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Who Rides the Storm? Political Institutions and Trade Adjustment

Published online by Cambridge University Press:  20 January 2017

Daniel Y. Kono  and
Greg Love
Daniel Y. Kono
Affiliation:
University of California, Davis
Greg Love
Affiliation:
University of California, Davis
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Abstract

Both policymakers and scholars have expressed concern that trade has increased inequality in advanced industrialized countries (AICs). We argue that the impact of trade on inequality depends on the availability of public goods, such as educational opportunities, that allow displaced workers to upgrade their skills and adjust to trade. The provision of public goods, in turn, depends on political institutions: institutions that unify budgetary powers promote public-good spending while institutions that separate budgetary powers discourage it. Trade should thus increase inequality more (reduce inequality less) in countries with a high separation of budgetary powers. We test and find support for these hypotheses with a cross-sectional time-series analysis of fourteen AICs. Our results imply that trade can improve aggregate welfare without worsening economic inequities, but only if governments adopt complementary policies that facilitate human capital formation and labor-market adjustment.

Keywords

tradeinequalitypolitical institutions
Type
Article
Information
Business and Politics , Volume 9 , Issue 1 , April 2007 , pp. 1 - 26
Copyright
Copyright © V.K. Aggarwal 2007 and published under exclusive license to Cambridge University Press 

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