BUCHAREST ACADEMY OF ECONOMIC STUDIES

INTERNATIONAL
TRADE PROJECT 2016
SCIENTIFIC ARTICLES ANALYSIS
Roxana Iustina Cusma

INCOME DISTRIBUTION INEQUALITY

INTRODUCTION
For this analysis I have chosen four scientific articles on the topic of income distribution
inequality.
Income inequality refers to the fact that income is unequally distributed among a population. The
factors that can influence the distribution vary significantly by region, gender and education.
While there are many other elements that affect equality in societies, trade liberalization proves
to be one of the most blamed for that.
The main idea of the analyzed articles is related to the relationship between trade policy and
income distribution. The connection between them provides answers to plenty of questions
regarding trade liberalization. These might be: Is there evidence that open developing economies
have a more unequal distribution of income than more protectionist ones? Or is it true that
countries that have liberalized international trade have experienced an increase in inequality?
Trade has substantial effects on the income distribution in each trading nation, so that the
benefits of trade are distributed very unevenly.
There are two main reasons why international trade has strong effects on the distribution of
income. First, resources cannot move immediately or without cost from one industry to another.
Secondly, industries differ in the factors of production they demand. A shift in the mix of goods a
country produces will reduce the demand for some factors of production, while raising the
demand for the others.

METHODS
The four articles in question study both the long term and the short term effects of trade on
income distribution.
First, the Heckscher-Ohlin model is used to understand the long-run impact on the distribution of
income. Regarding the short-run consequences, the specific factors model is used.
One of the methods used in the articles consists in an empirical analysis which states that the
income distribution can be explained by factor endowments and the degree of openness. In the
analysis, the dependent variable is the GINI coefficient. The data set consists of GINI
coefficients and quintile shares for 108 countries covering the 1947-1994 period. All the
observations are taken directly from the household surveys, at the national level, and include all
sources of income. Three factor endowments are considered: arable land per capita, skill
intensity and capital per worker.
Another method is using the general equilibrium model by taking into account technology and
growth. A basic model is used, showing that both trade and technology can be seen as causes of
changes in wages. A graphical version of this model is represented.
In the pursuit of assessing the relationship between trade liberalization and income distribution
the Stolper-Samuelson theorem is used. Empirical work relating trade liberalization and income
distribution has identified an important anomaly. The Stolper-Samuelson theorem predicts that
trade liberalization will shift income toward a countrys abundant factor. And most developing
countries, when compared to the global economy, are relatively abundant in unskilled labor.
Results at odds with the Stolper-Samuelson suggestion appear in the important work of Robbins
(1996), whose study of seven countries in Latin America and East Asia showed that in almost all
cases the relative skilled to unskilled wage rose after trade liberalization.
There is a simple theoretical explanation for this anomaly. It shows that countries which are labor
abundant in a global sense may see wages decline with liberalization if they are capital abundant
in a local sense.

A different method of assessing the impact of trade liberalization on income distribution is using
World Bank data set on income distribution, and relying on six alternative measures of trade
orientation, four of which have data for two moments in time, roughly the 1970's and 1980's. The
following trade orientation indicators were used: average tariffs (TAR), average QR coverage,
the World Bank index of outward orientation (OUT), average collected tariff ratio (PRO), Wolf's
index of import outward orientation (CLOSE) and average black-market premium (BL).
Two variables that measure the change in income inequality between the 1970's and the 1980's
were used: the change in the average Gini coefficient for each of the two decades
(AGINI = Gini80s -Gini70s; a positive number of this index denotes an increase in inequality)
and the decade-to-decade change in the average share of income accruing to the poorest 20
percent of the population (APOOR; a positive number for this indicator represents a decline in
inequality).
The data set comprises all countries with available data on income distribution and trade-policy
indexes BL and CLOSE for the 1970's and 1980's. The data set includes 44 countries, 27 of
which are developing.

LIMITS
One of the limits found in the articles is the current absence of empirical work that would allow
the authors to identify the relevant local abundance of factor endowments, as in the case of the
Stolper-Samuelson theorem. The scarcity of empirical papers also impedes the analysts to
determine the limits between personal income distribution and trade.
Another limit could be represented by the small number of countries taken in a sample, for
example the study of seven countries in Latin America and East Asia. This limitation could lead
to unrepresentative data.
Furthermore, the coexistence of tariffs and quantitative restrictions (QR's) has made the
construction of satisfactory summary indicators of trade policy at different points in time
particularly difficult.

Regarding the available income data, which is related to a complete population, it is usually
provided for a certain year, which represents a major limitation. Moreover, several limits are
represented by the scarcity of data for long periods, the errors in the data and the inadequacy of
the unit used, which is, at best, a family.

CONCLUSION
The four articles illustrate the way the trade liberalization influences income distribution, using
different methods. However, the results are still subject to some measurement problems, and to
several shortcomings of cross-country analyses.
There is a crucial difference regarding the income distribution, based on different models. The
specificity of factors to particular industries is often only a temporary problem. In time,
manufacturing employment for example can shift from declining sectors to expanding ones.
Thus, income distribution effects that arise because labor and other factors of production are
immobile represent a temporary, transitional problem. In contrast, effects of trade on the
distribution of income among land, labor and capital are more or less permanent.

REFERENCES
Donald R. Davis, 1996, Trade Liberalization and Income Distribution, NBER Working Paper
569, Available at:
https://www.researchgate.net/profile/Ronald_Fischer4/publication/4722442_Income_distribution
_and_Trade_Liberalization/links/54d37f400cf28e0697284637.pdf [the 8th of December 2016]
J. David Richardson, 1995, Income Inequality and Trade: How to think, what to conclude,
Journal of Economic Perspectives, Volume 9, Number 3, Pages 33-55, Available at:
http://n.ereserve.fiu.edu/010012462-1.pdf [the 8th of December 2016]
Antonio Spilimbergo, Juan Luis Londono, Miguel Szekely, 1997, Income Distribution, Factor
Endowments and Trade Openess, Available at:
https://publications.iadb.org/bitstream/handle/11319/6091/Income%20Distribution,%20Factor
%20Endowments,%20and%20Trade%20Openness.pdf?sequence=1 [the 8th of December 2016]
Simon Kuznets, 1955, Economic Growth and Income Inequality, The American Economic
Review, Volume XLV, Number 1, Available at: http://j-bradforddelong.net/teaching_folder/Econ_210c_spring_2002/Readings/Kuznets_Inequality.pdf [the 8th of
December 2016]