El efecto del comercio y la inversion extranjera directa en la desigualdad: ?importan la gobernanza y la estabilidad macroeconomica?
| Autor | Angeles-Castro, Gerardo |
The effect of trade and foreign direct investment on inequality: do governance and macroeconomic stability matter?
Introduction
The surge of market-oriented policies, such as deregulation, privatization, liberalization of markets and macroeconomic discipline, undertaken on a global scale since the early 1980s, has created the preconditions for the expansion of trade and the flow of investments across countries. The theoretical support for these economic policies is the standard neoclassical theory, which argues that trade, investment and, in general, the market mechanisms boost growth and facilitate development. This view also holds that an important factor affecting growth and the effectiveness of the market system is the efficient organization of the domestic economy itself (Gilpin, 1987, pp. 265-266).
The implications of this model for income distribution are that high and sustained rates of growth and the expansion of exports foster employment reduce poverty and eventually provide additional resources that facilitate the distribution of income.
Moreover, economic liberalism facilitates the operation of market forces and the adjustment to world prices, which allow resources to be allocated more efficiently. The theoretical formulations explaining this effect are the orthodox principle of comparative advantages and the Stolper-Samuelson theorem. The latter is a neoclassical two-factor model, in which foreign trade increases the use of the cheaper-abundant factor as exports and imports adjust according to the principle of comparative advantages, while the costly-scarce factor is used less. This mechanism increases the income of the factor which is relatively most used in the export sector and which is also most abundant. For example, this factor is conventionally assumed to be unskilled labor in developing countries; by the same token, income distribution is expected to improve.
The set of market-oriented policies is a policy prescription often referred to as the Washington Consensus1 or first generation reforms (Ortiz, 2003, pp. 14-17). These terms are applied especially in developing countries.
By applying panel data techniques, with observations across countries and over time, this paper is aimed at testing the effect of the economic variables--trade, investment, macroeconomic discipline and employment--that are assumed to improve income distribution.
Over the last few years, leading globalizers and multilateral institutions have induced support for a set of socio-political norms, and have also recognized the need for a stronger governance dimension. They have added institution building, civil society participation, social and human capital formation, safety nets, transparency and accountability, among others, to the original economic norms or first generation policies. The global governance agenda is a response to the financial crises that have hit emerging markets since 1995; the increasing perception that liberalization brings with it inequality and other subsequent forms of resistance to globalization (Higgott, 2000, pp. 131-140).
This set of socio-political norms is usually called the Post Washington Consensus (PWC) or second generation reforms. The PWC is an attempt to socialize and humanize the operation of market forces, and to legitimize global economic liberalization, although there is also a genuine recognition of the importance of tackling issues of fairness and inequality (Edwards, 1999). In this model, the re-empowerment of the state plays a central role for addressing the socioeconomic dislocation that may be generated by global liberalization. Thus, in this context, the understanding of governance is the effective and efficient management of the modern state.
Moreover, from this perspective domestic efficiency and sound and disciplined macroeconomic policies accentuate the benefits of globalization, and are associated with sustainable economic growth and equity over the long-run. In contrast, those countries which do not adopt sound policies and show evidence of pronounced macroeconomic disequilibria are likely to fall behind in relative terms (IMF, 1997, p. 72; Camdessus, 1998, p. xiv; Higgott and Phillips, 2000, p. 363). In this context, the paper also tests the effects of the PWC approach on income distribution. For this purpose we use variables such as general government expenditure to proxy the size of the state, and subsidies and transfers to proxy the social orientation of the state. We also explore the effect of trade and FDI under different scenarios of macroeconomic stability and governance. Finally, we test the effect of human capital formation, represented by secondary school enrollment, on income distribution. Education is deemed as one of the key elements in the PWC perspective.
We find that the variable on trade exerts a weak benefit on income distribution, but the benefit increases over the longer run; however, the effect is statistically significant only on the samples which comprise countries associated with good governance or macroeconomic stability. The flow of FDI increases inequality under any scenario, but the effect is mitigated in those countries that exhibit domestic efficiency. Inflation worsens inequality in those countries with domestic inefficiency, and this variable adversely affects income distribution even in those countries which exhibit good governance, although, in any case, the effect is weak. Inflation serves as a proxy for macroeconomic stability because it is shown that it affects inequality through budget deficit and money supply.
Manufactured exports reduce inequality, whereas the expansion of primary exports does not exert benefit on income distribution under any scenario. Employment benefits income distribution; however, when we explore the effects of employment by sector we notice that the expansion of employment in industry reduces inequality; in contrast, employment in agriculture is not able to improve income distribution. Consequently, the analysis of exports and employment by sector suggests that emphasis on primary production does not form the basis for redistributional effects. Even those countries with some form of domestic inefficiency, which are associated with lower levels of development and also with comparative advantages supported on natural resources and unskilled labor, do not seem to improve income distribution with the expansion of primary exports. It is also worth noting that manufactured exports and employment in industry can have longer run benefits on income distribution.
As for the set of socio-political norms underlined in the PWC, we find that domestic efficiency can help to reduce the adverse effect of FDI on income distribution, while it can also help to enhance benefits from trade. Moreover, a stronger state, social expenditure, and human capital formation are important factors to decrease inequality. These findings suggest that the PWC represents an improvement to mitigate the adverse effects that the operation of markets can exert on income distribution.
The paper is organized as follows: section I analyzes the characteristics of the data-sets on income distribution available in the literature, and selects the appropriate option for this study. It also presents the features of the explanatory variables included in the model. Section II explains the econometric method applied in the analysis. Section III gives results. Finally, concluding remarks are provided in section IV.
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The data
Data on income inequality
One of the features that characterize the available data-sets on income inequality is that the coverage is sparse and varies widely across countries and over time. In the absence of adequate longitudinal data, some studies attempting to assess the trend of inequality worldwide over time draw general conclusions from cross sectional data, so as to try to overcome this major drawback (Milanovic, 1995; Jha, 1996). However, this type of data does not deal with intertemporal relationships. In addition, other studies restrict attention to a subset of the data, such as five-year intervals (De Gregorio and Lee, 2002; Dollar and Kraay, 2004) or group the data in five-year or ten-year averages (deininger and Squire, 1998; Calderon and Chong, 2001), but in these cases there is a risk of bias in the selection of the subset or in the construction of the average, respectively. Finally, in order to improve coverage across space and through time, other studies use data-sets measuring a component of overall income inequality (Galbraith and Kum, 2002); however, these data-sets are not representative samples covering all the population.
So as to provide an accurate assessment, the data-set on income inequality must contain a substantial coverage across countries and over time. It must also be consistent and harmonized, and based on a representative measure covering all of the population.
The competing options available in the literature have the following characteristics: the World Bank data-set by deininger and Squire (hereafter, D & S) in its 1996 version and the World Income Inequality database by unu/wider (2007) are important compilations of Gini coefficients reported in the literature; however, they suffer from a substantial degree of heterogeneity and sparse coverage. The Luxembourg Income Study (2007) assembles observations that are more harmonized than the previous two data-sets, since it obtains information from standardized macro-level data, but its coverage is constrained to 29 countries. The UTIP-uinido dataset by UTIP (2002) calculates industrial pay-inequality. It has a large coverage and shows evidence of consistency and accuracy, but it is not an index of overall inequality.
The Estimated Household Income Inequality (EHII), constructed by Galbraith and Kum (2003), aims to fill the gaps and correct what they consider errors in the D & S data-set. This indicator takes advantage of the information in...
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