Who Benefits from Free Trade?

Abstract

How is wealth distributed when the economy grows? I study this question in the context of African countries and ethnic groups. If wealth is distributed proportional to population, larger ethnic groups should benefit more when economic activity increases. Using nighttime light and individual level data to geographically locate wealth, I find the exact opposite: Smaller ethnic groups, particularly those in political power, benefit more from increased economic activity than larger ones. The results indicate that political elites in power redistribute wealth from larger ethnic groups. As a result, people’s satisfaction with democracy and trust in institutions reduces, casting a shadow on the implementation of trade liberalization policies in developing countries. Instrumental variables estimating exploiting exogenous variation in trading activity confirm initial results.