The Triangle of Trade Liberalization, Economic growth and Income Inequality

Abstract

Trade liberalization as a move towards free trade by reducing tariffs and other trade barriers is considered to be the main driving force of globalization. One of the controversial issues regarding trade liberalization is how it affects the lives of different classes of society and indicators of inequality. Conditions of poor communities, the distribution of income, and economic growth parallel with the spread of globalization are among the challenging areas where, in the past two decades, a great number of studies on the resulting effects, benefits, and disadvantages of trade liberalization have been done. The main objective of this study is to investigate the interactions between the three variables of trade liberalization, economic growth, and income inequality using the observations in 30 developed and developing countries within the period 2000-2011 using the econometric model of generalized method of moments (GMM) for dynamic panel models. To this end, the main factors affecting the variables have been identified and tested. Regarding that the validity of the instrumental variables used in the model has been approved by the Sargan test, findings indicate in the first place that there is a positive correlation between trade liberalization and economic growth. It can be interpreted that not only can trade expansion and elimination of trade barriers speed up economic growth, but the increase in GDP also paves the way for globalization. Further liberalization of trade along with higher economic growth can decrease the unequal distribution of income in society. In addition, increases in the literacy rate and government spending on education and health care improve the distribution of income. However, if there is inequality, economic growth and globalization will slow down.