Trade and Income Distribution in Developing Countries

This study examines the relationship between trade policy and income distribution on a cross-section of developing countries. The evidence suggests that the impact of openness on income distribution depends on the endowments of human capital. Basic education was found to be the key human capital variable determining export composition. Countries relatively well endowed with basic education tend to have higher shares of manufacturing exports and experience lower income inequality than countries with high shares of primary exports. These findings suggest that trade policies promoting manufactures should be based on expanding basic education to have the necessary poverty and inequality reducing effects.

Introduction: Numerous multi-country studies, using various measures of trade openness, report that relatively open economies experience substantially higher rates of per capita growth rates than closed economies (Balassa 1978; Krueger 1980; Heitger 1987; World Bank 1987; De Long and Summers 1991; Michaely et al. 1991; Dollar 1992; Roubini and Sala-i-Martin 1992; Sheehey, 1995). However, relatively little attention has been given to the effects on personal income distribution and the way human resource endowments interacts with the trade regime. This study attempts to examine the role of human resources in enhancing incomes through trade and provide insights into why trade liberalization has sometimes increased and sometimes decreased income inequality. Empirical evidence for developing countries makes clear that changes in poverty and income distribution depend on more than the rate of economic growth. A high rate of growth is neither necessary nor sufficient for inequality or poverty to decline (Fields, 1984).

Author: Carol Litwin

Source: Göteborg University

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