Trade, Politics, and the Poor: Is Sen Right and Bhagwati Wrong?

Abstract

The current debate between two of the world’s finest economists—Amartya Sen and Jagdish Bhagwati—has not only roiled India but also attracted global attention. Is trade liberalization associated with improved welfare outcomes for the poor, as Bhagwati contends? Or is Sen correct that policymakers in liberalizing economies need to change their governance priorities to focus on redistribution? This analysis draws on existing literature to develop testable hypotheses that attempt to resolve the Sen–Bhagwati divide. Using fixed effect panel regressions and simultaneous equation models, we find that although there is empirical support for both arguments, the results on balance favor Sen: The positive relationship between trade and improved poverty is conditional upon more equitable distributions of income. In effect, Bhagwati’s predictions about the beneficial impacts of openness on social welfare occur only in a subset of developing nations, findings which have very different implications for the poor in developing countries.