Openness, Inequality, and Poverty: Endowments Matter
Centre d'Etudes Prospectives et d'Informations Internationales (CEPII)
UNCTAD - United Nations Conference on Trade and Development; Department of Economics - University of Geneva
Jaime De Melo
University of Geneva - Department of Political Economics; Centre for Economic Policy Research (CEPR); World Bank
May 1, 2006
CEPR Working Paper No. 5738
Using tariffs as a measure of openness, this paper finds consistent evidence that the conditional effects of trade liberalization on inequality are correlated with relative factor endowments. Trade liberalization is associated with increases in inequality in countries well-endowed in highly skilled workers and capital or with workers that have very low education levels, and in countries relatively well-endowed in mining and fuels while it is associated with decreases in inequality in countries that are well-endowed with primary-educated labor. Similar results are also apparent when decile data are used instead of the usual Gini coefficient. The results are strongly supportive of the factor-proportions theory of trade and suggest that trade liberalization in poor countries where the share of the labor force with little education is high raises inequality, although in our sample relative endowments in capital turn out to be the overriding determinant so that trade liberalization is accompanied by reduced income inequality in low-income countries. Simulation results also suggest that relatively small changes in inequality as measured by aggregate measures of inequality like the Gini coefficient are magnified when estimates are carried out using decile data.
Number of Pages in PDF File: 52
Keywords: International Trade, Income Distribution, Poverty
JEL Classification: D3, F11working papers series
Date posted: July 18, 2006 ; Last revised: April 27, 2012
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