Abstract
AbstractThis paper investigates the relationship between trade openness and income inequality in 11 Latin American countries over the period 1989–2015. The authors use a panel dynamic approach to take into account the high persistence of income inequality. The analysis classifies trade flows, exports and imports according to trading partner’s income level. Then, the authors split trade flows according to different stages of production. The results show that overall trade flows do not statistically affect income inequality in Latin America. However, trade has divergent effects depending on the trade partners: trade with similar- and lower-income countries exacerbates inequality, while trade with higherincome countries reduces income dispersion. The results also emphasise the role of the export channel (in particular in primary commodities) in explaining income inequality in Latin American countries and imports of consumption goods seem to matter more than imports of intermediate and capital goods.
Highlights
The question of how trade openness affects income inequality is still a matter of controversy
There are 3 models: Models 1 report the results for trade flows regardless the partners, Models 2 display the results for trade flows within and outside Latin America and Models 3 contain the results for trade flows with higher, similarand lower-income countries)
Income inequality decreases with GDP per capita while the effect is lower for higher income
Summary
The question of how trade openness affects income inequality is still a matter of controversy. Theoretical predictions from the standard trade theory (Stolper and Samuelson, 1941) emphasise that trade openness would be beneficial to unskilled-labour in developing countries. Wood (1997) argues that trade openness has shifted the production toward more skill-intensive goods in Latin America due to the integration of low-income exporters into the global economy, i.e. China and India. This argument is in line with the ‘defensive innovation’ term introduced by (Wood, 1995a), which states that the increased foreign competition provides incentives for firms to invest in new technologies. In this paper, we attempt to identify the possible channels through which trade openness would have affected income inequality in Latin America
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