Trade and Development Review, Vol 2, No 2 (2009)

Does Inequality Prevent Trade Development? A Political-Economy Approach

Marcus Marktanner, Nagham Sayour

Abstract


This paper argues both theoretically and empirically that initial inequality between labor and capital income is inversely related to trade development. In the model government maximizes political support subject to the redistributive nature of trade liberalization. To test our hypothesis we set up a simultaneous system of equations consisting of proxies for social equality, political regime, level of economic development, and trade structure. We also test whether unequal countries join the General Agreement on Tariffs and Trade later. The empirical results support that unequal countries face more trade liberalization constraints than equal ones.


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