Trade, Technology and Inequality in a Developing Country: Theory and Evidence from China
AbstractCould globalization--specifically, increased international trade and openness to foreign investment--increase inequality in developing countries? Empirical studies in many such economies show that expanding trade and FDI are associated with higher inequality in wages and regional incomes. However, there is no agreement regarding the cause of such increases. We present a theoretical model showing how interactions between factor mobility restrictions and different rates of technical progress (due to trade and FDI) in a regionally heterogeneous economy can explain the evolution of inequality. As favored regions benefit more from trade, their growing demand for skills drains skilled workers from disadvantaged areas, and average incomes in favored regions grow faster than in less favored regions. Moreover, this unbalanced regional growth may be the source of rising inequality within each region, and even of falling per capita incomes in the less favored region. We test our predictions with data from China's coastal and inland provinces. The results confirm that different regional growth rates have increased both interregional and intraregional inequality. In addition, growth of skills-based export industries in coastal regions, other things equal, is associated with lower incomes for the poor in inland provinces.
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Bibliographic InfoPaper provided by University of Wisconsin, Agricultural and Applied Economics in its series Staff Paper Series with number 539.
Date of creation: Jul 2009
Date of revision:
Find related papers by JEL classification:
- F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
- O15 - Economic Development, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration
- R10 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-12-11 (All new papers)
- NEP-DEV-2009-12-11 (Development)
- NEP-INT-2009-12-11 (International Trade)
- NEP-TRA-2009-12-11 (Transition Economics)
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- Muqun Li & Ian Coxhead, 2011.
"Trade and Inequality with Limited Labor Mobility: Theory and Evidence from China,"
Review of Development Economics,
Wiley Blackwell, vol. 15(1), pages 48-65, 02.
- Muqun Li & Ian Coxhead, 2010. "Trade And Inequality With Limited Labor Mobility: Theory And Evidence From China," ISER Discussion Paper 0780, Institute of Social and Economic Research, Osaka University.
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