7 0.66 0.72

Rich

Mexico 23.5 1.27 63.5 1.05 1.02

Japan 20.2 1.35 19.5 1.77 1.61

Argentina 14.3 1.49 23.3 1.29 1.07

Venezuela 51.9 1.53 41.0 0.90 0.73

Greece 38.1 1.77 48.0 1.54 1.08

Spain 28.0 1.92 54.4 1.94 1.25

New Zealand 53.4 1.97 59.8 1.74 1.09

France 38.6 1.99 49.6 2.19 1.36

Italy 44.8 2.08 49.4 2.47 1.46

Australia 31.2 2.12 40.3 2.32 1.36

Canada 50.1 2.21 81.5 2.26 1.26

USA 17.5 2.57 23.9 2.82 1.36

J. Eaton / Journal of Monetary Economics 53 (2006) 911–916 913

their openness growth factor to only 1.1.) BC must thus very much attribute the worsegrowth performance of the open relative to closed poor to their openness levels in 1978rather than to how their openness evolved subsequently.

I adapt Quah’s (1993) methodology to examine how countries within the closed andopen groupings moved across income categories. Among the open countries, Taiwan andPanama mark the border between my poor and middle subgroups while Trinidad andTobago and Ireland separate the middle and rich. GDP per worker in the first pair

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Table 3

y98=y78 Open98=Open78

Open Poor 1.61 1.20

Middle 1.33 1.15

Rich 1.99 1.31

Closed Poor 1.69 1.93

Middle 1.15 1.49

Rich 1.22 1.42

J. Eaton / Journal of Monetary Economics 53 (2006) 911–916914

averaged 0.65 of the group average while GDP per worker for the second pair 1.26 timesthe group average. I then applied the cutoffs of 0.65 and 1.26 times the 1998 group averageto create new groups of poor, middle-income, and rich among the open for 1998.Similarly for the closed group, Morocco and Syria form the border between poor and

middle-income, while Namibia and Mexico established the middle-income–rich border.These pairs had, on average, 0.59 and 1.20 times the closed group average GDP per workerin 1978. Applying these cutoffs to the 1998 data I created 1998 income groups.By construction, the sizes of each of the six income groups for 1978 were about the same (at

12 or 13 members). Consistent with BC, the middle closed subgroup fell only slightly in size to11 members, but among the open group the middle subgroup shrunk to seven members.Table 4 reports countries that transited between income subgroups, with upward

transitions on the left and downward ones on the right.In sync with BC’s result, there is more action in both directions among the open.

Botswana aside, East Asian economies were the most upwardly mobile among the open.Small Latin American countries dominate the open downwardly mobile, while large LatinAmerican countries are well represented among the closed downwardly mobile.A different take on BC’s finding is that it reflects the overall low growth among Latin

American countries during the period. The large Latin American countries were relativelyrich in 1978 while the small ones were already poor. Hence, the overall Latin Americandecline created more inequality among open economies, where the Latin Americancountries were already among the poorest, but less inequality among the closed, whereLatin American countries started ahead.1

In summary, a look at individual country experience confirms BC’s basic result but someadditional observations put into question their interpretation. Before turning to BC’sexplanation, note four moments of these data to take into that discussion: the averageopenness indicator among the open in 1978 was 94.3 while among the closed it was 35.8;the open rich group’s growth factor averaged 1.98 while for the open poor it was only 1.27(Tigers removed).

3. The gains from trade under factor market distortions

BC revive a venerable topic in the pure theory of international trade, the gains fromtrade under distortions.2 They posit a two-factor, two-sector world in which workers in the

1Cole et al. (2005) note and seek explanations for the poor growth performance of Latin America.2Contributions include Johnson (1965), Kemp and Negishi (1970), Bhagwati (1971), and Eaton and Panagariya

(1979).

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Table 4

P!M P! R M ! R R!M R! P M ! P

Open Botswana Taiwan Costa Rica

Korea El Salvador

Malaysia Fiji

Jordan

Nicaragua

Panama

Tunisia

Closed Dominican Republic Portugal Mexico Colombia

Venezuela Ecuador

Paraguay

Peru

J. Eaton / Journal of Monetary Economics 53 (2006) 911–916 915

capital-intensive sector receive a premium over their marginal product. Lower tradebarriers provide rich, capital-abundant countries a secondary windfall by mitigating adistortion: trade reallocates workers toward the capital-intensive sector where they arepaid more than their marginal product. Poor, capital-scarce economies experience thereverse: trade exacerbates a distortion, possibly reversing the gains from trade.

Consider a country that faced an initial price (row) vector p that changes to p0, where

ðp0 � pÞðq� cÞX0.

Here q is the initial production (column) vector and c the initial consumption (column)vector. This condition implies that the price change was an improvement in terms of trade.With balanced trade

pðq� cÞ ¼ 0.

By revealed preference the change implies a welfare gain if p0c0 ¼ p0q0Xp0c, so that thecountry could afford its initial consumption vector after the change. (Throughout primesdenote post-change magnitudes.)

The economy has an endowment (column) vector L, with each sector i employingthe vector li. By assumption endowments and technologies do not change, while factorprices and the allocation of factors across sectors respond to the change in commodityprices.

Factor payments are (a row vector) w. To capture BC’s labor-market distortion, in somesector d a factor s is paid more than its market wage in proportion d. Zero profits implythat in each sector iad:

p0iq0i ¼ w0l0i; iad,

while, for sector d

p0dq0d ¼ w0l0d þ dw0sl0ds.

Summing up

p0q0 ¼ w0Lþ dw0sl0ds.

Zero profits also imply that anything that is technically feasible cannot earn a positiveprofit. Producing the initial output at initial factor employment is feasible. Hence, in each

ARTICLE IN PRESSJ. Eaton / Journal of Monetary Economics 53 (2006) 911–916916

sector iad we must have

p0iqipw0li; iad,

while, for sector d,

p0dqdpw0l þ dw0slds.

Summing up

p0qpw0Lþ dw0slds.

We have thus established that

p0c0 ¼ p0q0 ¼ w0Lþ dw0sl0ds,

while

p0cpp0qpw0Lþ dw0slds

(with the first inequality following from our assumption that the terms of trade improved.)Gains are thus assured if the right-hand side of the first expression exceeds the right-handside of the second, or if

l0dsXlds.

There are additional gains in an economy where employment of factor d in sector s rises,but there might be losses if employment fell, BC’s point.

A calculation: Let us take the openness measures to the extreme and treat imports ascompletely displacing the import-competing sector in the open countries. With a laborshare of 2

3, a wedge of 0.71 in incomes between the two groups requires a lower bound on d

of around 100%, a large, if not implausible, number. But my assumptions aboutspecialization have been extreme.

4. Conclusion

BC’s paper provides a service in its dissection of the twin peaks. But I question theirinterpreting the observation that only open economies exhibited the phenomenon asimplying that openness was the cause of the phenomenon. While BC’s labor-marketexplanation is thought-provoking I do not think that macro data are up to the job ofestablishing it. I want more direct evidence from the labor markets.

References

Bhagwati, J.N., 1971. The generalized theory of distortions and welfare. In: Bhagwati, J.N., et al. (Eds.), Trade,

Balance of Payments, and Growth. North-Holland, Amsterdam.

Cole, H.L., Ohanian, L.E., Riascos, A., Schmitz Jr, J.A., 2005. Latin America in the rearview mirror. Journal of

Monetary Economics 52, 69–107.

Eaton, J., Panagariya, A., 1979. Gains from trade under variable returns to scale, commodity taxation, tariffs, and

factor market distortions. Journal of International Economics 9, 481–501.

Johnson, H.G., 1965. Optimal trade intervention in the presence of domestic distortions. In: Baldwin, R.E., et al.

(Eds.), Trade, Growth, and the Balance of Payments. Rand-McNally, Chicago.

Kemp, M.C., Negishi, T., 1970. Variable returns to scale, commodity taxes, factor market distortions and their

implications for trade gains. Swedish Journal of Economics 72, 1–11.

Quah, D., 1993. Empirical cross-section dynamics in economic growth. European Economic Review 37, 426–434.