THE IMPACT OF TRADE OPENNESS ON INCOME INEQUALITY IN THE FORMER CENTRALLY PLANNED MIDDLE–INCOME ECONOMIES

Abstract

This study investigates the association between trade openness and income inequality in the former centrally planned middle–income economies over the period 1994–2019. Apart from the full sample, the EU member or candidate middle–income Balkan economies, and the middle–income CIS countries subsamples were used in estimations as benchmark. Foreign direct investment, inflation, government expenditures and gross fixed capital formation control variables are incorporated into the PMG–ARDL model used in the study. Although some individual country or a few panel studies in the literature have investigated the relationship between trade openness and income inequality, to the best of our knowledge, none have examined these issues focusing on the middle–income post-communist economies and its subgroups particularly. The PMG estimation results for the sample including the middle–income Balkan economies reveal that within 1% increase of trade openness, income inequality worsens by 0.27. We suggest these countries to strengthen their income redistribution strategies while pursuing policies that promote integration into the global market.

Keywords

• Transition Economies
• Trade Openness
• Income Inequality
• Panel ARDL

References

1. Albu, L.L., Lupu, R. and Calin, A.C. (2019) “A Model to Simulate The Convergence Process in The EU and in The Balkans Region Based on Empirical Evidence”, KnE Social Sciences / Economies of the Balkan and Eastern European Countries, 116–128.
2. Alili, M.Z. and Adnett, N. (2018) “Did FDI Increase Wage Inequality in Transition Economies?” International Journal of Social Economics, 45(9): 1283–1304.
3. Anderson, E., Jalles D’Orey, M.A., Duvendack, M. and Esposito, L. (2017) “Does Government Spending Affect Income Inequality? A meta‐regression analysis”, Journal of Economic Surveys, 31(4): 961–987.
4. Barusman, A.F. and Barusman, M.Y.S. (2017) “The Impact of International Trade on Income Inequality in The United States Since 1970's”, European Research Studies Journal, 4A: 35–50.
5. Braha–Vokshi, L., Rexhepi, G., Ramadani, V., Abazi–Alili, H. and Sharif, A. (2021) “The Impact of Multinational Companies on Inequality in Western Balkan Countries”, Review of International Business and Strategy, 32(2): 305–323.
6. Bekele, D. and Merid, A.S. (2020) “Determinants of Poverty in Rural Ethiopia: Evidence from Tenta Woreda, Amhara Region”, Journal of Sustainable Rural Development, 3(1–2): 3–14.
7. Cassette, A., Fleury, N. and Petit, S. (2012) “Income Inequalities and International Trade in Goods and Services: Short and Long–Run Evidence”, The International Trade Journal, 26(3): 223–254.
8. Cevik, S. and Correa–Caro, C. (2020) “Taking Down the Wall: Transition and Inequality”, Review of Development Economics, 24(1): 238–253.

9. Cornia, G.A. (1996) “Transition and Income Distribution: Theory, Evidence and Initial Interpretation”, UNU World Institute for Development Economics Research Nr. 1.
10. Cornia, G.A., Honkkila, J., Paniccia, R. and Popov, V. (1996) “Long–Term Growth and Welfare in Transitional Economies: The Impact of Demographic, Investment and Social Policy Changes”, UNU World Institute for Development Economics Research no.122.
11. De Hoyos, R.E. and Sarafidis, V. (2006) “Testing for Cross–Sectional Dependence in Panel–Data Models”, The Stata Journal, 6(4): 482–496.
12. Dickey, D.A. and Fuller, W.A. (1981) “The Likelihood Ratio Statistics for Autoregressive Time Series With A Unit Root”, Econometrica, 49(4): 1057–1072.
13. Dorn, F., Fuest, C. and Potrafke, N. (2022) “Trade Openness and Income Inequality: New Empirical Evidence”, Economic Inquiry, 60(1): 202–223.
14. Doumbia, D. and Kinda, T. (2019) “Reallocating Public Spending to Reduce Income Inequality: Can It Work?”, International Monetary Fund Asia and Pacific Department Working Paper No: WP/19/188.
15. Franco, C. and Gerussi, E. (2013) “Trade, Foreign Direct Investments (FDI) And Income Inequality: Empirical Evidence from Transition Countries”, The Journal of International Trade and Economic Development, 22(8): 1131–1160.
16. Hausman, J. (1978) “Specification Tests in Econometrics”, Econometrica, 46(6): 1251–1271.
17. Lucas, R.E.Jr. (1988) “On the mechanics of economic development”, Journal of Monetary Economics, 22(4): 3–42.
18. Feenstra, R.C., and Hanson, G.H. (1999) “The Impact of Outsourcing and High–Technology Capital on Wages: Estimates for the U.S., 1979–1990”, Quarterly Journal of Economics, 114(3): 907–940.
19. Gourdon, J., Maystre, N. and De Melo, J. (2008) “Openness, Inequality and Poverty: Endowments Matter”, Journal of International Trade and Economic Development, 17(3): 343–378.
20. Im, K.S., Pesaran, M.H. and Shin, Y. (2003) “Testing for Unit Roots in Heterogeneous Panels”, Journal of Econometrics, 115: 53–74.
21. Jensen, P.S. and Schmidt, T.D. (2011) “Testing for Cross Sectional Dependence in Regional Panel Data”, Spatial Economic Analysis, 6(4): 423–450.
22. Kumo, K., Korgun, I.A., Koval, A.G. and Trofimenko, O.Y. (2018) “Foreign Trade and Regional Inequality: The Case of the Russian Federation”, Ekonomika Regiona [Economy of Region], 14(3): 884–895.
23. Levin, A., Lin, C.F. and Chu, C.S.J. (2002) “Unit Root Tests in Panel Data: Asymptotic and Finite–Sample Properties”, Journal of Econometrics, 108: 1–24.
24. Lundberg, M. and Squire, L. (2003) “The Simultaneous Evolution of Growth and Inequality”, The Economic Journal, 113(487): 326–344.
25. Mah, J.A. (2003) “Note on Globalization and Income Distribution – The Case of Korea, 1975–1995”, Journal of Asian Economics, 14: 157–164.
26. Makreshanska–Mladenovska, S. and Petrevski, G. (2019) “Decentralization and Income Inequality in Central and Eastern European Countries”, Post–Communist Economies, 31(1): 123–136.
27. Meschi, E. and Vivarelli, M. (2009) “Trade and Income Inequality in Developing Countries”, World Development, 37(2): 287–302.
28. Neagu, O., Dumiter, F. and Braica, A. (2016) “Inequality, Economic Growth and Trade Openness: A Case Study for Central and Eastern European Countries (ECE) ”, Amfiteatru Economic Journal, 18(43): 557–574.
29. Norris, E.D., Kochhar, K., Suphaphiphat, N., Ricka, F. and Tsounta, E. (2015) ‘‘Causes and Consequences of Income Inequality: A Global Perspective”, IMF Staff Discussion Note SDN/15/13.
30. Ohlin, B.G. (1967) ‘‘Interregional and International Trade”, Cambridge: Harvard University Press.
31. Pesaran, M.H. (2004) ‘‘General Diagnostic Tests for Cross Section Dependence in Panels”, Cambridge Working Papers in Economics No. 0435.
32. Pesaran, M.H. (2007) “A Simple Panel Unit Root Test in The Presence of Cross Section Dependence”, Journal of Applied Econometrics, 22(2): 265–312.
33. Pesaran M.H., Shin, Y. and Smith, R. (1999) “Pooled Mean Group Estimation of Dynamic Heterogeneous Panels”, Journal of the American Statistical Association, 94: 621–634.
34. Pesaran, M.H. and Smith, R. (1995) “Estimating Long–Run Relationships from Dynamic Heterogeneous Panels”, Journal of Econometrics, 68(1): 79–113.
35. Phillips, P.C.B. and Perron, P. (1988) “Testing for A Unit Root in Time Series Regression”, Biometrika, 75: 335–346.
36. Ravallion, M. (2004) ‘‘Looking Beyond Averages in The Trade and Poverty Debate”, The World Bank Policy Research Working Paper Series 3461.
37. Ricardo, D. (2004) ‘‘The Principles of Political Economy and Taxation (first published 1817)”, New York: Dover Publications.
38. Romer, P.M. (1986) “Increasing Returns and Long Run Growth”, Journal of Political Economy, 94(5): 1002–1037.
39. Roser, M. and Cuaresma, J.C. (2016) “Why is Income Inequality Increasing in The Developed World?”, Review of Income and Wealth, 62(1): 1–27.
40. Salvatore, D. (2013) ‘‘International Economics”, New York: Prentice–Hall.
41. Săvoiu, G., Dinu, V. and Ciucă, S. (2013) “Foreign Direct Investment Based on Country Risk And Other Macroeconomic Factors: Econometric Models for Romanian Economy”, Romanian Journal of Economic Forecasting, 16(1): 39–61.
42. Solt, F. (2016) “The Standardized World Income Inequality Database”, Social Science Quarterly, 97(5): 1267–1281.
43. Stack, S. (1978) “The Effect of Direct Government Involvement in The Economy on The Degree of Income Inequality: A Cross–National Study”, American Sociological Review, 43(6): 880–888.
44. Stolper, W.F. and Samuelson, P. (1941) “Protection and real wages”, Review of Economic Studies, 9(1): 58–73.
45. Ullah, A., Kui, Z., Ullah, S., Pinglu, C., and Khan, S. (2021) “Sustainable Utilization of Financial and Institutional Resources in Reducing Income Inequality and Poverty”, Sustainability, 13(3): 1038.
46. Winters, L.A., McCulloch, N., and McKay, A. (2004) “Trade Liberalization and Poverty: The Evidence So Far”, Journal of Economic Literature, 42(1): 72–115.
47. Worldbank (2021a) ‘‘The World Development Indicator. https://databank.worldbank.org/source/world-development-indicators. (Accessed 1 August 2022)
48. Worldbank (2021b) New World Bank Country Classifications by Income Level: 2020–2021. https://blogs.worldbank.org/opendata/new–world–bank–country–classifications–income–level–2020–2021. (Accessed 18 August 2022)