Is There an Openness Kuznets Curve?

One of the key features of research on income inequality is the search for a Kuznets curve. Two curvilinear relationships in particular have been documented in the literature: one between inequality and income and the other between inequality and environmental factors. More recently, inequality and its link to trade liberalisation has received a good deal of attention, not least because it is among the major controversies provoked by the globalisation process. The outcomes for developing countries of greater openness do not fit neatly with the predictions of standard trade theory. Given this, it is natural to ask whether the relationship between trade openness and inequality may be better understood in terms of the Kuznets hypothesis. To this end, the study tests the Kuznets hypothesis in the context of trade liberalisation using data for Latin America. The evidence is new and is consistent with the Kuznets hypothesis: inequality increases with trade openness until a critical level of openness is reached after which inequality begins to fall. The curvilinear relationship between openness and inequality suggests that Latin American countries should continue with trade liberalisation measures but also introduce redistribution policies to ease the (initial) adverse consequences of liberalisation.