Trade Policy and the Household Distribution of Income

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. In this paper we analyze the impact of trade and tariffs on the observed cross-country variation in the household distribution of income. We build on results of the literature on production and the functional distribution of income in the 2x2 and higher-dimensional manifestations of the factorintensity model of international trade to link import protection to variations in the household distribution of income. Working with a new dataset on inequality, we then examine cross-country variation in inequality with respect to import protection. Results are fully consistent with the predictions of the factor-intensity model of trade. Our regression results suggest that import protection makes income distribution worse for countries with labour-intensive production patterns --technically know as diversification cones. This relationship shifts to one of falling inequality as incomes rise and we move to capital-intensive diversification cones. The crossing-point is for the set of economies with a per-capita income of between $5500 and $8750 (in 1995 dollars). Below this level, increased import protection tends to make gross household income inequality worse at the margin. Above this range, import protection tends to reduce inequality. Results also suggest that OLS-based cross-country inequality regressions might best be viewed with some suspicion, due to quality of data for countries at lower income levels and variability in variables at this income range left out of unconditional Kuznets-U regressions. Terms of use: Documents inOur results also have implications for the welfare consequences of trade policy. If we work with Sen-type social welfare indexes, then increased inequality discounts the welfare benefits of improved incomes through the efficiency gains from trade. It is in higher-income countries thathigher import protection appears to improve the gross household distribution of income the most.Yet these are the same countries with well-developed social safety nets (at least vis-à-vis lower income countries), such that the adverse effects of inequality that accompany efficiency gains may be offset. As such, current import protection patterns impose welfare costs related to inequality exactly in those countries least able to offset distribution losses through a well-functioning social safety net.1 TRADE POLICY AND THE HOUSEHOLD DISTRIBUTION OF INCOME Abstract: We explore the relationship between import protection and the household distribution of income. We ...

Relationship between free trade and income inequality in South America

“…However, it is conclusive that for liberal countries (Brazil, Peru, Chile, Uruguay) reduction in tariff rate generates increase in economic inequality in the period 1990 -2010 and for moderate countries (Argentina, Bolivia, Colombia, Ecuador, Paraguay) augmentation in tariff rate and trade restriction increases economic inequality in the period 1990 -2010. Findings in this research are coherent with the results of Francois & Rojas-Romagosa who found that in relatively low-income countries high import protection, such as tariffs, is associated with greater inequality, but in relatively high-income countries high levels of protection improve income distribution (Francois & Rojas-Romagosa, 2004).…”

“…Latin America is in an intermediate position (Nissanke & Thorbecke, 2010). However, studies about inequality found that income distribution tends to be worse for countries with labour-intensive diversification than those that apply import substitution policies (Francois & Rojas-Romagosa, 2004). civilizar 11 Ángela Isabel Giraldo Suárez For the region, an analysis of income inequality in three Latin American countries, Argentina, Brazil and Mexico during the period 2000-2010, evidenced that inequality has declined significantly (Lustig, Lopez-Calva, Ortiz-Juarez, & Cases, 2012) the Gini coefficient declined in 13 of 17 Latin American countries.…”

“…Furthermore, although the indexes used are a good alternative to assess economic behavior, they have some problems. Gini coefficient is criticised because it does not show a clear mapping through aggregation from individual preferences to an aggregate social welfare function (Francois & Rojas-Romagosa, 2004). Moreover, indexes elaborated by the Heritage Foundation -used in this research to classify countries between Liberal, Moderate or State -has been considered subjective and to suffer from judgment biases (Rodriguez & Rodrik, 2001).…”

“…Tariffs: This is a measure that captures differences in trade share by countries (Skipton, 2003). Empirical research has tested the relationship between tariffs and inequality, finding that in relatively low-income countries high import protection, such as tariffs, is associated with greater inequality while for relatively high-income countries high levels of protection improve income distribution (Francois & Rojas-Romagosa, 2004). On the other hand, Rodríguez found that tariff restriction is negatively associated with growth ( 2006).…”