Functional distribution of income as a determinant of importing behavior: An empirical analysis

Abstract

We examine the dynamic impact of the functional distribution of income on the demand for imports in developed and developing countries. Drawing upon a motivating accounting structure suggesting a potentially causal effect of the functional distribution of income in an extended version of a standard import function, we find evidence that a fall in the wage share has a statistically significant positive (negative) impact on the volume of imports in developing (developed) countries and the entire sample of countries. Therefore, the neglect of such income distribution effects in import demand functions represents the omission of both an empirically relevant variable and a further theoretically significant structural channel through which the functional distribution of income affects output growth. A key implication is that the impact of the functional distribution of income on the demand for imports has to be considered in growth empirics based on either a binding balance-of-payments constraint in the Kaldor–Thirlwall tradition or a demand-led regime approach or a competitive real exchange rate.