Trade and Income Inequality in Developing Countries

Abstract

We use a dynamic specification to estimate the impact of trade on within-country income inequality in a sample of 65 developing countries (DCs) over the 1980-99 period. Our results suggest that trade with high income countries worsen income distribution in DCs, through both imports and exports. These findings provide support to the hypothesis that technological differentials and the skill biased nature of new technologies may be important factors in shaping the distributive effects of trade. Moreover, we observe that the previous results only hold for middle-income countries (MICs); we interpret this evidence by considering the greater potential for technological upgrading in MICs. © 2008 Elsevier Ltd. All rights reserved.