Working Paper: CEPR ID: DP8616
Authors: Andrés Rodríguez-Pose
Abstract: This paper examines the relationship between openness and within-country regional inequality across 28 countries over the period 1975-2005. In particular, it tests a) whether increases in trade lead to rising inequalities, b) whether these inequalities recede in time, and c) whether increases in global trade affect the developed and developing worlds differently. Using static and dynamic panel data analysis, it is found that while increases in trade per se do not lead to greater territorial polarisation, in combination with certain country-specific conditions, trade has a positive and significant association with regional inequality. States with higher inter-regional differences in sectoral endowments, a lower share of government expenditure, and a combination of high internal transaction costs with a higher degree of coincidence between the regional income distribution and regional foreign market access positions have experienced the greatest rise in territorial inequality when exposed to greater trade flows. Hence, changes in trade regimes have a more polarising and enduring effect in low- and middle-income countries, whose structural features tend to enhance the trade-inequality effect and whose levels of internal spatial inequality are, on average, significantly higher than in high-income countries.
Keywords: developed countries; developing countries; regional inequality; trade
JEL Codes: F11; O18; R12; R58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increases in trade (F19) | Regional inequality (R11) |
| Higher interregional differences in sectoral endowments (R11) | Trade increases regional inequality (F61) |
| Lower shares of government expenditure (H59) | Trade increases regional inequality (F61) |
| Higher internal transaction costs (D23) | Trade increases regional inequality (F61) |
| Trade (F19) | Higher existing levels of spatial inequality in developing countries (F63) |
| Previous levels of inequality (I24) | Trade influences regional inequality (F61) |