Premium
Trade and income in the long run: Are there really gains, and are they widely shared?
Author(s) -
Cerdeiro Diego A.,
Komaromi Andras
Publication year - 2021
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1111/roie.12494
Subject(s) - economics , romer , decile , economic inequality , inequality , income distribution , income inequality metrics , welfare , econometrics , demographic economics , geography , mathematical analysis , statistics , cartography , mathematics , market economy
In the cross‐section of countries, there is a strong positive correlation between trade and income, and a negative relationship between trade and inequality. Does this reflect a causal relationship? We revisit the Frankel and Romer (1999) identification strategy, and exploit countries’ exogenous geographic characteristics to estimate the causal effect of trade on income and inequality. Our cross‐country estimates for trade’s impact on real income are consistently positive and significant over time. In addition, we do not find any statistical evidence that more trade increases aggregate measures of income inequality in the long run. A decile‐level decomposition reveals that the positive effect of trade on income decreases monotonically along the income distribution, suggesting that trade integration should be an integral part of long‐run development agendas under any reasonable social welfare function. Addressing previous concerns in the literature, we carefully analyze the validity of our geography‐based instrument, and confirm that the IV estimates for the impact of trade are not driven by other direct or indirect effects of geography through non‐trade channels.