{"id":7792,"date":"2022-06-08T18:42:00","date_gmt":"2022-06-08T22:42:00","guid":{"rendered":"https:\/\/latinamericasecurityreport.com\/?p=7792"},"modified":"2022-06-08T18:42:00","modified_gmt":"2022-06-08T22:42:00","slug":"trade-can-worsen-income-inequality","status":"publish","type":"post","link":"https:\/\/latinamericasecurityreport.com\/?p=7792","title":{"rendered":"Trade Can Worsen Income Inequality"},"content":{"rendered":"
MIT economists studying individual income data in Ecuador found that international trade generates income gains that are about 7 percent greater for those at the 90th income percentile, compared to those of median income, and up to 11 percent greater for the top percentile of income.<\/figcaption><\/figure>\n

Using Ecuador as case study, economists show international trade widens the income gap in individual countries.<\/strong><\/p>\n

International trade exacerbates domestic income inequality, at least in some circumstances, according to an empirical study that two MIT economists helped co-author.<\/p>\n

The research, focusing on Ecuador as a case study, digs into individual-level income data while examining in close detail the connections between Ecuador\u2019s economy and international trade. The study finds that trade generates income gains that are about 7 percent greater for those at the 90th income percentile, compared to those of median income, and up to 11 percent greater for the top percentile of income in Ecuador.<\/p>\n

\u201cTrade in Ecuador tends to be something that is good for the richest, relative to the middle class,\u201d says Dave Donaldson, a professor in the MIT Department of Economics and co-author of a published paper detailing the findings. \u201cIt\u2019s pretty neutral in terms of the middle class relative to the poorest. The [largest benefits] are found both among those who have founded businesses, as well as those who are well off and work as employees. So, it\u2019s both a labor and capital effect at the top.\u201d<\/p>\n

The study also identifies the dynamics that generate this outcome. Ecuadorian exports, mostly commodities and raw goods, tend to help the middle class or those less well-off, while the country\u2019s import activities generally help the already well-off \u2014 and overall, importing has a bigger effect.<\/p>\n

\u201cThere is a horse race between the export channel and the import channel,\u201d says Arnaud Costinot, also a professor in the MIT Department of Economics and co-author of the paper. \u201cUltimately, what is quantitatively more important in the data, in the case of Ecuador, is the import channel.\u201d<\/p>\n

The paper, \u201cImports, Exports, and Earnings Inequality: Measures of Exposure and Estimates of Incidence<\/a>,\u201d appears online in the Quarterly Journal of Economics<\/em>. The authors are Rodrigo Adao, an associate professor at the University of Chicago Booth School of Business; Paul Carillo, a professor of economics and international affairs at George Washington University; Costinot, who is also associate head of MIT\u2019s Department of Economics; Donaldson; and Dina Pomeranz, an assistant professor of economics at the University of Zurich.<\/p>\n

Commodities out, machinery in<\/strong><\/p>\n

The effect of international trade on a nation\u2019s income distribution is hard to pinpoint. Economists cannot, after all, devise a country-size experiment and study the same nation, both with and without trade involvement, to see if differences emerge.<\/p>\n

As an alternate strategy, the scholars developed an unusually detailed reconstruction of trade-related economic activity in Ecuador. For the period from 2009 to 2015, they examined revenue from 1.5 million firms with a tax ID, and income for 2.9 million founders and employees of those firms. The scholars collected revenue data, payments to labor, and divided up individual income data according to three levels of education (ending before high school, high school graduates, and college graduates) across all 24 provinces in Ecuador.<\/p>\n

Digging further, the research team compiled customs records, VAT (Value-Added Tax) data on purchases, and domestic firm-to-firm trade data, to develop a broad and detailed picture of the value of imports and exports, as well as business transactions that occurred domestically but were related to international trade.<\/p>\n

Overall, oil accounted for 54 percent of Ecuador\u2019s exports in the period from 2009 to 2011, followed by fruits (11 percent), seafood products (10 percent), and flowers (4 percent). But Ecuador\u2019s imports are mostly manufactured products, including machinery (21 percent of imports), chemicals (14 percent), and vehicles (13 percent).<\/p>\n

This composition of imports and exports \u2014 commodities out, manufactured goods in \u2014 turns out to be crucial to the relationship between trade and greater income inequality in Ecuador. Firms that employ well-educated, better-paid individuals also tend to be the ones benefitting from trade more because it allows their firms to buy manufactured goods more cheaply and flourish, in turn bolstering demand for more extensively educated workers.<\/p>\n

\u201cIt\u2019s all about whether trade increases demand for your services,\u201d Costinot says.<\/p>\n

\u201cThe thing that is happening in Ecuador is that the richest individuals tend to be employed by firms that directly import a lot, or tend to be employed by firms that are buying a lot of goods from other Ecuadorian firms that import a lot. Getting access to these imported inputs lowers their costs and increases demand for the services of their workers.\u201d<\/p>\n

For this reason, ultimately, \u201cearnings inequality is higher in Ecuador than it would be in the absence of trade,\u201d as the paper states.<\/p>\n

Reconsidering trade ideas<\/strong><\/p>\n

As Costinot and Donaldson observe, this core finding runs counter what some portions of established trade theory would expect. For instance, some earlier theories would anticipate that opening up Ecuador to trade would bolster the country\u2019s relatively larger portion of lower-skilled workers.<\/p>\n

\u201cIt\u2019s not what a standard theory would have predicted,\u201d Costinot says. \u201cA standard theory would be one where [because] Ecuador has [a] relatively scarcity, compared to a country like the U.S., of skilled workers, not unskilled workers, as Ecuador turns to trade, the low-skilled workers should be the ones benefitting relatively more. We found the opposite.\u201d<\/p>\n

Additionally, Donaldson notes, some trade theories incorporate the idea of \u201cperfect substitution,\u201d that like goods will be traded among countries \u2014 with level wages resulting. But not in Ecuador, at least.<\/p>\n

\u201cThis is the idea that you could have a country making a good and other countries making an identical good, and \u2018perfect substitution\u2019 across countries would create strong pressure to equalize wages in the two countries,\u201d Donaldson says. \u201cBecause they\u2019re both making the same good in the same way, they can\u2019t pay their workers differently.\u201d However, he adds, while \u201cearlier thinkers [economists] didn\u2019t think it was literally true, it\u2019s still a question of how strong that force is. Our findings suggest that force is quite weak.\u201d<\/p>\n

Costinot and Donaldson acknowledge that their study must take into account a variety of complexities. For instance, they note, about half of Ecuador\u2019s economy is informal, and cannot be measured using official records. Additionally, global \u201cshocks\u201d can affect trade patterns in a given country at a given time \u2014 something they test for and incorporate into the current study.<\/p>\n

And while trade patterns can also change more gradually, the data from the 2009-2015 time period are stable enough to suggest that the researchers identified a clear and ongoing trend in Ecuador.<\/p>\n

\u201cPeople don\u2019t change jobs very often, and the income distribution does not change very much,\u201d Donaldson says. \u201cWe did make sure to check that \u2014 within the sample, the stability is very high.\u201d<\/p>\n

A global pattern?<\/strong><\/p>\n

The study also naturally raises the question of whether similar outcomes might be found in other countries. In the paper, the authors list many other countries to which their methods could be applied. <\/p>\n

\u201cEcuador is definitely very different from the United States, but it\u2019s not very different from many middle-income countries that are mostly exporting commodities in exchange for manufactured goods,\u201d Costinot says. Donaldson, for his part, is already working on a similar project in Chile.<\/p>\n

\u201cThat pattern of participation [in global trade] is important, and exporting could be very different across countries,\u201d Donaldson says. \u201cBut it would be very easy to know, if you just found the data.\u201d<\/p>\n","protected":false},"excerpt":{"rendered":"

Using Ecuador as case study, economists show international trade widens the income gap in individual countries. International trade exacerbates domestic income inequality, at least in some circumstances, according to an empirical study that two MIT economists helped co-author. The research, focusing on Ecuador as a case study, digs into individual-level income data while examining in…<\/p>\n","protected":false},"author":124,"featured_media":7794,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"ngg_post_thumbnail":0,"fifu_image_url":"https:\/\/news.mit.edu\/sites\/default\/files\/styles\/news_article__image_gallery\/public\/images\/202206\/MIT_Import-Export-01_0.jpg?itok=A4W-7j10","fifu_image_alt":"Trade Can Worsen Income Inequality","footnotes":""},"categories":[189],"tags":[],"class_list":["post-7792","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-borders-commerce"],"_links":{"self":[{"href":"https:\/\/latinamericasecurityreport.com\/index.php?rest_route=\/wp\/v2\/posts\/7792","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/latinamericasecurityreport.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/latinamericasecurityreport.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/latinamericasecurityreport.com\/index.php?rest_route=\/wp\/v2\/users\/124"}],"replies":[{"embeddable":true,"href":"https:\/\/latinamericasecurityreport.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=7792"}],"version-history":[{"count":1,"href":"https:\/\/latinamericasecurityreport.com\/index.php?rest_route=\/wp\/v2\/posts\/7792\/revisions"}],"predecessor-version":[{"id":7793,"href":"https:\/\/latinamericasecurityreport.com\/index.php?rest_route=\/wp\/v2\/posts\/7792\/revisions\/7793"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/latinamericasecurityreport.com\/index.php?rest_route=\/wp\/v2\/media\/7794"}],"wp:attachment":[{"href":"https:\/\/latinamericasecurityreport.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=7792"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/latinamericasecurityreport.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=7792"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/latinamericasecurityreport.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=7792"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}