Trade orientation and income distribution in developing countries

This study is an attempt to test the hypothesis that outward orientation is favorable for income distribution in labor abundant country. The hypothesis is examined by using data from a cross-section of 34 developing countries. A positive relationship is found between outward orientation and income distribution. The share of lower income classes tends to increase with increased degree of openness, while the share of higher income classes tend to decrease with it. Income inequality drops when countries shift their trade strategy from an inward-oriented to an outward-oriented one. This equalizing effect of outward orientation is statistically significant. In addition to trade policy variable, this study also examines how income per capita, investment ratio, and educational variables influence income distribution. The relationship between income per capita and inequality is found to give weak support to Kuznets' inverted U relationship. Higher investment ratio is found to be favorable for higher income classes. An increase in the secondary education enrollment ratio is positively associated with lower income inequality, while mean years of schooling is positively associated with higher income inequality.