How trade flows have affected income distributions within countries, theoretical expectations versus empirical analysis

Abstract

This research shows how commodity price shocks affect income distribution in oil, coffee and wheat exporting countries. We first identify the channels through which shocks are transmitted. We then analyzed the evolution of commodity prices and inequality over long periods (1960-2019, 1970-2019) to see if a link could be established between price instability and inequality dynamics. Finally, we estimated regression models on an unbalanced panel of 159 countries over the period 1991-2019. Our results show that after 1973, oil prices became more volatile than coffee and wheat prices, but the peaks of the three series coincide, indicating a strong correlation in the relative prices of these commodities. This means that shocks have systemic repercussions on commodity markets because they are accelerated by financial globalization, which is itself a result of globalization. The dynamics of inequality reveals that developing regions most dependent on commodities for their exports such as Sub-Saharan Africa, Latin
America & Caribbean and East Asia & Pacific are also those where inequality is very high and where the wealthiest 10% of the population has the lion's share of national income, often between 51 and 69%. While the developed regions of Europe and Australia are the most egalitarian. The world's economies have become richer over the years. However, countries that are not dependent on commodities have seen their wealth grow faster than others. This has been accompanied by a divergence in income levels between developed and developing countries. It is inferred from the econometric model estimates that commodity price shocks increase inequality in exporting countries. However, this relationship differs by commodity type and exporting country. The coefficient of the relative oil price shock is positive and
strongly significant for the Gini fixed-effects model while it is negative and non-significant for coffee and wheat. Country-specific effects were found to be significant, suggesting that other location-specific factors impact on the level of inequality, including weak institutions (Soran and David, 2019), market power (Stiglitz, 2010), differences in capital initial conditions and education (Piketty, 2014). In addition, the results show that commodity price shocks have a
positive but not significant impact on government revenue in exporting countries. However, the shock becomes significant when studying interaction with non-dependent-countries, we found a negative coefficient equal to -6.131e+12. That mean non-dependent-countries are less expose to those three commodities shocks. Country-specific-effects were found to be significant for oil, coffee and wheat, suggesting that others location-specific-factors impact on government revenue, including the quality of institutions (Soran and David, 2019), fiscal policy, the size of the tax base and the structure of the economy.

Date of Award	2021
Original language	English
Awarding Institution	University of Namur
Supervisor	Stephanie Weynants (Supervisor)