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The Effects of Trade openness and Democratic Institutions on Income Inequality: Cross-National Analysis and The Case study of Thailand.
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A Dissertation Submitted to the School of International Development of the University of East Anglia in Part-fulfillment of the Requirements for the Degree of Master of Arts in Development Economics
September 2010
Table of contents
Title Pages
Abstract...I Acknowledgements........... II 1. Introduction 1 2. Theoretical Perspectives..3 2.1. Trade Openness and income inequality..3 2.1.1. Heckscher-Ohlin trade theory..................................................3 2.1.2 Spatial inequality and economic geography.4 2.2. Democracy and income inequality...5 2.2.1 Median voter theorem...6 2.2.2 Democracy and size of public sector.6
2.3 Tradeopenness,democracyandinequality..........................................7
3. Existing empirical evidences....9 3.1 Cross-national studies.9 3.1.1 Trade openness and income inequality...9 3.1.2 Democracy and income inequality.11 3.1.3 Trade openness, democracy and inequality...12 3.2 Case Studies..13 3.2.1 East Asian countries (South Korea and Taiwan)....13 3.2.2 Post-reformed China.. 14 4. Econometric analysis.16 4.1 Hypotheses16
4.2 Methodology.17 4.2.1 Data.17 4.2.2 Econometric Specification..18 4.3 Econometric results..20 5. Case study of Thailand..29 5.1 Trade openness.32 5.2 Democratic institution..35 6. Concluding remarks...39 List of references.41 Appendix 1: List of countries in cross-national analysis.49
Acknowledgements
First of all, I am indebted to Dr. Edward Anderson, who is the supervisor of this dissertation. I have been usually received invaluable advices and exceptional patient for this dissertation from him. Without his helps, I would have much more trouble in writing my dissertation. I was also gained his assistances on my coursework, which definitely have contributions to the construction of ground idea of this dissertation. I would also like to thank Dr. Pieter Serneels, who made a helpful discussion which shaped and formulated the structure of this dissertation. Additionally, I am appreciated for hospitality and sympathy that people in the school of International Development at University of East Anglia gave me during short but memorable year. With their kindness, my life in foreign soil would be not too bitter, because they not only helped me to deal with difficult academic tasks, but also enjoy with delightful social activities. Without their helps, this dissertation would be tortured part of my higher education life. Also, I would like to thank Isariya Suttakulpiboon, who is my proof-reader. Without him, my dissertation will be contains many grammatical errors. Finally, I feel deeply thankful with my family who has usually allocated their resources to my costly education, which can be one of the most valuable assets in my life. Without them, my academic life would not be gone so far like today.
1. Introduction
Nowadays, a number of academics and practitioners in the fields of development studies widely accept that the goals of development are not only an improvement of the wellbeing or accumulation of prosperity, but also argue that development missions should also take mitigation of inequality into account, because the inequality is seen as potentially having negative effects on developmental processes. One of the negative effects that often mentioned is that higher income inequality could prolong a state of massive poverty, since it tends to reduce the ability of economic growth to contribute to poverty reduction (see
example from Ravallion (2001) for cross-national evidence; Khan and Sen (2006) for evidence of Bangladesh). Another negative effect is that higher inequality could cause social unrest, such
as crime and violence, which could obstruct development process and make social capital and trust deteriorate (Wade, 2007). At the same time, it has been argued that countries in the world are experiencing the third wave of economic globalization, and political globalization, in the form of democratization (Haynes, 2008). As perceived by several people, many countries have increased their degree of participation in international trade. The increased degree of international trade participation could be shown by the fact that world exports of goods and services have nearly tripled during 1990-2007 moreover, the ratio of trades of the developing countries expanded from 34 percent in 1990 to 62 percent in 2008 (World Bank, 2010b). Simultaneously, many societies, especially developing countries, have been experiencing gradually democratic transitions and a rise in political equality on their own soil. According to Freedom House (2003), in the mid 2000s, democratic general elections were held in three quarters of the countries in the world. Compared to the end of 1980s, only almost half of those countries could be classified as democratic regimes (Huntington, 1991). Influentially, these two recognitions construct the main question of this dissertation. The main question - do trade openness and democratic transitions affect income inequality at national level and if so, how? However, in order to be more precise, this dissertation mainly focuses on inequality in terms of income inequality. In order to answer the main question, the structure of this dissertation consists of six sections. Following the introduction, the dissertation will describe theoretical perspectives that relate to the main question. The next section will illustrate previous empirical studies that could provide a clearer picture for the main question. Subsequently, an econometric
analysis will be used for finding systematic relationships of trade openness, democratic transitions and income inequality. Thereafter, the case study analysis of Thailand will be analyzed, in order to discover how income inequality in Thai society has been affected by trade openness and democratic transitions. The time frame of the case study will be the periods of the mid 1980s to late 2000s. Finally, the concluding section will summarize the main issues in this dissertation.
2. Theoretical perspectives
This section will discuss about theories that have a potential to answer the question that how trade openness and democracy affect inequality, particularly intra-national income gap. This section will begin by giving a description of theories on trade openness and inequality. Next, the theories on democracy and inequality will be described.
Nonetheless, according to recent studies, there could be many other factors that make HO provide an inaccurate prediction on inequality in developing countries. Theoretically, trade liberalization might enable developing countries companies to import more capital goods, and adopt more skilled biased technologies (Thoenig and Verdier, 2003; Goldberg and Pavcnik, 2007). The changing behaviors of these companies will push demand for skilled labors upward in these developing countries, since the utilization of imported capital goods requires higher share of skilled labor. Accordingly, higher demand for skilled labors will probably make wages of skilled labors higher and income gap will be expanded.
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of production will attract suppliers of intermediate goods and services. In a nutshell, the presence of the first and second nature tends to attract industries to locate in the cluster areas; consequently, the concentration of industry in cluster areas will lead to widened spatial gap. However, in some cases, trade openness may also reduce spatial inequality in the domestic level. A case in point is that, in inward-looking economies, firms prefer to locate closer to national center because they can easily access to domestic market; on the contrary, when outward-looking policies are implemented, the firms will have less incentive to locate in the centre areas, since they could comfortably access to foreign commodity and production factor market (Fujita, Krugman and Venables, 1999). As a result, in this kind of economies, trade openness will narrow the gap between centre and periphery, because of the emergence of new industrial clusters that move away from national centre.
It has to be mentioned that democracy, theoretically, not only affect inequality, but it can also be affected by
the existence of inequality; however, this topic is not the main concern of the dissertation. This topic could be further read from Muller (1997); Acemouglu and Robinson (2006).
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important factor to reverse the positive relationship between government size and income inequality to become negative. The reason is that expanding democratic government size usually goes hand in hand with the realization of subordinate classs demand for redistributive policies. Contrarily, in non-democratic regimes, expansion of public sector tends to worsen income inequality since states resources are more likely to be used to serve elites interests. Shortly, in democratic societies, expansion of public sector could lead to the reduction of income inequality. However, in developing societies, democratic governments could not expand their size due to lack of capacity in generating government revenues (Nel, 2008). The insufficient capacity could make government difficult to implement redistributive policies. Consequently, these policies may not be implemented by the governments because they might not have enough resources to cover huge cost of the policies.
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minimization of government spending in the authoritarian states (Adsera and Boix, 2002). The reason is that authoritarian governments partly lose the ability to generate income, because of the reduced income from import tariffs. Meanwhile they could not implement higher income tax rate or tax on private property since it will push greater burden to political elites. The minimized public spending will lead to degradation of social welfare and thus widen income gap. Contrarily, in democratic regimes, governments usually expand the compensation spending for the losers of trade openness since governments have incentives to implement social spending and progressive tax system for gaining political support from the citizens (Adsera and Boix, 2002). In summary, it could be said that the effects of trade openness on inequality differs between democratic and authoritarian regimes. The reason could be that, in the conditions of trade openness, income inequality in democratic societies tends to be lower than that in non-democratic ones because democratic governments rather compensate the openness-led losers than authoritarian states do.
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Further details of the index can be seen in Sachs and Warner (1995).
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As reported in his paper, Edward claims that implementation of less distorted policies, could mitigate inequality. Additionally, Calderon and Chong (2001) point out that trade openness, which is shown by trade volume, has a negative relationship with the Gini coefficient, by applying the model using unbalanced panel five-year average data in the period of 1960-95. Nonetheless, some studies argue that trade liberalization might not affect inequality. For example, Dollar and Kraay (2002) attempt to prove the hypothesis that whether greater trade liberalization lead to higher income inequality or not. They point out that change in trade ratio does not affect change in the Gini coefficient and change in the income share of 20% poorest for panel data sample of 130 countries. Furthermore, to be more advanced, some researchers take endowment factors into account, for testing the hypothesis of the Heckscher-Ohlin trade theory, which claims that effects of trade openness on inequality depend on endowment factors of an economy. Generally, some studies employ level of GDP per capita to be the proxy of endowment factors. A case in point is that Ravallions study (2001), applied dataset of Li Squire and Zou (1998) that cover 112 countries for the years 1947-94. He attempted to test Heckscher-Ohlin theorys hypothesis by creating interactive variables of ratio of export to GDP and initial GDP per capita. He found that greater openness will lead to an increase in inequality in developing countries, according to the values of coefficient of export ratio and interactive variable, which are positive and negative, respectively. To be more precisely, some studies prove Heckscher-Ohlins hypothesis by directly usage of production factors per capita or amount of production factors instead of level of GDP per capita. For instance, Spilimbergo, Londono and Szekery (1999), who constructed a panel model that covers sample of 320 observations for 34 countries in the period of 196592. They apply arable land and stock of capital per worker as proxies of endowments in land and capital, respectively. They also measure endowment in skilled labors via proportion of population over the age of 25 with higher education. In order to prove Heckscher-Ohlins hypothesis, they create interactive variable of factors endowment (land, capital and skilled labors) and trade volume ratio. According to the model, they claim that greater trade volume will lead to an increase in income inequality in skilled labors abundant countries, and a decline in income inequality in land and capital abundant countries.
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societies, in order to test the hypothesis whether the expansion of government size in developing countries is associated with declining in income inequality. A case in point is that the study of Lee (2005), which constructs interactive variable of tax revenue ratio (government size) and dummy variables for institutionalized democratic regimes. He reports that the sign of coefficient of this interactive variable is negative, while the sign of government revenues ratio is positive by applying sample data of 64 countries that covering 25 years. Consequently, he affirms that institutionalized democracy could reverse the relationship of government size to income inequality from positive to negative. In other words, it could be concluded that, in democratic societies, bigger government size could be correlated with a decline in income inequality.
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openness and democracy mitigate inequality via reduction wage inequality and expansion of social spending on education.
This could be shown by Zhang and Zhang (2003), who show that during 1978-98, the increasing of trade volume ratio from 9.80% to 34.42%.
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spending in village expenditures. Accordingly, this kind might lead to a decline in income inequality. However, election for village committee might not effectively serve demand of citizens since the election tend to confront with institutional constraints that imposed by authoritarian characteristics of Chinese state (Shen and Yao, 2008). This anticipation might correspond with the fact that income inequality in Chinese has been constantly increasing in last two decades, despite there have been presence of village election. Briefly, the continual increase in income inequality in Chinese economy could be resulted by greater participation in international trade because greater participation leads to worsened regional inequality. Meanwhile, Chinese political factors might have a little contribution to improvement of income distribution since these political factors provide a limited chance to citizens to participate in policy decision processes.
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4. Econometric analysis
In this section, a set of regressions will be conducted in order to test the hypotheses that mainly focus on the relationships between trade openness, political regimes, and income inequality. Intentionally, these hypotheses are planned to be means of revealing the answers of the dissertations main question. Each hypothesis detail will be shown below.
4.1 Hypotheses
These following hypotheses will be tested in this section. Hypothesis 1: Greater trade openness is associated with higher income inequality in both developed and developing countries. Hypothesis 2: The effect of trade openness on income inequality depends on income level of countries, regarding Heckscher-Ohlin theory. Greater trade openness could mitigate income inequality in relatively low-income countries, but aggravate inequality in relatively high-income countries. Hypothesis 3: As stated by Heckscher-Ohlin theory, the effect of trade openness on income inequality depends on the abundant production factors in particular economies. Greater trade openness will lead to a decline in income inequality in unskilled-labor abundant economies, and vice versa for skilled-labors and land abundant economies. Hypothesis 4: The presence of democratic institutions (free press, competitive election, protected political and civil rights, and stabilized democratic regimes) is associated with lower income inequality. On the contrary to democratic societies, the presence of authoritarian institutions is associated with higher income inequality. Hypothesis 5: On the one hand, in the democratic societies, expansion of government size tends to be associated with lower income inequality. On the other hand, in the authoritarian states, government expansion tends to be associated with a rise in income inequality. Hypothesis 6: In democratic societies, the negative effects of trade openness on income distribution will be lowered. On the contrary, in authoritarian states, the negative effects of openness on income inequality will be higher. Theoretically,
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democratic governments usually compensate the losers from globalization, via expansion of public size, but authoritarian tends to ignore the losers.
As reported in the existing empirical evidences, Hypothesis 1 to Hypothesis 5 was already tested by previous studies, except Hypothesis 6 that might have not been tested. This section will test Hypothesis 6 since there might be few studies which try to explain whether the effect of trade openness differs between democratic and authoritarian regime.
4.2 Methodology
4.2.1 Data
This section mainly uses the data from the panel (both cross-national and timesseries) dataset of Dollar and Kraay (2002). This panel dataset provides data on Gini coefficient, which cover sample of 137 countries during 1956-99, real GDP per capita , and ratio of trade (exports plus imports) to GDP. The dataset also supplies data on the share of government consumption to GDP, average arable land per worker, and average stock years of primary and secondary education. This section employs index of political regimes data from two reliable sources: The POLITY IV Project and Freedom House. Particularly, the score of The Polity IV Project dataset mainly focuses on characteristics of governing authority of states. The Polity IV Projects score rates the authority characteristics from -10 (hereditary monarchy) to +10 (consolidated democracy), regarding to CSP and INSCR (2010a). The dataset of The Polity IV Project is available online at webpage of Regime Authority Characteristics and Transitions Datasets (CSP and INSCR, 2010b) . Unlike Polity IVs score, the score of Freedom House primarily emphasizes on political rights and civil liberties. The values of score of Freedom House are rated between 1 (most free) and 7 (least free) (Freedom House, 2010a). The dataset of Freedom House is
7 5 6
5 6
The list of countries is shown in Appendix 1. GDP per capita is constant at 1985 US Dollars at purchasing power parity. 7 This webpages URL is http://www.systemicpeace.org/inscr/inscr.htm viewed 29/07/2010.
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available online at section of Freedom in the World Comparative and Historical Data (Freedom House, 2010b) .
8
ct
X1 X 2 X3 X 4 X5
ct 2 ct 3 ct 4 ct 5 ct
ct
X 1 is proxy of degree of openness. X 2 is proxy of government size. X 3 is proxy of democratic societies. X 4 is proxy of authoritarian regimes. X 5 is the set of
controlling variables: economic growth, endowments of production factors. On explanatory variables, the dissertation, firstly, employs the ratio of trade volume to GDP as a proxy of degree of trade openness, rather than other variables that relating to trade restriction policies because, trade volume ratio tends to be more directly indicator of degree of participation in international trade . Secondly, the dissertation uses average proportion of government consumption to GDP to be proxy of government size. This usage of variable follows the Rodriks study (1998). Moreover, this section constructs two separated sets of dummy variables for political regimes or societies. The categorization of dummy variables relies on political score of two databases: the POLITY IV Project and Freedom House. The reason for application of dummy variables instead of score on political regimes/rights from these databases is that the value of databases score is bounded in fixed range, so it should be more suitable to use dummy variable rather than directly usage of political score. The first dummy variable set is the category variables of democratic and authoritarian regime. The construction of these dummy variables is relied on the value of
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This sections URL is http://www.freedomhouse.org/template.cfm?page=439 viewed 29/07/2010. This kind of argument could be seen in Rodriks work (2007: 216-7).
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Polity IV projects score: countries are classified as consolidated democratic regime if their Polity scores are rated in the range of 6 to 10; countries are classified as autocrat authoritarian regime if their Polity scores are rated in the range of -6 to -10; countries, which their Polity scores are not rated in these specified ranges, are neither consolidated democratic nor autocrat authoritarian regimes . Likewise, another set of dummy variable is the category variables of free and not-free societies. The dissertation classifies societies, which reach combined average Freedom Houses score within the range of 1.0 to 2.5, as free societies; additionally, the societies, which reach average combined score between 5.5 and 7.0, are classified as not-free societies. Nonetheless, societies in which average combined score is not in these specified ranges are neither free nor not-free societies . Generally, in free societies, political rights and civil liberties tends to be higher than not-free societies; therefore, the category of free and not-free societies could be used as proxies of democratic and authoritarian regimes, respectively. Along with explanatory variables, there are six controlling variables in this section. The first controlled variable is GDP per capita, which could represent level of economic development of each country at given time. The second controlled variable is squared GDP per capita; the dissertation intentionally includes this variable for testing the hypothesis of Kuznets curve . The third controlling variable is average arable land per capita, which is the proxy of endowments in arable land. The fourth controlling variable is average stock years of primary education, which is proxy of endowments in unskilled labors. The fifth controlling variable is average stock years of secondary education, which is the proxy of endowments in skilled workers. Purposively, this section also creates interactive variables as explanatory variables to test some particular hypotheses. Particularly, this section generates the interactive variable of trade volume ratio and GDP per capita, and the interactive variables of trade volume ratio and proxies of production factors endowment. These generated variables are planned to test
The classification of dummy variables, to be consolidated democracy or autocrat authoritarian or neither, regards to the recommendation of CPS and INSCR (2010a).
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10
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The construction of dummy variables for free and not-free societies relies on the classification of in Tables
The hypothesis claims that income inequality will rapidly widen in the early state of economic development, before stabilize for a while; and then, in the later phase of development, income inequality will narrow down (Fields, 2001). According to the hypothesis, it could be implied that the relationship between economic growth and income inequality is inverted-U curve (Fields, 2001).
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the hypotheses that relate to the Heckscher-Ohlin theory. Besides, the dissertation constructs the interactive variables of dummy variables for political regimes and government consumption ratio, and the interactive variables of dummy variables for political regimes and trade volume ratio . These constructed variables are planned to test the hypothesis 5 and 6. In order to test the hypotheses, this section will perform several regressions. The coefficient value of these regressions will be estimated by Ordinary Least Square (OLS). However, OLS might not produce reliable estimators if its assumptions are violated (Gujarati, 2003). Especially, in the case of panel-data regression, there could usually be the presence heteroscedatiscity and serial correlation (Reuveny and Li, 2003). Like Reuveny and Li, this section applies Huber-White robust standard errors, which are clustered by countries, for dealing with these problems.
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The construction of this variable is partially influenced from Adsera and Boix (2002), which create this kind of dummy, but the difference is that they uses government revenues ratio as dependent variable. 14 The values of standard error are shown in the brackets that located below coefficient value.
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= = = = = = = =
Definition Average ratio of trade volume to GDP Average share of government consumption to GDP Dummy variable for consolidated democratic regimes Dummy variable for autocrat authoritarian regimes Dummy variable for free societies Dummy variable for not-free societies Interactive variable of average trade volume ratio and GDP per capita
TradeLand
Interactive variable of average trade volume ratio and average arable land per capita
TradePri
Interactive variable of average trade volume ratio and average stock years of primary education
TradeSec
Interactive variable of average trade volume ratio and average stock years of secondary education
GovDemoc
Interactive variable of average share of government consumption and dummy variable for consolidated democratic regimes
GovAutho
Interactive variable of average share of government consumption and dummy variable for autocrat authoritarian regimes
GovFreesoc =
Interactive variable of average share of government consumption and dummy variable for free societies
GovNotfree =
Interactive variable of average share of government consumption and dummy variable for not-free societies
TradeDemoc =
Interactive variable of average trade volume ratio and dummy variable for consolidated democratic regimes
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TradeAutho
Interactive variable of average trade volume ratio and dummy variable for autocrat authoritarian regimes
TradeFreesoc =
Interactive variable of average trade volume ratio and dummy variable for free societies
TradeNotfree =
Interactive variable of average trade volume ratio and dummy variable for not-free societies
= = = = = =
GDP per capita Squared GDP per capita Average stock years of primary education Average stock years of secondary education Average arable land per capita Constant term
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59.223** (29.049)
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As reported in both parts of Table 4.1, the fitness to the data of all regressions is quite moderate; the fitness is shown by R-square, which it values vary from 0.327 (Regression 1) to 0.406 (Regression 11). In all regressions, the coefficient of GDP per capita and squared GDP per capita support Kutnets curve, respectively; both coefficients are statistically significant at various levels. In Regression 1, 1 per cent increase in trade volume ratio will lead to 0.05 point increase in the Gini coefficient, at 10 per cent significant level, for all countries in the sample. The result of Regression 1 supports the hypothesis that greater trade openness is associated with increasing in income inequality in both developed and developing countries. The result is similar to Barro (2000) and Lundberg and Squire (2003). However, in Regression 2, when including government consumption ratio as added explanatory variable, the coefficient of trade volume ratio remains positive, but insignificant. In addition, when including dummy variables for political regimes or free/not-free societies into model, i.e., Regression 7 and 9, the coefficient of trade volume ratio is positive but insignificant, same as Regression 2. The results of these regressions tend to be similar to Dollar and Kraay (2002). The result of Regression 3 strongly rejects the hypothesis, which is influenced by Heckscher-Ohlin theory, that Greater trade openness could mitigate income inequality in low-income countries. For Regression 3, in low-income countries greater trade volume ratio will lead to higher Gini coefficient. This can be suggested by the coefficient of interactive variable of trade volume ratio and GDP per capita determined by GDP per capita level (13.005*GDP per capita), while the coefficient value of trade volume ratio is positive (119.852). Both coefficients are significant at 1 per cent level. As a result, coefficient of interactive variable of low-income countries tends to be lower than trade volume ratio coefficient . The result in Regression 3 is the same as Ravallion (2001). Additionally, Regression 4 illustrates that the coefficient of all interactive terms of factors endowment proxies and trade volume ratio are negative, but only coefficient of interactive variable of arable land per capita is statistically significant at 5 per cent level. It could be partly concluded that in countries with endowment in arable land, if trade volume
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The GDP per capita level which is turning point in effects of trade openness on income inequality is approximately 9.22. This mean that greater trade openness will lead to increasing in income equality in countries which reach level of GDP per capita lower than 9.22; greater trade openness will lead to declining in income inequality for countries that have level of GDP per capita higher than 9.22.
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ratio is greater, the Gini coefficient will lower. This kind of conclusion could also be seen from Spilimbergo, Londono and Szekery (1999). Accordingly, this result is partly incompatible with hypothesis that Greater trade openness will lead to declining in income inequality in unskilled labor abundant economies, and vice versa for skilled labors and land abundant economies. The result of dummy variables for democratic and authoritarian regimes in Regression 5 and 7 could reject the hypothesis that countries with democratic institutions is associated with lower income inequality, and vice versa for countries with authoritarian institutions. Although the coefficients are negative in both regressions, only dummy variable for autocrat authoritarian regimes is significant at 1 per cent level in both regressions. Regards to coefficient of dummy variable for authoritarian regime, the Gini coefficient in authoritarian countries is lower than expected value by 4.9 and 4.9 point, as seen, in Regression 5 and7, respectively. Likewise, in regression 9, coefficients of dummy variables for free and not-free societies are negative; nonetheless, only coefficient of dummy for notfree societies is significant at 5 per cent level. This means that the value of Gini coefficient in the not-free societies is lower than expected value by 4.8 point. The results form Regression 5, 7 and 9 seems to be incompatible with the previous studies, for example, Muller (1998) or Reuveny and Li (2003). One of the possibly explanation of the negative coefficient of dummy for authoritarian regimes and not-free societies is that, before 1990s, several low-income-inequality societies were former Communist countries in which have priority on economic equality, but tend to neglect political freedoms and civil rights. Intentionally, Regression 6 and 10 are designed to test the hypothesis that, in the democratic societies, expansion of government size tends to be associated with lower income inequality, and vice versa for authoritarian regimes. In Regression 6, the coefficient of interactive term of dummy for democratic regimes and share of government consumption as a proportion of GDP is opposite (negative) to the positive term of coefficient of government size at 10 per cent significant level. In democratic regimes 1 per cent increase in government consumption share will lead to 0.09 point increasing in Gini coefficient, (equaling 59.461 + (-50.159)). Whereas in non-democratic societies, 1 per cent increase in government consumption share will lead to 0.59 point in Gini coefficient. From Regression 6, it could be said that democratic institutions could reduce the negative effects of government expansion on income distribution.
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Like the sign of term in Regression 6, the sign of interactive term of dummy for free societies and government consumption share in Regression 10 is also negative at 10 per cent significant level, while the coefficient of government consumption share is positive. In free societies , 1 per cent increase in government consumption share will lead to 2.865 point decrease in the Gini coefficient (equaling 59.223 + (-62.088)). The result of Regression 10 is nearly identical to study of Lee (2005), since both of them support the hypothesis that, in democratic societies, expansion of government size is associated with declining in income inequality. Nevertheless, in Regression 6 and 10, coefficient of dummy variables for authoritarian regimes and not-free societies is positive, but insignificant. This could not totally accept the hypothesis that, in authoritarian regimes, the negative effect of government expansion on income distribution will be higher. The hypothesis that, in democratic regimes, the negative effect of trade openness on income distribution will be lowered could not be rejected, according to the result of Regression 8 and 11. For Regression 8 and 11, in democratic regimes and free societies, increasing in greater trade volume ratio will lead to lower income inequality. The reason is that, in Regression 8 and 11, the coefficients of interactive terms, which are statistically significant at 1 per cent level in both regressions (dummy variable for democratic regimes and trade volume ratio of Regression 8; dummy variable for free societies and trade volume ratio of Regression 11) are greater opposite (negative) to positive coefficients, of linear term of trade volume ratio, which are significant at 1 per cent level in Regression 8, and 5 per cent level in Regression 11. Particularly, regarding to Regression 8, in democratic regimes, 1 per cent increasing in trade volume ratio will lead to 0.01 point decline in the Gini coefficient (equaling 18.769 + (-19.641)). Likewise, regarding Regression 11, in free societies, 1 per cent increase in trade volume ratio is associated with 0.02 point decreasing in Gini coefficient (equaling 23.110 + (-25.149)). In brief, according to Regression 8 and 11, it could be said that the presence of consolidated democratic institutions could mitigate negative effect of trade openness on income inequality. This could be the result of expansion of democratic government size, which could potentially mitigate income inequality, when trade openness policies are taken place (example of this situation can be seen in Adsera and Boix, 2002).
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As mentioned already, this kind of societies could be referred to societies with consolidated democratic institutions.
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In addition, the coefficients of interactive terms of authoritarian regimes (for Regression 8) or not-free societies (for regression 11), and trade volume ratio are positive, but statistically insignificant in both regressions. This could not completely accept the hypothesis that, in authoritarian regimes, the negative effect of trade openness on income distribution will be higher.
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Sources: Adapted from Table 1 in Ikemoto and Uehara (2000) for data in 1962-86, and Table 3.1 in Laovakul el al (2008) for data in 1988-2006.
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The change in income inequality in Thailand could also be illustrated by the income share by quintile. According to Figure 5.2, in 1981, the poorest gained 5.4 percent of national income while the richest possessed about a half of national income, but, in 2006, the poorest share decreased to 3.8 percent while the richest share increased to 56 percent. Moreover, during 1981-2006, the ratio of income shares of quintile 5 (the richest group) to quintile 1 (the poorest group) increased from 9.5 in 1981 to 14.7 in 2006 (Laovakul, et al 2008: Table 3.).
Sources: Adapted from table 11 in Warr (2000) for data in 1981-1994, and Table 3.1 in Laovakul el al (2008) for data in 1996-2006.
Unlike above studies, the dissertation focuses on the situation income inequality in the period of early 1980s to mid 2000s, for two reasons. The first reason is that although income inequality gradually increased during early 1960s to mid 2000s, there was a decline in Gini coefficient between 1992 and 2004, from 0.536 to 0.493, as presented in Figure 5.1. Likewise, the change of the ratio of income share
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of quintile 5 to quintile 1 tends to be consonant with the change in Gini coefficient. The ratio decreased from 15 in 1992 to 12.1 in 2004 (Laovakul, et al 2008: Table 3.). The second reason is that, in this period, Thailand increasingly participated in international trade, as observed by the dramatic rise in ratio of trade volume to GDP dramatically rose from 42 per cent in 1985 to 130 per cent in 2005, as illustrated in Figure 5.3 below. The enlargement of trade volume ratio could have been an outcome of greater liberalized trade policies (Phongpaichit and Baker, 2002). Simultaneously, democratic institutions in Thailand has been continually developed between 1992 and 2006, the development could be illustrated by introduction of 1997 constitution
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that attempted to
establish participatory democracy, which could enable public to control politicians and bureaucrats (Klein, 1998).
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However, this democratic constitution was removed by military coup in 2006 (Connors and Hewison, 2008). It can be inferred that democratic development has been impeded since 2006.
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According to the above reasons, this section attempts to discover how trade openness and democratic transitions affect situations of income inequality in Thailand in the period of the 1980s to mid 2000s. The dissertation uses descriptive statistics and a literature study as the research methods.
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general information on regional inequality in Thailand during the period of early 1980s to mid 2000s is illustrated in Table 5.1.
Source: Adapted from Table 4 in Ikemoto and Uehara (2000) for data in 1981-1998 Calculated from The online version of Household Socio-Economic Survey (2007) of NSO for data in 2000, 2002, 2004 and 2006 According to Table 5.1 above, during 1981-92, a regional inequality between greater Bangkok and the other regions widened. A good example can be seen from the disparity between Greater Bangkok, which is the capital city, and Northeast, which is the poorest region. In 1981, the ratio of income in these two regions was 100 to 34.6. Then, in 1986, the ratio increased to 100: 28.5; and later in 1992, the ratio was in peak at 100 to 22.4. The widening in regional gap in period of early 1980s to early 1990s tends to be consonant with the increasing in income inequality in the same period. The widening of regional inequality concurrently emerged with the increase in degree of trade openness during 1980s to 1990s. The reason could be that in 1980s, a vast majority of export industries, was concentrated in Greater Bangkok region (Kittiprapas, 1999). It is evidenced that, more than 90 per cent of Japanese export companies, which was predominated by textile, was located in Bangkok during 1980s (Tiwari et al, 2003). Comparatively, this kind of situation tends to be look like the case of China in which openness-led regional inequality could be resulted from the unequal concentration of international economic activities.
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Greater Bangkok region includes Bangkok and three surrounding provinces (Nonthaburi, Phatum Thani and Samut Pakarn).
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The concentration of export industries in Greater Bangkok in 1980s could be explained by theory of economic geography that emphasizes role of first and second nature in formation of industrial cluster. The first nature of Greater Bangkok could be resulted from its geographical location. Greater Bangkok is located in delta Plain of Chao Phraya River in which could easily connect to Pacific Ocean through Gulf of Thailand; additionally, Greater Bangkok is also the centre of railway links that could make companies easily access to labor, input and commodities markets (Kittiprapas, 1999; Dixon, 1999). The second nature of Greater Bangkok could be partly produced by densely labor market. The labor market could be the product of flow of migration, according to the fact that, during 1970-80, the proportion of lifetime migrants in Bangkok increased from 27 per cent to 36 per cent (Dixon, 1999). Accordingly, the first and second nature of Greater Bangkok could have a contribution to emergence of industrial clusters in this region. Nonetheless, the emergence of industrial clusters may not solely relate to the first and second nature of Bangkok. The clusters could be also the outcome of Thai governments policies that primarily subsidized industries which are located in Greater Bangkok region (Dixon, 1999). However, regards to Table 5.1, regional gap between Greater Bangkok and other regions has been gradually narrowed down during 1992-2006. This could be shown by the ratio of income of Greater Bangkok and Northeast which decreased from the peak (100: 22.4) in 1992 to 100: 32.4 in 2006. In this period, regional inequality between Greater Bangkok and other areas (Centre, North and South) also declined. Expectably, a narrow down in regional during mid 1990s to early 2000s seems to be parallel with declining in income inequality at the same period. The narrowed regional gap between might be caused by the moving of industrial clusters from Bangkok to the other provinces, especially Eastern provinces, e.g., Chon Buri and Rayong. The moving of export industries could be resulted from higher costs of labors and lands in the capital city, due to concentration of factory (Lecler, 2002). The moving also was also the result of the government policies that promote to companies to locate in remote areas (Kittiprapas, 1999; Lecler, 2002). The promotion could be seen from tax exemption to companies that locate outside Greater Bangkok, and provision of infrastructure, such as highway, deep-sea port and broadband communication in other areas. In summary, from above information, even trade openness has constantly increased during 1980-2006, wage gap and regional inequality tends to not followed trend of change in trade openness, since these kinds of inequality have been also affected by other factors.
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Particularly, the reduction of regional disparity during 1992-06 could be partly resulted from government policies that attempt to attract companies to locate in other areas that apart from Greater Bangkok. From the case of regional inequality, it could be implied that government policies could mitigate the effects of trade openness on inequality because they could have a potential to fairly share the benefits from free trade.
Table 5.2: GDP, Government expenditure (million of Baht) and a proportion of government expenditure to GDP (percentage), 1993-2006
GDP 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 3,165,222 3,629,341 4,186,212 4,611,041 4,732,610 4,626,447 4,637,079 4,916,505 5,133,502 5,450,643 5,917,369 6,489,476 7,092,893 7,850,193
Government expenditure 316000 354000 414000 478000 477000 512000 533000 558000 581000 604000 635000 721000 839000 907000
Proportion of government expenditure to GDP 9.98 9.75 9.89 10.37 10.08 11.07 11.49 11.35 11.32 11.08 10.73 11.11 11.83 11.55
Source: Calculated from Table 1 in Jirayankul and Brahmasrene (2007) for data on government expenditure, and NESDB (2009) for data on GDP.
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According to Table 5.2, during the democratic period, a proportion of government expenditure to GDP has slightly increased from around 10 per cent in 1993 to about 12 per cent in 2006. Meanwhile, the amount of government expenditures rapidly increased from about 316,000 million Baht to around 907,000 million Baht in 2006. It could be expected that the expansion of government size via increase in public spending tends to be correlated with a decline in Gini coefficient during 1992-2004. However, the decline in Gini coefficient may not only relate to an increase in the amount of government spending, but the decline could also associate with a change in an allocation of expenditure. Firstly, during democratic period, expanding government expenditures were allocated more to education. With regards to database of World Databank (2010), during 1995-2000, a share of public spending on education to total government expenditure rapidly increased from 19 per cent to around 31 per cent, but the share of the education spending gradually decreased from 28 per cent in 2001 to 25 per cent in 2006. Increased education spending was utilized for extension of years of basic education, teacher trainings, school facilities enhancement, and student loans (Booth, 1999; Pinijitsamut, 2009). Consequently, the utilization of education spending could mitigate inequality in education in Thailand. Particularly, utilized education spending could provide higher chance for people from lower socio-economic backgrounds to participate in a formal education, regarding to some situations. For example, the gross enrollment ratio at lower secondary education in Thailand increased from 50.6 percent in 1992 to 83.9 percent in 1999, because of the expansion of education facilities (Jones, 2003). The increased enrolment ratio could be interpreted as the poor people have better opportunity to access to secondary education. In addition, during 2001-03, the opportunity to participate in higher education for students, who are 40 per cent poorest have been enhanced, due to the provision of student loans (Pinijitsamut, 2009). Consequently, the utilization of expanding public educational spending could be one of the causes of a decrease in income inequality in democratic period since it enhance equality of opportunities to resources of human capital development. In spite of greater equality of opportunity to access to higher level of formal education between the rich and the poor, there seems to be disparity in education achievement. The disparity could be shown by the statistical fact that the scores of Ordinary National Education Test (ONET) are positively correlated with household resources and education level of parents (Mounier and Tangchuang, 2010). This could mean that children, who come from upper socio-economical backgrounds, tend to reach higher level of academic
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achievement than children from lower classes. Accordingly, the difference in ONET scores could widen opportunities to get well-paid jobs between students from different socioeconomical classes. However, although there is the difference in educational achievement, the improvement of the equality to participate in formal education could be prominent processes in establishment of educational equality in Thai society, since the majority of Thai people are given the chance to be educated. Moreover, Thai democratic governments not only expanded public spending in order to provide education, but also health-care services. This could be seen from an increase in budgets of central governments health-care agency. According to Faramnuayphol et al (2008: Figure 6.68), the proportion of budget Ministry of Public Health (MoPH), which is a central administration agency, to the overall national budget steadily rose from 5.4 per cent in 1992 to 7.7 percent in 1998, but the proportion of MoPH budget fell to 6.7 per cent in 2001. However, in the 2000s, proportion of MoPH budget slightly rose from 6.7 per cent in 2001 to 7.9 per cent in 2006. Particularly, the increased budget in 1990s could be one of the causes for a decline in health-related inequality. The evidence could partly be shown by Vapattanawong et al (2007: 852), who claim that, during 1990-2000, five-year mortality gap between the richest and the poorest quintile decreased by 55 per cent. They state that one of the causes of narrowed mortality gap is government medical welfare scheme in 1993 that was extended to cover, elderly, the disabled, and all children under 12 years old. Historically, the increased public health budget in the 2000s could be the result of implementation of the universal health-care coverage scheme (UC for short), which is promised policy in general election campaign of Thai Rak Thai party, who acquired majority vote in 2001 (NaRanong and NaRanong, 2006; McGuire, 2008). It could be said that the launching of the UC could be resulted from competitive general election. Interestingly, the implementation of the UC not only change quantitative amount of Thai government health-care spending, but also make health-care services more equitable. Particularly, UC enhances chances to receive health-care services to people, especially underprivileged ones. Prakornsai, Tangcharoensathien and Tisayatikom (2007: S22) claims that during 2001 (before the UC) and 2003 (after hat UC), UC increased ratio of health insurance coverage from 71 per cent to 95 per cent. Specifically, the increased
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insurance ratio covered majority of the poor. Accordingly, the increased insurance coverage makes the poor people could have a better access to health services. The better access could be shown by 159.2 per cent increasing in the usage of ambulatory services at community hospitals , and 78.8 per cent in the usage of hospitalization at community hospitals by the poorest (Prakornsai, Tangcharoensathien and Tisayatikom, 2007). In addition, UC tends to favor the poor over the rich, regards to some studies that apply benefit incidence analysis method . For example, Prakongsai, Limwattananon and Tangcharoensathien (2009: 71-2) illustrate that, in 2001, the 20 per cent poorest benefited from 28 per cent of total public spending on health, while the 20 per cent richest benefited only 18 per cent of total spending on health. In 2003, the share of 20 per cent poorest increased to 31 per cent, but the share of 20 per cent richest decreased to 15 per cent. The pro-poor characteristic of UC could lead to greater equality in health-services. In summary, democratic institutions, such as general election or constitution, might be one of the explanations of the decline in income inequality in Thailand during early 1990s to mid 2000s, even trade openness were still expanding in that time. The reason is that the institutions encourage Thai government to implement set of redistributive policies via expansion of government spending on education and health-care. The case of Thailand in democratic periods tends to be similar to Taiwan and South Korea in which an increase of social spending concurrently occurred with a decline in income inequality and democratic transitions. However, it should be mentioned that, in Thailand, the tax income, which one of important sources of government funding, is regressive tax structure. Empirically, the more than a half of tax income of Thai government relies on income from indirect taxes, i.e. consumption tax, which their tax burden tends to coped by the poor, due to their high proportion of consumption expenditure to income (Laovakul et al, 2008). In order to make tax structure to be more equity, new forms of direct tax, i.e. property and inheritance tax, have to be introduced (Laovakul et al, 2008).
19 20
19
20
Usage of health services is measured in terms of visits per capita per year. Benefit incidence analysis is the method that intends to study about distributive effects of public spending on different group of people, which are usually grouped by income level. Firstly, the method calculates per unit subsidy of particular public service. Then, the method imputes per unit subsidy to each public service users. Finally, the method compares how total subsidy is distributed across different groups by calculating total subsidy that is received by different groups. However, this method could not evaluate the outcome of public service on long-run benefits for users. The further detail of benefit incidence analysis could be seen in Demery (2000).
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6. Concluding remarks
In conclusion, according to the cross-national analysis and the experience of Thailand in the 1980s, greater trade openness tends to aggravate income inequality in several countries, especially developing ones. The reasons could be that the trade openness may widen earning gap between skilled and unskilled labors; moreover, trade openness might also lead to an increase in regional inequality. In other words, openness-led inequality could be the result of unequal distribution of benefits from trade openness across people in different socio-economic classes and regions. Nevertheless, the negative effect of openness on income distribution could be mitigated by government policies. This could be supported by the econometric analysis in this dissertation. The result has shown that when trade openness took place, countries with consolidated democratic institutions tend to have lower level of income inequality than that of other countries because democratic governments tend to implement redistributive policies via expansion of public sector in order to mitigate adverse effects on income distribution from trade openness. Likewise, the effects of public policies on openness-led inequality could be strengthened by the case of Thailand during democratic period, which there was a decline in income inequality while trade openness was stills expanding. The decline in income inequality could be resulted from the implementation of redistributive policies, i.e. social spending on education and health-care services. The decline in inequality could be also caused by the policies that attempted to promote export industries to locate in the other areas that apart from the national centre. From the above information, it could be concluded that the emergence of pro-equity public policies usually walks hand in hand with the presence of democratic institutions. The reason is that the democratic institutions could equally provide opportunities to all people from every socio-economic background to participate in the decision-making processes in a public policy design and implementation. Consequently, those institutions will encourage government to launch the policies that could equally distribute benefits from trade openness and compensate the losers from globalization. In summary, the presence of consolidated democratic institutions is the necessary condition for making globalization to be fairer. However, apart from this dissertation, the studies about the relationships of trade openness, democracy and income inequality could be improved. On the cross-national
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studies, the improvement can be conducted by using more recent dataset or applying new econometric model. For the case study analysis, there should be more recent studies that focus on the countries that concurrently experience trade openness and democratic transitions, but were hardly to be researched by previous studies.
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