International Trade and Inequality
International trade's impact on income inequality is mixed; governments need to promote human resource development and income redistribution.
The impact of globalization on equality has become a serious concern for many countries. There is growing evidence challenging the theoretical prediction that international trade positively impacts income distribution. We address this subject, surveying the empirical findings on the impact of international trade on inequalities from various perspectives. Our survey reveals that increased trade openness by developing countries appears to have contributed to narrowing the development gap vis-à-vis developed countries, while its impact on the income gap between developing countries is not clear. The impact of increased trade or trade liberalization on within-country inequalities is mixed. In some cases, trade liberalization improved wage-inequality, but in some other cases, the opposite pattern was observed. Similar mixed patterns are found for regional inequalities. These mixed findings are consistent with the fact that theoretical predictions are also mixed. One reason for the mixed findings is the impact of other factors affecting inequalities, including labor market conditions, inflow of capital, and policy reforms.
Governments need to implement appropriate policies to deal with the inequalities. Two important policies are the promotion of human resource development and income redistribution. The former improves quality of labor, with support from a well-functioning and flexible labor market. The latter covers policies on social safety nets or on tax systems. The safety nets pay some portion of adjustment costs borne by workers who are adversely affected by trade liberalization, while tax systems (e.g., progressive and inheritance tax) help distribute income more equally between the rich and the poor.
WORKING PAPER NO: 675