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The Effect of Trade and Foreign Direct Investment on Inequality: Do Governance and Macroeconomic Stability Matter?


  • Gerardo Ángeles Castro

    () (Profesor-investigador y jefe de la Sección de Estudios de Posgrado e Investigación, Escuela Superior de Economía (ESE), Instituto Politécnico Nacional (IPN). México, D.F. Mexico)


Through dynamic panel data techniques and applying the estimated household income inequality data-set (Galbraith and Kum, 2003), this paper is aimed at exploring the effect of economic variables such as trade, foreign direct investment (FDI) and inflation on inequality, under different scenarios of domestic efficiency and over time. Trade benefits income distribution, whereas FDI and inflation increase inequality. The expansion of exports and employment based on the primary sector does not provide distributional effects, not even in low income countries. Those economies associated with macroeconomic stability and a high governance indicator can mitigate the adverse effect of FDI on income distribution, and enhance the benefits of trade. In the longer run, employment in industry, trade and in particular manufactured exports, can exert more distributional effects, while the adverse effect of FDI and inflation decreases.

Suggested Citation

  • Gerardo Ángeles Castro, 2011. "The Effect of Trade and Foreign Direct Investment on Inequality: Do Governance and Macroeconomic Stability Matter?," Economía Mexicana NUEVA ÉPOCA, , vol. 0(1), pages 181-219, January-J.
  • Handle: RePEc:emc:ecomex:v:20:y:2011:i:1:p:181-219

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    References listed on IDEAS

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    More about this item


    trade; foreign direct investment; inflation; inequality; good governance; panel data.;

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • F59 - International Economics - - International Relations, National Security, and International Political Economy - - - Other
    • O15 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration
    • P51 - Economic Systems - - Comparative Economic Systems - - - Comparative Analysis of Economic Systems


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