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Trade, Integration, and Interregional Inequality
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Trade, Integration, and Interregional Inequality

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  • Georg Hirte
  • Christian Lessmann

Abstract

We study the effect of international trade and freeness of trade (openness) on interregional inequality within countries. We estimate a model derived from a structural economic-geography approach in which interregional inequality depends on weighted trade shares and trade costs. In addition to the standard trade-to-GDP ratio, we derive and propose an aggregate freeness-of-trade measure based on phiness of trade. Both measures are instrumented by proxies constructed from estimates of a gravity model of bilateral trade, which covers 208 countries for the period 1948-2006. For our study we use Gennaioli et al.’s (2013) cross-country data set, which covers 110 countries (1569 sub-national regions) for the year 2005, and the panel data set of Lessmann (2014), which covers 56 countries (835 sub-national regions) for the period 1980-2009. The IV and dynamic panel regressions provide evidence that trade increases interregional inequality, but that the coefficient of the freeness-of-trade variable is ambiguous. Because the latter is an indicator for integration in the world markets, we conclude that more integration may neutralize the negative interregional distribution effects of trade.

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  • Georg Hirte & Christian Lessmann, 2014. "Trade, Integration, and Interregional Inequality," CESifo Working Paper Series 4799, CESifo.
    • Handle: RePEc:ces:ceswps:_4799
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    More about this item

    Keywords

    regional inequality; trade; gravity model; New Economic Geography; panel data;
    All these keywords.

    JEL classification:

    • R12 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)
    • F10 - International Economics - - Trade - - - General
    • C36 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Instrumental Variables (IV) Estimation

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