Modeling Trade and Income Distribution in Six Developing Countries A dynamic general equilibrium analysis up to the year 2050

This paper presents an empirical exercise, aimed at investigating the implications on poverty and income distribution of a reference scenario (SSP2) of economic development. It does so by coupling a dynamic general equilibrium model of the global economy, specifically designed to capture structural change dynamics in the medium and long run, with detailed micro data on household income in six countries: Albania, Bolivia, Ethiopia, Malawi, Nicaragua and Vietnam. We also consider an alternative scenario of accelerated international trade integration, with a higher degree of trade openness. We found that long run structural change widens income inequality in all six developing countries. Accelerated trade integration amplifies the effect further, but most of it is already generated in the baseline scenario. A decrease in the relative value of land property and an increase in the relative value of capital ownership appear as key determinants. We decompose income differentials in three dimensions. Structural change worsens the income gap between male and female headed households, but the additional impact of trade is minimal. The effect of structural change is not uniform across countries when income of rural households is contrasted with the one of urban households, yet more trade reduces the relative rural income. Relative poverty increases in both the baseline and the larger trade volume case. However, we found that absolute poverty would be eradicated in almost all countries by the year 2050.