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Income distribution and Trade Liberalization

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  • Ronald Fischer

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Abstract

The paper presents a general framework for the analysis of the evolution of personal income distribution following trade liberalization. The model allows many factors of production and the possibility of capital gains. In this framework, the short run evolution of inequality depends on the wage to wealth ratio, while changes in the interest rate determine the changes in long run inequality. The general frame-work is applied to the dynamic specific factors model of Eaton (1987). In this model the land-labor ratio determines whether a country exports the land-using or the capital-using good in the long run. The type of the export good determines the effects of liberalization on inequality. In land (labor) abundant countries, inequalities increase (decrease) along the dynamic path. The model provides an explanation for the differences between Latin American and Asian countries in their response to trade liberalization. Econometric analysis provide mixed results for these predictions, with the correct signs but non-significant coefficients for the coefficient on the interaction between openness and the land-labor ratio.

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Bibliographic Info

Paper provided by Centro de Economía Aplicada, Universidad de Chile in its series Documentos de Trabajo with number 67.

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Date of creation: 1999
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Handle: RePEc:edj:ceauch:67

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  1. Francisco Rodriguez & Dani Rodrik, 1999. "Trade Policy and Economic Growth: A Skeptic's Guide to Cross-National Evidence," NBER Working Papers 7081, National Bureau of Economic Research, Inc.
  2. Eaton, Jonathan, 1987. "A Dynamic Specific-Factors Model of International Trade," Review of Economic Studies, Wiley Blackwell, vol. 54(2), pages 325-38, April.
  3. Leamer, Edward E. & Maul, Hugo & Rodriguez, Sergio & Schott, Peter K., 1999. "Does natural resource abundance increase Latin American income inequality?," Journal of Development Economics, Elsevier, vol. 59(1), pages 3-42, June.
  4. Karni, Edi & Zilcha, Itzhak, 1995. "Technological Progress and Income Inequality," Economic Theory, Springer, vol. 5(2), pages 277-94, March.
  5. Jeffrey Sachs & Andrew Warner, 1995. "Economic Reform and the Progress of Global Integration," Harvard Institute of Economic Research Working Papers 1733, Harvard - Institute of Economic Research.
  6. Galor, Oded & Zeira, Joseph, 1993. "Income Distribution and Macroeconomics," Review of Economic Studies, Wiley Blackwell, vol. 60(1), pages 35-52, January.
  7. Fischer, Ronald D, 1992. "Income Distribution in the Dynamic Two-Factor Trade Model," Economica, London School of Economics and Political Science, vol. 59(234), pages 221-33, May.
  8. Neary, J Peter, 1985. "International Factor Mobility, Minimum Wage Rates, and Factor-Price Equalization: A Synthesis," The Quarterly Journal of Economics, MIT Press, vol. 100(3), pages 551-70, August.
  9. Spilimbergo, Antonio & Londono, Juan Luis & Szekely, Miguel, 1999. "Income distribution, factor endowments, and trade openness," Journal of Development Economics, Elsevier, vol. 59(1), pages 77-101, June.
  10. Barro, Robert J., 1974. "Are Government Bonds Net Wealth?," Scholarly Articles 3451399, Harvard University Department of Economics.
  11. Abhijit Banerjee & Andrew F. Newman, 1989. "Risk-Bearing and the Theory of Income Distribution," Discussion Papers 877, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  12. Judd, Kenneth L., 1985. "The law of large numbers with a continuum of IID random variables," Journal of Economic Theory, Elsevier, vol. 35(1), pages 19-25, February.
  13. Bourguignon, F. & Morrisson, C., 1989. "Income Distribution, Development and Foreign Trade: A Cross-Sectional Analysis," DELTA Working Papers 89-05, DELTA (Ecole normale supérieure).
  14. Brecher, Richard A, 1974. "Minimum Wage Rates and the Pure Theory of International Trade," The Quarterly Journal of Economics, MIT Press, vol. 88(1), pages 98-116, February.
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Cited by:
  1. Fischer, Ronald D., 2001. "The evolution of inequality after trade liberalization," Journal of Development Economics, Elsevier, vol. 66(2), pages 555-579, December.

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