Protection, Skill Formation and Income Distribution

Abstract

This short paper looks at the process of skill-formation and income inequality for a small developing economy where credit market for financing education or human capital formation is absent. This assumption is more or less consistent with the literature on human capital accumulation under credit market imperfection. We show that protection discourages skill formation and may aggravate inequality. Free-trade puts a check on the problem of acute credit market imperfection by reducing the cost of skill acquisition. We provide an example where freer trade leads to better income distribution for the poor.

JEL Classifications:

• F13
• F16
• I22

Keywords:

• credit market
• skill formation
• protection