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Trade Policies for Combating Inequality

Equal Opportunities to Firms, Workers and Countries

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In the last four decades, international trade, along with finance and technology, has been instrumental in the development process of many countries. Trade reforms undertaken in developing countries have been accompanied by more rapid economic growth, leading to a reduction in income gaps and lower levels of inequality between countries. While the process of global trade integration has contributed to broad economic gains at country levels and convergence between developed and developing countries, yet it has also been accompanied by polarization in the distribution of income, sometimes increasing within-country income inequality. The increase in within country inequality is possibly a cause behind the current reaction against globalization, international trade and the multilateral trading system.

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Trade and within-country income inequality

Until recently the economic literature had difficulties reconciling the empirical evidence of the increase in income inequality with the opening of the global economy (Wood, 1994). During the 1990s the economic literature indicated that not trade, but something else must have been driving changes in income inequality. The focus turned to skill-biased technological progress. It is only in the last decade that new trade models that allow for worker and firm heterogeneity provided mechanisms through which international trade can affect within country inequality that are consistent with empirical observation. The fact that micro level datasets became available allowed researchers to estimate and test these models providing some robust insights of the relationship between trade and within country income inequality.

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