A Cross-National Evidence on Initial Inequality and Openness

Abstract

Using a cross-national evidence, this paper establishes a negative association between initial inequality, either asset or income, and trade openness. It is found that a country with a higher initial inequality (measured by land or income gini indices close to 1960) tends to have more trade protection. In other words, a country with greater asset or income inequality generally has a lower openness measure (compiled by Sachs and Warner), smaller shares of trade (sum of export and import) and import to GDP and a higher black market premium (compiled by Levine, Loayza and Beck). The empirical results are robust to a few different econometric methods and to the inclusion of some independent variables. A possible interpretation of the observed relationship is that well-organized special interests groups can influence their interests in the formation of trade policy. Further, the existence and number of organized groups in an economy can be determined by the asset and/or income distributions. Therefore, the main implication of this paper is that it is possible to observe an indirect impact of inequality on economic performances, such as investment and economic growth. through openness as long as the openness is endogenous on initial inequality.