Analysis of the relationship between trade openness, structural change, and income inequality under Kuznets curve hypothesis: The case of Turkey

Abstract

ABSTRACT This study investigates the effect of trade liberalization between 1987 and 2016 on income inequality, which is related to structural transformation in Turkey. For this purpose, the effect of trade openness on income inequality is modelled in non-linear form based on the Kuznets hypothesis. The model has been analysed using the Autoregressive Distributed Lag (ARDL) method. This study has found that there is a non-linear U type relationship between trade openness and income inequality. We have some evidence that shows that while income inequality first decreased when trade openness increased in the early stages of the trade liberalization, during later stages of trade liberalization, there has been an increasing income inequality trend in Turkey. Additionally, the sectoral income inequality variable calculated to represent structural transformation shows that as income gap between agriculture and industry sectors increases, there has been an increasing trend in overall income inequality. The results that were obtained through this analysis are evaluated with other explanatory variables such as GDP per capita, the internal terms of trade and financial development dynamics. There is evidence that while an increase in income per capita decreases income inequality, an increase in financial development and internal terms of trade decrease income inequality.