Trade and Regional Inequality

This article examines the relationship between openness and within-country regional inequality across 28 countries over the period 19752005. In particular, it tests whether increases in trade lead to rising inequalities, whether these inequalities recede in time, and whether increases in global trade affect the developed and developing worlds differently. Using static and dynamic panel data analysis, I found that while increases in trade per se do not lead to greater territorial polarization, in combination with certain country-specific conditions, trade has a positive and significant association with regional inequality. States with higher interregional differences in sectoral endowments, a lower share of governmental expenditures, and a combination of high internal transaction costs with a higher degree of coincidence between the regional income distribution and regional foreign market access positions have experienced the greatest rise in territorial inequality when exposed to greater trade flows. Hence, changes in trade regimes have a more polarizing and enduring effect in low- and middle-income countries whose structural features tend to enhance the trade-inequality effect and whose levels of internal spatial inequality are, on average, significantly higher than in high-income countries.