Income Distribution, International Integration, and Sustained Poverty Reduction

Pinelopi K. Goldberg, Tristan Reed

NBER Working Paper No. 27286
Issued in May 2020
NBER Program(s):Development Economics, Industrial Organization, International Trade and Investment

What is the pathway to development in a world with less international integration? We answer this question within a model that emphasizes the role of demand-side constraints on national development, which we identify with sustained poverty reduction. In this framework, development is linked to the adoption of an increasing returns to scale technology by imperfectly competitive firms, who need to pay the fixed setup cost of switching to that technology. Sustained poverty reduction is measured as a continuous decline in the share of the population living below $1.90/day PPP in 2011 US dollars over a five year period. This outcome is affected in a statistically significant and economically meaningful way by both domestic market size, which is measured as function of the income distribution, and international market size, which is measured as a function of legally-binding provisions to international trade agreements, including the General Agreement on Tariffs and Trade, the World Trade Organization and 279 preferential trade agreements. Counterfactual estimates suggest that, in the absence of international integration, the average resident of a low and lower-middle income country does not live in a market large enough to experience sustained poverty reduction.

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Document Object Identifier (DOI): 10.3386/w27286

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