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Openness, inequality, and poverty : endowments matter

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  • Gourdon, Julien
  • Maystre, Nicolas
  • de Melo, Jaime

Abstract

Using tariffs as a measure of openness, the authors find consistent evidence that the conditional effects of trade liberalization on inequality are correlated with relative factor endowments. Trade liberalization is associated with increases in inequality in countries well-endowed in highly skilled workers and capital or with workers that have very low education levels and in countries relatively well-endowed in mining and fuels. Trade liberalization is associated with decreases in inequality in countries that are well-endowed with primary-educated labor. Similar results are also apparent when decile data are used instead of the usual Gini coefficient. The results are strongly supportive of the factor-proportions theory of trade and suggest that trade liberalization in poor countries where the share of the labor force with very low education levels (likely employed in nontradable activities) is high raises inequality. In the sample, countries with low education levels also have relatively scarce endowments of capital. Quantitatively capital scarcity is the dominating effect so that trade liberalization is accompanied by reduced income inequality in low-income countries. Within-country inequality is also positively correlated with measures of macroeconomic instability. Simulation results suggest that relatively small changes in inequality as measured by aggregate measures of inequality like the Gini coefficient are magnified when estimates are carried out using decile data.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 3981.

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Date of creation: 01 Aug 2006
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Handle: RePEc:wbk:wbrwps:3981

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Keywords: Free Trade; Economic Theory&Research; Inequality; Trade Law; Achieving Shared Growth;

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Citations

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Cited by:
  1. Oloufade, Djoulassi K., 2012. "Trade Openness, Conflict Risk and Income Inequality," MPRA Paper 40702, University Library of Munich, Germany, revised Feb 2013.
  2. Isabelle Bensidoun & Sébastien Jean & Aude Sztulman, 2005. "International Trade and Income Distribution: Reconsidering the Evidence," Working Papers, CEPII research center 2005-17, CEPII research center.
  3. Meschi, Elena & Vivarelli, Marco, 2009. "Trade and Income Inequality in Developing Countries," World Development, Elsevier, Elsevier, vol. 37(2), pages 287-302, February.
  4. G. C. Lim & Paul D. McNelis, 2014. "Income Inequality, Trade and Financial Openness," Melbourne Institute Working Paper Series, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne wp2014n07, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
  5. Xiaodong Lu & Guowei Cai, 2011. "Effective factor endowments, trade openness and income distribution in China," Frontiers of Economics in China, Springer, Springer, vol. 6(2), pages 188-210, June.
  6. Bergh, Andreas & Nilsson, Therese, 2010. "Do liberalization and globalization increase income inequality?," European Journal of Political Economy, Elsevier, Elsevier, vol. 26(4), pages 488-505, December.
  7. Meschi, Elena & Vivarelli, Marco, 2007. "Globalization and Income Inequality," IZA Discussion Papers 2958, Institute for the Study of Labor (IZA).
  8. Caroline DAYMON, 2012. "Ouverture Commerciale, Inégalités De Revenu Et Répartition Salariale Dans Les Pays Du Sud Et De L’Est De La Méditerranée," Region et Developpement, Region et Developpement, LEAD, Universite du Sud - Toulon Var, Region et Developpement, LEAD, Universite du Sud - Toulon Var, vol. 35, pages 81-98.

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