Endogenous Liberalization and Within-Country Inequality: A Theoretical and Empirical Analysis
AbstractWe theoretically model and empirically investigate a societyâs liberalization decision and its impact on income inequality. The motivation is that a blanket conclusion that globalization increases inequality within countries can be misleading. In the paper, the decision of the society rests on the pre- and post-liberalization utilities of different segments, and, complying with stylized facts, the economyâs structure follows Kuznetsâ predictions on industrialization and urbanization. Our findings support the line of research which emphasizes the importance of country-specific factors in prescribing policies. In particular, countries are more likely to open up when relative productivity of migrant ex-rural workers to those of initial urban workers in manufacturing, β, is high, and the societyâs tastes for the agricultural goods, α, are not particularly strong. Following liberalization, the income distribution too improves if α is low and β is high. Empirical results show that open economies, ceteris paribus, have 3- 4 higher Gini points than closed economies. In developing countries except Sub-saharan Africa, β can offset this stand-alone effect just after the switch if the switch is made with a minimum β value of 0.67 â 0.89, while in Sub-saharan Africa, this standalone effect can be offset in 10-15 years after the switch. Overall, however, the β effect cannot surpass the stand-alone effect in the whole sample, which implies that the median country has made a âwrongâ switch.
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Bibliographic InfoPaper provided by Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance in its series Economics Series with number 2005_18.
Length: 57 pages
Date of creation: 17 Oct 2005
Date of revision:
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Liberalization; Industrialization; Income Inequality; Political Economy;
Find related papers by JEL classification:
- F15 - International Economics - - Trade - - - Economic Integration
- J61 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Geographic Labor Mobility; Immigrant Workers
- O12 - Economic Development, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
- O14 - Economic Development, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology
- O18 - Economic Development, Technological Change, and Growth - - Economic Development - - - Urban, Rural, Regional, and Transportation Analysis; Housing; Infrastructure
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