Advertisement

Open Economies Review

, Volume 28, Issue 4, pp 603–631 | Cite as

Tariff Reduction and Income Inequality: Some Empirical Evidence

  • Jorge Rojas-Vallejos
  • Stephen J. TurnovskyEmail author
Research Article

Abstract

This paper explores the relationship between tariff reductions and income inequality for 37 countries over the period 1984 to 2010, a period of extensive trade liberalization. Using panel data techniques we find that a permanent reduction in the tariff rate will significantly increase short-run income inequality. To obtain further insight into how the distribution of income is affected, we also estimate the impact of tariffs on income shares by quintiles. We find that the relative income of the lowest quintile is the most adversely affected, while the greatest beneficiaries are the agents in the second richest quintile. By adopting a panel data approach, and including a wide range of control variables, we are confident that these findings reflect causal effects rather than merely reflecting spurious correlations. We also find that reducing tariffs will likely increase long-run income inequality, although these results are less conclusive. The empirical evidence provides some support for the proposition that the speed with which, and the initial level from which, the tariff is adjusted affects income inequality. Finally, our empirical analysis confirms the conventional result that tariff reductions have an expansionary effect on aggregate output. This suggests that tariff reduction involves at least a short-run tradeoff between increasing the level of economic activity coupled with more income inequality.

Keywords

Tariff reduction Income inequality Empirical evidence 

JEL Classifications

C23 D31 F13 F41 

Notes

Acknowledgements

Rojas-Vallejos’s research was supported in part by the BecasChile Scholarship Program of the Chilean Government and the Grover and Creta Ensley Fellowship of the University of Washington. Turnovsky’s research was supported in part by the Van Voorhis endowment at the University of Washington. We thank Chris Papageorgiou for his constructive suggestions. Also, comments received at the 2014 Conference of the Association of Public Economic Theory, the 2014 Annual Conference of the Chilean Economic Association, the 4th International Economic Conference of the Turkish Economic Association and the 2015 Society for Computational Economics conference are gratefully acknowledged.

Supplementary material

11079_2017_9439_MOESM1_ESM.docx (15 kb)
ESM 1 (DOCX 15 kb)
11079_2017_9439_MOESM2_ESM.docx (14 kb)
ESM 2 (DOCX 14 kb)
11079_2017_9439_MOESM3_ESM.docx (16 kb)
ESM 3 (DOCX 15 kb)
11079_2017_9439_MOESM4_ESM.docx (15 kb)
ESM 4 (DOCX 15 kb)

References

  1. Albertus M, Menaldo VA (2016) Capital in the twenty-first century - in the rest of the world. Annual Review of Political Science 19:49–66CrossRefGoogle Scholar
  2. Alesina A, Rodrik D (1994) Distributive politics and economic growth. Q J Econ 109:465–490CrossRefGoogle Scholar
  3. Aneuryn-Evans G, Deaton A (1980) Testing linear versus logarithmic regression models. Rev Econ Stud 47:275–291CrossRefGoogle Scholar
  4. Arellano M, Bond S (1991) Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. Rev Econ Stud 58:277–297CrossRefGoogle Scholar
  5. Arellano M, Bover O (1995) Another look at the instrumental variable estimation of error-components models. J Econ 68:29–51CrossRefGoogle Scholar
  6. Atkinson AB (1970) On the measurement of inequality. J Econ Theory 2:244–263CrossRefGoogle Scholar
  7. Barro R (2000) Inequality and growth in a panel of countries. J Econ Growth 5:5–32CrossRefGoogle Scholar
  8. Barro R, Lee JW (2001) International data on educational attaintment: updates and implications. Oxf Econ Pap 53:541–563CrossRefGoogle Scholar
  9. Barro R, Lee JW (2013) A new data set of educational attainment in the world, 1950-2010. J Dev Econ 104:184–198CrossRefGoogle Scholar
  10. Bergh A, Nilsson T (2010) Do liberalization and globalization increase world inequality? Eur J Polit Econ 26:488–505CrossRefGoogle Scholar
  11. Blundell R, Bond S (1998) Initial conditions and moment restrictions in dynamic panel data models. J Econ 87:115–143CrossRefGoogle Scholar
  12. Bohara AK, Gawande K, Sanguinetti P (2004) Trade diversion and declining tariffs: evidence from Mercosur. J Int Econ 64:65–88CrossRefGoogle Scholar
  13. Bound J, Krueger AB (1991) The extent of measurement error in longitudinal earnings data: do two wrongs make a right? J Labor Econ 9:1–24CrossRefGoogle Scholar
  14. Bourguignon F, Morrisson C (1998) Inequality and development: the role of dualism. J Dev Econ 57:233–257CrossRefGoogle Scholar
  15. Box GEP, Cox DR (1964) An analysis of transformations. J R Stat Soc Ser B Methodol 26:211–252Google Scholar
  16. Breen R, García-Peñalosa C (2005) Income inequality and macroeconomic volatility: an empirical investigation. Rev Dev Econ 9:380–398CrossRefGoogle Scholar
  17. Carpenter SB, Rodgers WM (2004) The disparate labor market impacts of monetary policy. Journal of Policy Analysis and Management 23:813–830CrossRefGoogle Scholar
  18. Caselli F, Ventura J (2000) A representative consumer theory of distribution. Am Econ Rev 90:909–926CrossRefGoogle Scholar
  19. Chinn MD, Ito H (2008) A new measure of financial openness. Journal of Comparative Policy Analysis: Research and Practice 10:309–322CrossRefGoogle Scholar
  20. Cinak, M., Demirguc-Kunt A., Feyen E. & Levine R. (2012). Global financial development database (GFDD). World Bank policy research, Working paper 6175Google Scholar
  21. Deininger K, Squire L (1997) Economic growth and income inequality: reexamining the links. Finance & Development 34:38–41Google Scholar
  22. Dollar D, Kraay A (2004) Trade, growth, and poverty. Econ J 114:F22–F49CrossRefGoogle Scholar
  23. Duarte R, Pinilla V, Serrano A (2013) Is there an environmental Kuznets curve for water use? A panel smooth transition regression approach. Econ Model 31:518–527CrossRefGoogle Scholar
  24. Edwards S (1997) Trade policy, growth, and income distribution. Am Econ Rev 87:205–210Google Scholar
  25. Forbes KJ (2000) A reassessment of the relationship between inequality and growth. Am Econ Rev 90:869–887CrossRefGoogle Scholar
  26. Fouquau J, Hurlin C, Rabaud I (2008) The Feldstein-Horioka puzzle: a panel smooth transition regression approach. Econ Model 25:284–299CrossRefGoogle Scholar
  27. Freedom House (2015) Freedom in the world. Washington D.C, Freedom HouseGoogle Scholar
  28. Galbraith, J.K. (1998). With economic inequality for all. The Nation, pp 7–14Google Scholar
  29. Goldberg PK, Pavcnik N (2007) Distributional effects of globalization in developing countries. J Econ Lit 45:39–82CrossRefGoogle Scholar
  30. González, A., Teräsvirta T. & van Dijk D. (2005). Panel smooth transition regression models. SSE/EFI Working paper series in economics and Finance. Research paper no. 604Google Scholar
  31. Gorman W (1953) Community preference fields. Econometrica 21:63–80CrossRefGoogle Scholar
  32. Granger CWJ, Teräsvirta T (1993) Modelling dynamic nonlinear relationships. Oxford University Press, OxfordGoogle Scholar
  33. Griliches Z, Hausman JA (1986) Errors in variables in panel data. J Econ 31:93–118CrossRefGoogle Scholar
  34. Hansen LP (1982) Large sample properties of generalized method of moments estimators. Econometrica 50:1029–1054CrossRefGoogle Scholar
  35. Hansen BE (1999) Threshold effects in non-dynamics panels: estimation, testing, and inference. J Econ 93:345–368CrossRefGoogle Scholar
  36. Jaumotte F, Lall S, Papageorgiou C (2013) Technology, or trade and financial globalization? IMF Economic Review 61:271–309CrossRefGoogle Scholar
  37. Jorgenson DW, Vu K (2005) Information technology and the world economy. Scand J Econ 107:631–650CrossRefGoogle Scholar
  38. Jorgenson DW, Vu K (2007) Information technology and the world growth resurgence. Ger Econ Rev 8:125–145CrossRefGoogle Scholar
  39. Katsimi M, Moutos T (2010) Inequality and the relative reliance on tariffs. Rev Int Econ 18:121–137CrossRefGoogle Scholar
  40. Kleibergen F, Paap R (2006) Generalized reduced rank tests using the singular value decomposition. J Econ 133:97–126CrossRefGoogle Scholar
  41. Lane PR, Milesi-Ferretti GM (2007) The external wealth of nations mark II: revised and extended estimates of foreign assets and liabilities. J Int Econ 73:223–250CrossRefGoogle Scholar
  42. Li H, Zou H-F (1998) Income inequality is not harmful for growth: theory and evidence. Rev Dev Econ 2:318–334CrossRefGoogle Scholar
  43. Li H, Squire L, Zou H-F (1998) Explaining international and intertemporal variations in income inequality. Econ J 108:26–43CrossRefGoogle Scholar
  44. Lim, G.C. & McNelis P.D. (2014). Income inequality, trade and financial openness. Melbourne institute Working paper series, Working paper no. 7/14Google Scholar
  45. Milanovic, B. (2014). All the Ginis database. World Bank development research program. http://Econ.Worldbank.Org. Accessed 7 2014
  46. Milanovic, B. & Squire L. (2005). Does tariff liberalization increase wage inequality? Some empirical evidence. National Bureau of economic research, Working paper no. 11046Google Scholar
  47. Nickell S (1981) Biases in dynamic models with fixed effects. Econometrica 49:1417–1426CrossRefGoogle Scholar
  48. Perotti R (1996) Growth, income distribution, and democracy: what the data say? J Econ Growth 1:149–187CrossRefGoogle Scholar
  49. Persson T, Tabellini G (1994) Is inequality harmful for growth? Am Econ Rev 84:600–621Google Scholar
  50. Piketty T (2011) On the long-run evolution of inheritance: France 1820-2050. Q J Econ 126:1071–1131CrossRefGoogle Scholar
  51. Piketty T, Saez E (2014) Inequality in the long run. Science 344:838–843CrossRefGoogle Scholar
  52. Rojas-Vallejos J, Turnovsky SJ (2015) The consequences of tariff reduction for economic activity and inequality. Open Econ Rev 26:601–631CrossRefGoogle Scholar
  53. Sala-i-Martin X (2006) The world distribution of income: falling poverty and… convergence, period. Q J Econ 121:351–397CrossRefGoogle Scholar
  54. Savvides A (1998) Trade policy and income inequality: new evidence. Econ Lett 61:365–372CrossRefGoogle Scholar
  55. Sen P, Turnovsky SJ (1989) Tariffs, capital accumulation, and the current account in a small open economy. Int Econ Rev 30:811–831CrossRefGoogle Scholar
  56. Solt F (2009) Standardizing the world income inequality database. Soc Sci Q 90:231–242CrossRefGoogle Scholar
  57. Teräsvirta T (1994) Specification, estimation, and evaluation of smooth transition autoregressive models. J Am Stat Assoc 89:208–218Google Scholar
  58. Voitchovsky S (2005) Does the profile of income inequality matter for economic growth? Distinguishing between the effects of inequality in different parts of the income distribution. J Econ Growth 10:273–296CrossRefGoogle Scholar
  59. Wacziarg R, Welch KH (2008) Trade liberalization and growth: new evidence. World Bank Econ Rev 22:187–231CrossRefGoogle Scholar
  60. Windmeijer F (2005) A finite sample correction for the variance of linear efficient two-step GMM estimators. J Econ 126:25–51CrossRefGoogle Scholar
  61. World Bank (2015) The world development Indicators database. Washington D.C, World BankGoogle Scholar

Copyright information

© Springer Science+Business Media New York 2017

Authors and Affiliations

  1. 1.Pontificia Universidad Católica de ValparaísoValparaísoChile
  2. 2.University of WashingtonSeattleUSA

Personalised recommendations