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Trade openness and income inequality: The moderating role of institutional quality

Author

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  • Nam, Hyun-Jung
  • Frijns, Bart
  • Ryu, Doojin

Abstract

This study examines the effects of trade openness on income inequality and the moderating role of institutional quality in this dynamic within the Association of Southeast Asian Nations. We find the inverted U-shaped relationship between trade openness and income inequality. At a low level of trade openness, an increase in trade openness leads to higher income inequality. Beyond a certain threshold, however, trade openness starts to decrease income inequality. Institutional quality plays a moderating role, proving essential in reducing inequality. As policies and regulations improve and mature, they support private sector growth, contributing to a decrease in inequality. We highlight the importance of institutional quality as a moderator, not only to promote economic growth but also to ensure an equitable distribution of its benefits, particularly those derived from trade openness, across society.

Suggested Citation

  • Nam, Hyun-Jung & Frijns, Bart & Ryu, Doojin, 2024. "Trade openness and income inequality: The moderating role of institutional quality," Global Finance Journal, Elsevier, vol. 60(C).
    • Handle: RePEc:eee:glofin:v:60:y:2024:i:c:s1044028324000310
    DOI: 10.1016/j.gfj.2024.100959
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    Keywords

    ASEAN; Income inequality; Institutional quality; Inverted U-shape; Trade openness;
    All these keywords.

    JEL classification:

    • B27 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - International Trade and Finance
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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