Trade, Institution Quality and Income Inequality. (January 2016)

• Record Type: Journal Article
• Authors: Lin, Faqin; Fu, Dahai
• Is Part Of: World development. Volume 77(2016)
• Page Start: 129
• Page End: 142
• Publication Date: 2016-01
• Subjects: trade -- income inequality -- Baltic Dry Index -- commodity price index -- institution quality; Economic history -- 1990- -- Periodicals; Economic assistance -- Developing countries -- Periodicals; 330.9
• DOI: 10.1016/j.worlddev.2015.08.017
• Languages: English
• ISSNs: 0305-750X

Abstract

Highlights: We study how trade affects income inequality in small developing countries (SDCs). We use two well-accepted instruments to address the endogeneity issue of trade. We find the effect is not unconditional on institution quality. Trade increases (decreases) income inequality in democracies (autocracies). We use different trade patterns associated with institution quality for explanations. 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.