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06-06-2017 | Original Paper

Globalisation and inequality in a dynamic economy: an axiomatic analysis of unequal exchange

Authors: Roberto Veneziani, Naoki Yoshihara

Published in: Social Choice and Welfare | Issue 3-4/2017

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Abstract

An axiomatic analysis of the concept of unequal exchange (UE) between countries is developed in a dynamic general equilibrium model that generalises John Roemer’s (Central Planning and the Soviet Economy, MIT Press, Cambridge, 1983) economy with a global capital market. The class of UE definitions that satisfy three fundamental properties—including a correspondence between wealth, class and UE exploitation status—is completely characterised. It is shown that this class is nonempty and a definition of UE exploitation between countries is proposed, which is theoretically robust and firmly anchored to empirically observable data. The full class and UE exploitation structure of the international economy is derived in equilibrium.

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The literature is too vast for a comprehensive list of references. For a discussion of the classic contributions, we refer the reader to the excellent reviews by Bacha (1978) and Griffin and Gurley (1985).

UE theory is also criticised because it contradicts the principle of comparative advantage, according to which profit equalisation and capital flows from rich to poor countries have growth-inducing and inequality-reducing effects. See, for example, the debate between Paul Samuelson and Arghiri Emmanuel in The Journal of International Economics in 1978.

Empirically, we simply note that recent studies have provided evidence supporting the idea that international inequalities have indeed increased. See, for example, Slaughter (2001).

This insight is compatible with the classical Marxian theory of exploitation, as Marx (1968, chapter 20, (e)) notes that “a richer country exploits a poorer one, even when the latter benefits from the exchange.”

For example, Roemer (1986). See Veneziani (2013) for a thorough discussion.

A rigorous statement of all three axioms is in Sect. 4. LE is conceptually related to the classic theories of unequal exchange (Emmanuel 1972) and underdevelopment (Amin 1976; Frank 1978).

We discuss some normative implications of UE exploitation theory in Veneziani (2007, 2013) and Yoshihara and Veneziani (2009).

We specify the framework in the case with a finite T in order to highlight the similarity with Roemer (1982, 1983) economies. However, the notation and definitions can be extended in a straightforward way to the case with one infinitely-lived generation, and all of our results hold both if T is finite and if it is infinite.

Vector inequalities: for all \(x,y\in \mathbb {R}^{m}\), \(x\geqq y\) if and only if \(x_{i}\geqq y_{i}\) \((i=1,\ldots ,m)\); \(x\ge y\) if and only if \(x\geqq y\) and \(x\ne y\); \(x>y\) if and only if \(x_{i}>y_{i}\) \((i=1,\ldots ,m)\).

For a discussion of subjective and objective principles, see Roemer and Veneziani (2004) and, in the context of exploitation theory, Yoshihara and Veneziani (2011).

For example, it is possible to allow for heterogeneous preferences over consumption goods with \(u^{\nu ^{{}}}(c_{t} ^{\nu },l_{t}^{\nu })=\phi \left( L-\Lambda _{t}^{\nu }\right) +v^{\nu ^{{}} }(c_{t}^{\nu })\); a weakly concave \(\phi \); \(v^{\nu }\) being homogeneous of degree \(k<1\); and so on.

Constraints (1 ) and (2) are written as equalities without loss of generality, given the monotonicity of u.

The existence of a reproducible solution is proved in the Addendum.

The condition \(1+r_{t}>\max _{i}\frac{p_{it} }{p_{it-1}}\) ensures that undertaking production activities is better than storing goods to be sold at the end of the period. In order to interpret this condition, note that at a stationary IRS with \(p_{t}=p_{t-1}\) it reduces to the familiar requirement that \(r_{t}>0\).

For a generalisation to economies with heterogeneous labour, see Veneziani and Yoshihara (2015, 2017).

See, for example, Morishima (1974) and Roemer (1982). See Yoshihara (2010, 2017) and Veneziani and Yoshihara (2015) for a thorough discussion.

The set \(B_{t}\left( \left( \mathbf {p} ,\mathbf {r}\right) ;p_{t-1}\omega _{t}^{\nu ^{{}}},\Lambda _{t}^{\nu ^{{}} }\right) \) does not necessarily contain \(\nu \)’s actual consumption bundle at t, as \(p_{t}\omega _{t+1}^{\nu }\) may be different from \(R_{t}p_{t-1} \omega _{t}^{\nu }\), in equilibrium.

Note that \(p_{t}\widehat{\alpha }^{c}\geqq p_{t}c\) implies \(p_{t}\underline{\alpha }^{c}\leqq p_{t}\overline{\alpha }^{c}-p_{t}c\), where the left hand side represents the real asset value of the commodity inputs of production activity \(\alpha ^{c}\).

In particular, it is worth noting that axiom LE does not require UE exploitation status to be defined based on imputing embodied labor magnitudes to exchanged commodity bundles as in standard approaches. But nor does it rule out the possibility that the labour received by \(\nu \) corresponds to the labour embodied in a specific bundle. We are grateful to an anonymous referee for pointing this out.

If \(p_{t}\left( \widehat{\alpha }_{t}^{\mathbf {p},\mathbf {r}}+\widehat{\beta } _{t}^{\mathbf {p},\mathbf {r}}\right) =0\), we set \(\tau _{t}^{c}=0\) by definition.

One may argue that such movements are still smaller than predicted by the standard neoclassical model based on international differences in the marginal product of capital. As Lucas (1990, p. 92) put it, “one would expect no investment to occur in the wealthy countries in the face of return differentials of this magnitude”. This issue is not really relevant in our framework, especially given that, as noted in Sect. 3, international capital flows are not determined by differences in the marginal productivity of capital.

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Title: Globalisation and inequality in a dynamic economy: an axiomatic analysis of unequal exchange
Authors: Roberto Veneziani
Naoki Yoshihara
Publication date: 06-06-2017
Publisher: Springer Berlin Heidelberg
Published in: Social Choice and Welfare / Issue 3-4/2017
Print ISSN: 0176-1714
Electronic ISSN: 1432-217X
DOI: https://doi.org/10.1007/s00355-017-1062-8

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