International Trade, Government, and Income Distribution in Peru since 1870

Abstract

Whether and how the international trade and investments of less-developed countries affect their patterns of income distribution has long been a matter of interest and debate. Classical economic theory has tended to be optimistic on this count based on the assumption that when poor, heavily populated countries specialize in and export the labor-intensive goods in which they are expected to have an advantage, they will grow fast and improve their income distribution as well. But while trade's positive impact on distribution may be the natural expectation when a country's exports are mainly labor-intensive manufactures, no such generalization is warranted when primary products dominate the export mix, even though one might still expect some loose tendency toward labor intensity. The distribution of rents associated with an export-specific input or inputs may be very concentrated (often the case with mineral exports) or relatively egalitarian (as with exports produced by small family farms), but political factors also affect who gets them. Other, less-direct effects may also be important, including the type of linkages from the export sector, the demands created by the income they generate, and the direction of government expenditure of the fiscal revenues resulting from the trade.