The evolution of inequality after trade liberalization

wThe paper presents a general framework for the analysis of the evolution o f personal income distribution following trade liberalization. The model al lows many factors of production and the possibility of capital gains. In th is framework, the short run evolution of inequality depends on the wage to wealth ratio, while changes in the interest rate determine the changes in l ong run inequality. The general framework is applied to the dynamic specifi c factors model of Eaton (Rev. Econ. Stud., VLIV (1987)). In this model, th e land-labor ratio determines whether a country exports the land-using or t he capital-using good in the long run. The type of the export good determin es the effects of liberalization on Nod in the Ion., inequality. In land (l abor)-abundant countries, inequalities increase (decrease) along the dynami c path. The model provides an explanation for the differences between Latin American and Asian countries in their response to trade liberalization. Ec onometric analysis provides mixed results for these predictions, with the c orrect signs but non-significant coefficients for the coefficient on the in teraction between openness and the land-labor ratio. (C) 2001 Elsevier Scie nce B.V. All rights reserved.