International Trade Liberalization, Human Capital Accumulation, and Economic Growth

This paper adapts the seminal Lucas endogenous growth model to investigate the impact of trade liberalization on the accumulation of human capital, the resulting skill premium, and the growth of a small open economy. To illustrate the alternative channels through which trade liberalization may impinge on the economy and its correspondingly diverse implications, we consider three specific forms of liberalization. These include (i) a reduction in the tariff on consumption, (ii) a reduction in the tariff on a productive input, and (iii) an exogenous increase in the demand for exports. The diversity of the responses to the three widely adopted forms of trade liberalization suggests that the flexibility of the model enables us to reconcile the range of seemingly conflicting empirical evidence, and underscores the importance of taking a dynamic approach to evaluate their various effects.