Trade Openness, Conflict Risk and Income Inequality

Abstract

This paper investigates the effect of trade openness on income inequality, and shows how this effect is shaped by the presence of conflicts. I argue that income-generating activities controlled by the rich expand during conflicts, whereas those controlled by the poor contract. I find that trade openness leads to greater income inequality in countries where the risk of conflicts is high. Moreover, income inequality is directly affected by conflicts, and is higher in more ethnically diverse countries and lower under democratic regimes. The econometric analysis suggests that these effects are robust to a wide range of economic and institutional factors.