Trading Off the Income Gains and the Inequality Costs of Trade Policy

99 Pages Posted: 23 Apr 2019

See all articles by Bob Rijkers

Bob Rijkers

World Bank

Erhan Artuc

World Bank; World Bank - Development Research Group (DECRG)

Guido G. Porto

World Bank; National Bureau of Economic Research (NBER)

Date Written: April 22, 2019

Abstract

This paper characterizes the trade-off between the income gains and the inequality costs of trade using survey data for 54 developing countries. Tariff data on agricultural and manufacturing goods are combined with household survey data on detailed income and expenditure patterns to estimate the first-order effects of the elimination of import tariffs on household welfare. The paper assesses how these welfare effects vary across the distribution by estimating impacts on the consumption of traded goods, wage income, farm and non-farm family enterprise income, and government transfers. For each country, the income gains and the inequality costs of trade liberalization are quantified and the trade-offs between them are assessed using an Atkinson social welfare index. The analysis finds average income gains from import tariff liberalization in 45 countries and average income losses in nine countries. Across countries in the sample, the gains from trade are 1.9 percent of real household expenditure on average. We find overwhelming evidence of a trade-off between the income gains (losses) and the inequality costs (gains), which arise because trade tends to exacerbate income inequality: 45 countries face a trade-off, while only nine do not. The income gains typically more than offset the increase in inequality. In the majority of developing countries, the prevailing tariff structure thus induces sizable welfare losses.

Suggested Citation

Rijkers, Bob and Artuc, Erhan and Porto, Guido, Trading Off the Income Gains and the Inequality Costs of Trade Policy (April 22, 2019). World Bank Policy Research Working Paper No. 8825, Available at SSRN: https://ssrn.com/abstract=3376274

Bob Rijkers (Contact Author)

World Bank ( email )

1818 H Street, NW
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Erhan Artuc

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

World Bank - Development Research Group (DECRG)

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Washington, DC 20433
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Guido Porto

World Bank ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

HOME PAGE: http://econ.worldbank.org/staff/gporto

National Bureau of Economic Research (NBER)

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