Trade, Institution Quality and Income Inequality

Abstract

Summary We examine the effect of trade on income inequality in small developing countries. We use two well-accepted trade cost variables for identification: one is based on Baltic Dry Index and another is commodities’ price index. Our main finding is that trade leads to a significant reduction (increase) in income inequality in autocracies (democracies). To explain such different effects, we provide supporting evidence that autocracies export more primary commodities and may follow the Stolper–Samuelson theorem in HO framework, while democracies active in manufacturing outsourcing may follow Feenstra and Hanson (1996) task model.