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Openness and income disparities: does trade explain the “Mezzogiorno effect”?

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Abstract

We use Italian regional data to answer the question whether trade affects within-country income differentials. In Italy, the more affluent Northern regions trade more with the rest of the world than the poorer ones in the Southern “Mezzogiorno” regions. Prima facie, there is a positive correlation between external trade and per capita income. Studying this relationship empirically requires taking into account the endogenous component of trade. We argue that panel cointegration models can complement instrumental variables techniques to account for the endogeneity of trade in a panel context. Both methods show a positive link between trade openness and the level of income per capita.

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Notes

  1. Trade openness is measured through the actual volume of foreign trade, which differs across Italian regions even though trade policy is the same across regions. See Table 1, Figs. 1 and 2 and the Appendix for the definition Centre-North and South.

  2. Own calculations based on data from the Italian Statistical Office (ISTAT).

  3. See Banca dati REPRINT, ICE-Politecnico di Milano, www.ice.it.

  4. Figures in this section are computed from ISTAT data.

  5. We eliminate observations in which the share of bilateral imports or exports relative to partner country GDP exceeds 10%. These are less than 20 observations.

  6. See, e.g., Bank of Italy, Relazione Annuale, various issues, in particular those on 1994, 1995 and 1996.

  7. Unreported results using the capital stock per employee rather than the total capital stock are very similar.

  8. We owe this point to an anonymous referee.

  9. These results are not reported but available upon request.

  10. See also Breitung and Pesaran (2008).

  11. Note that our model is a reduced-form estimate of the impact of trade on GDP per capita. Therefore, we do not account for the possibility of reverse causality running from GDP per capita to trade.

  12. See Breitung and Pesaran (2008) for details.

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Acknowledgments

The authors would like to thank Luigi Federico Signorini, Roberto Tedeschi, and Farid Toubal as well as an anonymous referee for most helpful discussions. Any remaining errors and inaccuracies are solely our own responsibility.

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Authors and Affiliations

  1. Department of Economics, University of Tuebingen, Mohlstrasse 36, 72074, Tubingen, Germany

    Claudia M. Buch

  2. Banca d’Italia, Piazza Edison 3, 20123, Milan, Italy

    Paola Monti

Authors
  1. Claudia M. Buch
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Correspondence to Claudia M. Buch.

Appendix

Appendix

Data definitions and sources

Area: Area in Km2. Sources: ISTAT for Italian regions, World Bank (2008) for foreign partner countries.

Capital stock: The regional capital stock is computed on the basis of the total capital stock for Italy (at 2000 prices) as published by ISTAT (2006); the annual regional real investment share of total national real investment (source: ISTAT, Conti economicici regionali) is used as a proxy to allocate regionally the national capital stock.

Centre-North: Italian regions including: Piemonte, Valle d’Aosta, Lombardia, Trentino-Alto Adige, Veneto, Friuli Venezia Giulia, Liguria, Emilia-Romagna, Toscana, Umbria, Marche, Lazio.

Distance: Approximate distance formula applied to the longitude and latitude of the main regional center and of country capitals, in km.

Foreign Direct Investment: The source of the inward and outward FDI flows is Banca d’Italia balance of payments data. Inward flows by region are total FDI flows that originate from partner country “world” and whose destination are enterprises resident in a given region. Similarly FDI outflows are flows originating from enterprises residing in a given region and whose destination is partner country “world”. Regional flows do not sum up to total national flows due to the presence of transactions that could not be allocated regionally. The FDI share is computed as regional inflows plus outflows over regional GDP.

Foreign residents: The source of data on foreign residents by region is ISTAT, in particular the following publications: ISTAT (2000), ISTAT (2004) and http://demo.istat.it/. For the 1999–2002 period, data for total residents are own estimates based on data on “resident permits” published by ISTAT. The foreign residents’ share is computed as a ratio between total foreign residents by region and regional population.

Foreign trade: Trade in goods (imports and exports) at current prices and exchange rates. Computations based on ISTAT data and taking into account only trade flows regionally allocated by ISTAT.

Human capital: The human capital stock (HC) is constructed following Bronzini and Piselli (2006). In particular, the HC variable for the years 1992–2005 is computed as the average number of years of schooling needed to reach a given qualification, weighted by the share (out of the total) of employees in each region having that qualification. The data source is ISTAT (2007). Qualification levels are transformed into years of schooling in the following way: 0 years of schooling for “no qualification”, 5 for completing lower primary school, 8 for lower secondary school, 10.5 for a professional diploma, 12.5 for completing secondary education, 15.5 for a laurea breve (bachelor degree), 17.5 for a standard graduate degree, 21.5 for a “dottorato”, PhD or other post-graduate degree. No data are available for Valle d’Aosta.

Migration flows: The source of internal and external migration flows is ISTAT’s data on “bilancio demografico”. The migration share is computed as a share of the balance of total registration minus total deregistrations over total regional population. A breakdown is also available for internal migrations (registrations from another region minus deregistration to move to another region for internal migrations and registration from abroad minus deregistrations abroad).

Population: ISTAT’s demography database (ISTAT, Demo: demografia in cifre) for the population of the Italian regions; World Bank (2008) for foreign partner countries.

Real and nominal GDP per capita: For the Italian regions: ratio between regional GDP (at current prices and, until 2001, at 1995 prices, since 2002 at 2000 prices and chain indexes) as published by ISTAT’s regional accounts (ISTAT, Conti economicici regionali) and average annual regional population. For partner countries: World Bank (2008).

Research and development (R&D) capital stock: The R&D capital stock is computed according to Bronzini and Piselli (2006). Up to 2001 data are Bronzini and Piselli’s ones. For the years 2002–2005, the R&D capital stock (SD&R) is computed from ISTAT’s La ricerca e sviluppo in Italia in the following way: R&D expenditure (R t ) at current prices is first converted into constant (1995) prices, then the perpetual inventory method with a depreciation rate (δ) of 15% is applied to the 2001 capital stock, that is: SD&R t  = SD&Rt − 1(1 − δ) + R t , where SD&R0 = SD&R2001.

South: Italian regions including: Abruzzo, Molise, Campania, Puglia, Basilicata, Calabria, Sicilia, Sardegna

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Buch, C.M., Monti, P. Openness and income disparities: does trade explain the “Mezzogiorno effect”?. Rev World Econ 145, 667–688 (2010). https://doi.org/10.1007/s10290-009-0038-x

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