The effect of openness to trade on the Gini index in the Philippine economy
Date
2016-01
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Abstract
According to Heckscher-Ohlin (HO) theor}', openness to trade decreases income
inequality in developing countries like the Philippines. This paper aims to contribute to
the existing literature that explores this relationship by testing four hypotheses based on
HO theory using time series data (1950-2010) in the Philippines through ordinary least
squares (OLS) and error correction models (ECM) in both the short and long run and by
also incorporating consumption, government and investment share of GDP as controls
across all the regression runs. The four hypotheses state that: (1) openness alone; (2)
openness and national income; (3) openness and factor endowments; and (4) openness,
foreign direct investment (FDI) and remittances determine income inequality in an
economy. Four models are constructed to measure the effect of openness to trade on
income inequality, which are measured using Gini and Market Gini, while controlling for
GDP per capita, GDP per worker, land per worker, FDI net inflows and remittances.
OLS and ECM reveal that the effect of openness on income inequality is ambiguous,
which is consistent to previous studies of White and Anderson (2001), Lundberg and
Squire (2003), Dollar and Kray (2002). Regional data within the Philippines needs to be
obtained in order to increase the number of observations and the robustness of the results
of this paper.
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Keywords
openness to trade, income inequality, Gini index, Philippines