Good Institutions and Fair Trade

The paper examines how legal, economic, political and social institutions fare with different measures of inequality in a cross section framework. We differentiate between institutions based on four categories which are legal, economic, political and social. Among legal institutions, rule of law and control for corruption have a stronger impact on inequality than voice and accountability. We find that countries which practice democracy are less prone to unequal outcomes especially when it comes to wage inequality and income inequality whereas autocracy is associated with higher level of wage inequalities but its impact on income inequalities are insignificant. Though under good economic management, autocracies may redistribute incomes from the richest to the poorest, more generally an autocratic set up violates the median voter hypothesis. The results also show that political stability is more sensitive to inequalities than democracy and autocracy which is to say that the countries which are politically stable also form more equal societies. Though in a cross section analysis, our results indicate average sample characteristics of countries chosen which neutralise the single country case sensitivities and thus may have captured the simple observational analogy that most democracies in the world are also the ones which are politically stable and economically efficient whereas most autocracies, unless they are lead by enlightened leadership eventually suffer from unstable or repressed political systems. Economic institutions also play an important role in alleviating global inequalities. Whether the government is functioning effectively and whether it has a robust fiscal and monetary policy seems to have stronger impact on inequality than regulatory quality. Education for all, a proxy for social institutions, has a strong redistributive power. Overall, political stability, control for corruption and rule of law trumps any other institutional proxy in reducing inequalities in a country. On the other hand, middle income group is most likely to benefit from good functioning institutions than any other income group. Once controlling for institutions, openness is associated with increased wage inequalities across nations. However the results for trade policy are mixed. Decrease in import taxes increase wage inequality, whereas decrease in export taxes has an egalitarian effect. The results are applicable only to a larger sample of developed and developing countries and highlight the bottle neck faced by both developing and developed countries in WTO talks which have not been successful as yet in further decrease in trade taxes. In case the situation prevails, the paper calls for more South-South trade which would enable developing countries to decrease the relative wage gaps among labour force

The education bias of 'trade liberalization' and wage inequality in developing countries

The aim of this paper is to examine the impact of increased trade on wage inequality in developing countries, and whether a higher human capital stock moderates this effect. We look at the skilled-unskilled wage differential. High initial endowments of human capital imply a more egalitarian society. When more equal societies open up their economies further, increased trade is likely to induce less inequality on impact because the supply of skills better matches demand. But greater international exposure also brings about technological diffusion, further raising skilled labour demand. This may raise wage inequality, in contrast to the initial egalitarian level effect of human capital. We attempt to measure these two opposing forces. We also employ a broad set of openness indicators to measure trade liberalization policies as well as general openness, which is an outcome, and not a policy variable. We further examine what type of education most reduces inequality. Our findings suggest that countries with a higher level of initial human capital do well on the inequality front, but human capital which accrues through the trade liberalization channel has inegalitarian effects. One explanation could be that governments in developing countries invest more in higher education at the expense of primary education in order to gain immediate benefits from globalization; thus becoming prone to wage inequality after increased international trade. Our results also have implications for the speed at which trade policies are liberalized, the implication being that better educated nations should liberalize faster

When Education Explains Strong Institutions: Trade Policy also Matters

This paper empirically examines the contribution of trade liberalisation to differences in the level of prosperity across nations. We compare this with the relative contribution of institutional capacity to prosperity, as well as the role of human capital accumulation in that respect. We employ several concepts of institutional quality, trade policy and openness variables following various definitions prevalent in the literature. Unlike in the comparable study by Rodrik et al. (2004) we have (a) included a role for human capital, (b) employed six institutional variables compared to one only in Rodrik et al. (rule of law), (c) included trade policy variables, and not just openness indicators and (d) expanded the set of openness measures employed. We discover that opening up domestic markets to foreign competition by removing trade restrictions and barriers may promote economic performance. Furthermore, developing human capital is as important as superior institutional functioning for economic wellbeing. We find that openness counts for little per se in explaining income differences across countries. This is because it is an outcome and not a cause. Trade policies, and liberalisation, on the other hand, are not insignificant in explaining cross-country per-capita income variation. With regard to trade policies, export taxes are the most important in explaining cross-country per-capita income differences

On the Costs of Not Loving Thy Neighbour as Thyself

The authors examine whether greater inter-state trade, democracy and reduced military spending lower belligerence between India and Pakistan. They begin with theoretical models covering the opportunity costs of conflict in terms of trade losses and security spending, as well as the costs of making concessions to rivals. Conflict between the two nations can be best understood in a multivariate framework where variables such as economic performance, integration with rest of the world, bilateral trade, military expenditure, population are simultaneously taken into account. The authors' empirical investigation based on time series econometrics for the period 1950-2005 with causality tests suggests that reduced trade, greater military expenditure, less development expenditure, lower levels of democracy, lower growth rates and less general trade openness are all conflict enhancing. Moreover, there is reverse causality between bilateral trade, militarization and conflict; low levels of bilateral trade and high militarization are conflict enhancing, equally conflict also reduces bilateral trade and raises militarization. The authors also run forecasting simulations on 6 different VECM models. Globalization or a greater openness to international trade in general are more significant drivers of a liberal peace, rather than a common democratic political orientation suggested by the pure form of the democratic peace

Trade, Poverty, Inequality and Security

Trade, Poverty, Inequality and Securit