Discussion Paper

No. 2019-59 | November 12, 2019
Inequality in Latin America: the role of the nature of trade and partners

Abstract

This paper investigates the relationship between trade openness and income inequality in 11 Latin American countries over the period 1989-2015. We use a panel dynamic approach to take into account the high persistence of income inequality. The analysis classifies trade flows, exports and imports according to trading partner’s economic development and income level. Then, we split trade flows according to different stages of production. The results show that overall trade flows lessen income inequality in Latin America. However, trade has divergent effects depending on the trade partners: trade with similar-income countries exacerbates inequality, while trade with developing countries and higher-income countries reduces income dispersion. The results also emphasise the role of the export channel (in particular in primary commodities) in explaining income inequality in Latin American countries and imports of consumption goods seem to matter more than imports of intermediate and capital goods.

JEL Classification:

F14, O54, E25

Assessment

  • Downloads: 221

Links

Cite As

Teresa María García Muñoz, Juliette Milgram Baleix, and Omar Odeh Odeh (2019). Inequality in Latin America: the role of the nature of trade and partners. Economics Discussion Papers, No 2019-59, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2019-59


Comments and Questions


Anonymous - Referee Report 1
January 07, 2020 - 15:44

See attached file


Anonymous - Reply to Referee 1
February 28, 2020 - 14:32

Our reply to referee 1 is available in the attached file


Anonymous - Referee Report 2
February 04, 2020 - 15:53

Comments
1. This paper studies empirically the relationship between trade openness and inequality in 11 Latin American countries using dynamic panel data techniques. However, what the paper really does is to estimate a Kuznets curve, where trade is just one control. Surprisingly, the paper is silent about this, and the ...[more]

... Kuznets’ paper is not even cited in the text and in the references, in spite of the large number of empirical paper estimating similar models in the literature, also for Latin America countries. This is sad. I recommend to the authors to review this vast empirical literature, especially those papers focusing in Latin America countries and say what they are really doing.
2. However, my main concern refers to the estimation results. The authors estimate a negative relationship with per capita GDP, and a positive relationship with the square of per capita GDP, for some specifications. This is against existing empirical evidence, and against the data. Inequality for Latin America countries (proxied by the Gini coefficient) has decline in most of the countries in the last years (see Figure 1 in page 11), in a period with significant growth. This is true at last for Argentina, Bolivia, Brazil, Chile, Ecuador, Peru, Uruguay, and Venezuela. Estimation results are not consistent with this piece of empirical evidence.
3. Furthermore, estimations predict the existence of a U-shaped relationship between inequality and per capita GDP. Even, in some specifications, the coefficient for the square root of per capita GDP is not significant, predicting that as per capita GDP increases, also inequality increases for these countries. Empirical evidence indicates the opposite.
4. More control variables should be included in the econometric model to check for robustness beyond FDI net inflow. Inequality is a serious issue, and it should be treated seriously.
5. I do not understand the meaning of the data in Table 1. What is the Min (-12.31) or the Max (18.28) of GDP growth?


Anonymous - Reply to Referee 2
February 28, 2020 - 14:34

Our reply to referee 2 is available in the attached file.