Globalization and Income Inequality

36 Pages Posted: 30 Aug 2007

See all articles by Elena F. Meschi

Elena F. Meschi

University of Warwick - Centre for the Study of Globalisation and Regionalisation (CSGR); Università Politecnica delle Marche

Marco Vivarelli

Universita Cattolica del Sacro Cuore, Milano; IZA Institute of Labor Economics

Date Written: July 2007

Abstract

This paper discusses the distributive consequences of trade flows in developing countries (DCs). On the theoretical side, we argue that the interplays between international openness and technology adoption may constitute an important mechanism leading to a possible increase of income differentials in the liberalizing DCs, trough skill enhancing trade. We use a dynamic specification to estimate the impact of trade on within-country income inequality in a sample of 70 DCs over the 1980-1999 period. Our results suggest that total aggregate trade flows are weakly related with income inequality. However, once we disaggregate total trade flows according to their areas of origin/destination, we find that trade with high income countries worsen income distribution in DCs, both through imports and exports. This finding provides a preliminary support to the hypothesis that technological differentials between trading partners are important in shaping the distributive effects of trade openness. Moreover, after testing for the differential impact of trade in middle income DCs vs low income ones, we observe that the previous result only holds for middle income countries (MICs). We interpret this evidence by considering the greater potential for technological upgrading in MICs both in terms of their higher "absorptive capacity" and in terms of their superior ability in serving the differentiated and high-quality markets of the developed world.

Keywords: globalization, within-country income distribution, technology transfer, developing countries, LSDVC estimator

JEL Classification: F16, O15, O33

Suggested Citation

Meschi, Elena F. and Vivarelli, Marco, Globalization and Income Inequality (July 2007). IZA Discussion Paper No. 2958. Available at SSRN: https://ssrn.com/abstract=1010589

Elena F. Meschi

University of Warwick - Centre for the Study of Globalisation and Regionalisation (CSGR) ( email )

Coventry CV4 7AL
United Kingdom

Università Politecnica delle Marche

Piazzale Martelli 8
Ancona, 18039
Italy

Marco Vivarelli (Contact Author)

Universita Cattolica del Sacro Cuore, Milano ( email )

Largo Gemelli 1
Milano, 20123
Italy

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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