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Labor versus capital in trade-policy: the role of ideology and inequality

Author: Dutt, Pushan ; Mitra, DevashishINSEAD Area: Economics and Political ScienceIn: Journal of International Economics, vol. 69, no. 2, July 2006 Language: EnglishDescription: p. 310-320.Type of document: INSEAD ArticleNote: Please ask us for this itemAbstract: Trade policy depends on the extent to which the government wants to redistribute income. It also depends on a country's overall factor endowments and their distribution. While the government's desire to redistribute income itself is dependent on asset distribution, it is, to a large extent, also driven by the partisan nature of the government, i.e., whether it is pro-labor or pro-capital. Using cross-country data on factor endowments, inequality and government orientation, the authors find that, conditional on inequality, left-wing (pro-labor) governments will adopt more protectionist trade policies in capital-rich countries, but adopt more pro-trade policies in labor-rich economies than right-wing (pro-capital) ones. Also, holding government orientation constant, higher inequality is associated with higher protection in capital-abundant countries while it is associated with lower protection in labor-abundant countries. These results are consistent with the simultaneous presence of both inequality as well as ideology as determinants of protection within a two-factor, two-sector Heckscher-Ohlin framework. Overall, various statistical tests support an umbrella model (that combines both the ideology and inequality models) over each of the individual models.
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Trade policy depends on the extent to which the government wants to redistribute income. It also depends on a country's overall factor endowments and their distribution. While the government's desire to redistribute income itself is dependent on asset distribution, it is, to a large extent, also driven by the partisan nature of the government, i.e., whether it is pro-labor or pro-capital. Using cross-country data on factor endowments, inequality and government orientation, the authors find that, conditional on inequality, left-wing (pro-labor) governments will adopt more protectionist trade policies in capital-rich countries, but adopt more pro-trade policies in labor-rich economies than right-wing (pro-capital) ones. Also, holding government orientation constant, higher inequality is associated with higher protection in capital-abundant countries while it is associated with lower protection in labor-abundant countries. These results are consistent with the simultaneous presence of both inequality as well as ideology as determinants of protection within a two-factor, two-sector Heckscher-Ohlin framework. Overall, various statistical tests support an umbrella model (that combines both the ideology and inequality models) over each of the individual models.

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