Does trade openness and FDI reduce inequality? Evidence from South Asia

Abstract

This study seeks to examine whether trade openness and inward FDI may affect income distribution in an unbalanced panel of five South Asian countries over the period of 1990-2016. The analysis of the model involves the examination of likely non-linear effect of both trade and FDI on income distribution. Therefore, dynamic panel system-generalized method of moments (SYS-GMM) estimator has been applied to mitigate the problem of nonlinearity and possible endogeneity. In the second stage, the model is extended to test the impact of education on income inequality. The hypothesis was that secondary school enrolment speeds up the process of adoption of contemporary technology and decreases inequality. The results reveal that trade and FDI have significant effects on income inequality, however, inverted U-shaped curve holds for trade as purposed by the trade theory. The component wise effect of trade was also held, except imports from advanced countries. The joint effect of trade and FDI through education has produced mixed results. South Asia needs to invest in social infrastructure and swifter the process of openness to achieve the desired goal of equitable prosperity.

Convergence effect of the Belt and Road Initiative on income disparity: evidence from China

“…Although existing studies on the relationship between trade opening and income disparity found that trade opening reduces labor income share, thereby widening income disparity (Jayadev, 2007 ; Asteriou et al, 2014 ), these empirical analyses mainly focused on trade opening among developed economies, while this paper focuses on a developing country. Contrary to the conclusions of these studies, many studies suggested that when countries engage in trade opening, the production factors that are relatively abundant gain, especially in developing countries can gain a larger share of labor income through trade opening, which in turn leads to a decrease in income inequality (Jaumotte et al, 2013 ; Roser and Cuaresma, 2016 ; Khan et al, 2020 ; Dorn et al, 2022 ). These previous studies further provide empirical support for the rationality of the research hypothesis in this paper.…”

A study on the belt and road initiative’s trade and its influencing factors: Evidence of China-South Asia’s panel data

“…Khan (2020) examines whether trade openness and inward FDI may affect income distribution in an unbalanced panel of five South Asian countries over the period of 1990-2016. The results reveal that trade and FDI have significant effects on income inequality, however, inverted Ushaped curve holds for trade as purposed by the trade theory [13]. Basnet (2020) examines the long-run impact of terms of trade (TOT) on economic growth in the context of eight South and Southeast Asian emerging economies.…”

Income Inequality in Africa: Exploring the Interaction Between Urbanization and Governance Quality

“…However, the findings issued by these are inconclusive. While some scholars found that trade openness could contribute to exacerbating income inequality (Khan et al, 2020;Xu et al, 2021), others show that trade openness could contribute to lessening income inequality (Canh et al, 2020;Le et al, 2020). Trade openness has been proxied by the sum of imports and exports divided by GDP.…”