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Trade and Inequality in Developing Countries: An Empirical Assessment

By Susan Zhu and Daniel Trefler

Abstract

Developing and newly industrialized countries that have experienced the sharpest increases in wage inequality are those whose export shares have shifted towards more skill-intensive goods. We argue that this can be explained by technological catch-up. We develop this insight using a model that features both Ricardian and endowmentsbased comparative advantage. In this model Southern catch-up causes production of the least skill-intensive Northern goods to migrate South (where they become the most skill-intensive Southern goods). This raises wage inequality in both the South and the North. We provide empirical evidence that strongly supports this causal mechanism: Southern catch-up exacerbates Southern inequality by redirecting Southern export shares towards more skill-intensive goodsinternational trade, inequality, Southern catch-up

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