Trade, Integration, and Interregional Inequality

53 Pages Posted: 24 Jun 2014

See all articles by Georg Hirte

Georg Hirte

Technische Universität Dresden Institute of Transport & Economics

Christian Lessmann

Technology University of Braunschweig; Ifo Branch Dresden; CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute

Date Written: May 23, 2014

Abstract

We study the effect of international trade and freeness of trade (openness) on interregional inequality within countries. We estimate a model derived from a structural economic-geography approach in which interregional inequality depends on weighted trade shares and trade costs. In addition to the standard trade-to-GDP ratio, we derive and propose an aggregate freeness-of-trade measure based on phiness of trade. Both measures are instrumented by proxies constructed from estimates of a gravity model of bilateral trade, which covers 208 countries for the period 1948-2006. For our study we use Gennaioli et al.’s (2013) cross-country data set, which covers 110 countries (1569 sub-national regions) for the year 2005, and the panel data set of Lessmann (2014), which covers 56 countries (835 sub-national regions) for the period 1980-2009. The IV and dynamic panel regressions provide evidence that trade increases interregional inequality, but that the coefficient of the freeness-of-trade variable is ambiguous. Because the latter is an indicator for integration in the world markets, we conclude that more integration may neutralize the negative interregional distribution effects of trade.

Keywords: regional inequality, trade, gravity model, New Economic Geography, panel data

JEL Classification: R120, F100, C360

Suggested Citation

Hirte, Georg and Lessmann, Christian, Trade, Integration, and Interregional Inequality (May 23, 2014). CESifo Working Paper Series No. 4799, Available at SSRN: https://ssrn.com/abstract=2457828

Georg Hirte

Technische Universität Dresden Institute of Transport & Economics ( email )

Würzburger Str. 35
Dresden, 01062
Germany

Christian Lessmann (Contact Author)

Technology University of Braunschweig ( email )

Abt-Jerusalem-Str. 7
Braunschweig, D-38106
Germany

Ifo Branch Dresden ( email )

Poschinger Str. 5
Munich, 01069
Germany

CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute ( email )

Poschinger Str. 5
Munich, 01069
Germany

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