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The Effects of Trade openness and Democratic Institutions on Income Inequality: Cross-National Analysis and The Case study of Thailand.

Student Registration Number

4477022

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

Word Count: 11996 (Excluding references and appendix)

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.

2.1 Trade openness and income inequality

2.1.1 Heckscher-Ohlin trade theory
The Heckscher-Ohlin trade theory (HO) anticipates the change in income distribution from greater trade openness by focusing on the income gap of different production factors. This theory states that a country tends to export goods, which intensively use relative abundant factors, and import more commodities, which intensively use relative scarce factors, instead of producing them (Salvatore, 1993). Accordingly, the expansion of export activities will increase demand for comparatively abundant production factors, which could rise earning of the abundant factors; simultaneously, the demand for comparatively scarce production will be decreased that could make earning of the scarce factors lower (Salvatore, 1993; Wood, 1997; Bourguignon and Morrison, 1989). With referring to the simplest version of the HO, when the developing countries implement trade liberalization policies, the income inequality in those countries will decrease, and vice versa for the developed countries. The reason is that when developing countries open their economies, the wage of unskilled worker in those developing countries will increase, and vice versa for the wage of skilled labors; the decreased wage gap will narrow income inequality (Anderson, 2005; Wood, 1997). This prediction, however, is grounded on some assumptions. One main assumption is that developing countries are relatively abundant in unskilled labors; another assumption is that unskilled labor may be an asset that is most equally distributed among people in developing countries (Anderson, 2005). In brief, HO predicts that trade liberalization could reduce income inequality in developing countries because it decreases the earnings disparity between unskilled workers and other production factors.

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.

2.1.2 Spatial inequality and economic geography

Generally, trade openness not only leads to a change in factors earning gap, but also spatial inequality. This could be seen from the situation that when a country participate in international trade, some regions, which have greater concentration of international economic activities, tend to reach better level of development, e.g., higher income per capita, than other regions (Kanbur and Venables, 2007). The unequal concentration of international economic activities across different regions could be the causes of inequality (Williamson, 2002). In order to understand the causes of openness-led spatial inequality in domestic level, the question - why international economic activities are concentrated in some regions has to be answered. The precise answers could be provided by the theory of economic geography. This theory states that the concentration of industries can be the result of the first and second nature geography (Venables, 2005; Kanbur and Venables, 2007). The first nature refers to the condition that some regions are advantaged by their geographical characteristics, such as coasts, rivers ports, and borders. Apart from the first nature, the second nature could be the positive effects of proximity on behaviors and interactions of economic agents in the cluster areas (Venables, 2005; Kanbur and Venables, 2007). Firstly, firms in densely areas tend to gain benefits from technological spillovers from higher technological advanced firms. Secondly, labor market in densely area could be more efficient, since firms could easily find suitable specialized labors. Meanwhile, labors tend to have incentives to learn and acquire special skills that match the employers demand. Thirdly, the densely area firms could gain advantages from increasing return to scale, because of the large size of market; simultaneously, the large scale

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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.

2.2 Democracy and income inequality

There is a generally recognition that democracy, which can be the representation of political equality, could lead to the establishment of economic inequality . This recognition could be supported by some theories that emphasize the role of democratic institutions. Theoretically, democracy tends to mitigate inequality within societies since democracy could allow the majority to possess equally political rights, which provide them a chance to participate in public policy decisions, through legitimated political movements. (Lenski, 1966; Reuveny and Li, 2003; Nel, 2008). As a result, the pro-equity policies, which could enhance the well-being of the majority and reduce gap between elites and ordinary people, will be implemented.
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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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2.2.1 Median voter theorem

Particularly, the impacts of democracy on economic inequality are often analyzed via median voter theorem. This theorem explains that the majority of voters, who tend to have income below the average income level, usually insist political elites to implement redistributive policies by voting in general election (Alesina and Rodrik, 1994; Nel, 2008; Acemouglu and Robinson, 2000). It could be said that, in the democratic societies, general election can be used by the mass as means to force governments to respond their demand for redistribution. However, in developing countries, general election might not guarantee the realization of redistributive. Nel (2008: 103) argues that democratic regimes in developing countries tend to have constraints on political participation of citizens, even there is a general election in these countries. The constraints are network of patron-client relationships, immature party politics and absence of free press. This could not make citizens effectively control elites in the process of public policy decision. As a result, pro-equity policies are less likely to be carried out, because elites tend to implement the policies that serve their interests. Lack of accountability to citizens is also a contributing factor to this situation as well. Theoretically, the presence of democratic institutions, i.e. general election, might not be the necessary political means of the mass for pressuring governments to respond to the peoples demand for redistribution. This point could be seen from the work of Alesina and Rodrik (1994: 478), which argues that, in non-democratic regimes, citizens could force governments to implement redistributive policies by exploitation of social demands and social conflicts. On the contrary to Alesina and Rodrik, citizens in non-democratic societies tend to hardly achieve their redistributive demand because citizens in these societies could be more easily abused by governments than citizens in democratic state.

2.2.2 Democracy and size of public sector

To be more precise, some theories point out that, in the democratic societies, expansion of public sector could mitigate income inequality; on the contrary, to nondemocratic societies, expansion of public sector is associated with higher income inequality. For instance, Lee (2005: 163) explains that consolidated democratic institutions can be an

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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.

2.3 Trade openness, democracy and inequality

Since the beginning of this section, it has shown the theories that separately discuss about the effects of solely trade openness or democratic institutions on income inequality, yet it has not illustrated the theory, which attempts to answer the following questions. Does the effect of trade openness on income inequality depend on type of political institutions? How political institutions impact income inequality in the condition of trade openness? There are some scholars that attempt to construct the aforementioned theory. Some scholars point out that the existence of trade openness could lead to expansion of government size, i.e. enlargement of public spending. Initially, trade openness, could bring greater volatility to domestic income because greater openness make an economy more vulnerable to external shocks (Rodrik, 1998). Consequently, the volatility will stimulate demand for expansion of government expenditure in order to deal with greater risks from trade openness. Also, trade openness simultaneously creates winners and losers. Thus, openness might drive government to implement spending on safety nets, such as compensation of employment losses, from the losers for greater trade openness (Adsera and Boix, 2002). However, greater trade openness may not lead to expansion of public sector in some societies, especially authoritarian ones. Theoretically, trade openness could lead to

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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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3. Existing empirical evidences

3.1 Cross-national studies
Intentionally, this part will describe several existing studies using cross-national data that attempt to discover the systematic effects of trade openness and democracy on income inequality. Regularly, the studies assess income inequality, in term of aggregate measurement, such as Gini coefficient, the ratio of share of in national income of the richest 20 per cent, to the share of 20 per cent poorest. These researchers usually calculate data on income inequality from many existing sources, e.g. household survey of Deininger and Squire (1996) and World Income Distribution (WYD) database, which is a part of Global Income Inequality project, by Milanovic (1999).

3.1.1 Trade openness and income inequality

There are many researchers that study about the relationship between trade openness and inequality. Normally, these researchers indicate degree of trade openness via trade intensity, e.g., the ratio of international trade to GDP. In addition, some researchers measure the degree of openness from trade policies, such as tariffs or quantitative restrictions. Some researchers also employs Sachs-Warner index (1995) 2, which takes quantitative restrictions and socio-economic structures, e.g., type of economy (capitalist or socialist) and states monopoly of major export, into account for measuring degree of openness. On the one hand, some studies show that there could be positive relationship between trade openness and inequality. For example, Barro (2000), who constructs the single-year panel model, which contains sample of 68-84 countries in 1960, 1970, 1980, and 1990. According to the model, Barro states that greater trade ratio will lead to higher Gini coefficient. Likewise, Lundberg and Squire (2003) also conclude that greater trade openness could increase inequality for model that include sample of 147 countries during 1960-94, due to positive relationship between Gini coefficient and Sachs-Warner index. On the other hand, some researchers argue that greater trade openness could lead to a decline in income inequality. For instance, Edwards (1997) who constructs the model comprises of 44 countries sample data, including 27 developing countries during 1970-80.

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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3.1.2 Democracy on income inequality

Many researchers try to prove the hypothesis whether democratic regimes have impacts on economic inequality, especially income disparity. The variables, which are usually applied as proxies of the quality of democracy, are index on political regimes from The POLITY IV Project dataset, and Freedom Houses index on political rights and civil liberties. Usually, some studies employs dummy variable for democratic regimes, instead of directly using index to represent political regimes. However, the categorization of this kind dummy variable usually refers to score from the mentioned political databases . Particularly, some researchers create their own variable on democracy, for example, Boix (2003) create dichotomous variables that ground on his criteria on democracy. There are cross-national studies which try to test the hypothesis whether higher level of democracy, in term of high value of index on democratic societies, will lead to a lower level of inequality. For example, Muller (1988) describes that countries with higher index on democracy, tend to reach lower level of income inequality for sample of 55 countries in the period of 1965-75. Also, there are some researchers, who utilize dummy variable for democratic societies for testing the hypothesis that countries, which are consolidated democratic societies, tend to reach lower level of income inequality than other kinds of societies do. Taking the study of Rudra (2004) as an example, it shows that the level of income inequality in developing countries, which are democratic regimes, tends to be lower than that of nondemocratic developing societies, regarding to the value of dummy variables for democracy. Nonetheless, democracy might have no impacts on inequality, according to some researchers. For example, Bollen and Jackman (1985) illustrate that the change in level of political democracy (Bollens index) has no systematic effect on the change in income inequality, by using sample data of 60 countries. As stated in theoretical perspective section, the effect of democratic regime on income inequality is potentially dictated government sizes. According to this theoretical viewpoint, some researches create interactive variables of government size, which can be shown by the share of government consumption/spending to GDP or the ratio of current tax revenue of the central government to national income, and dummy variable for democratic

The examples could be shown by Rudra (2004), and Lee (2005)

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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.

3.1.3 Trade openness, Democracy, and Inequality

Nowadays, there might be no study that attempt to answer the question that whether the effect of trade openness on inequality might be different according to whether a country is democratic or not. Concurrently, there seems to be no researchers that attempt to answer the question that whether the effect of democracy on inequality might be different according to whether a country is open to trade or not. Although they might not directly answer to these above questions, there are some studies try to answer the question about the effects of trade openness on change in size of government whether they are resulted from level of democratic development. Taking Adsera and Boix (2002) as an example, in order to answer this question, they construct explanatory interactive variables of dummy variable for competitive democratic regimes and ratio of trade volume to GDP, and they uses a proportion of government revenues to GDP, which is the proxy of government size, as a dependent variable. According to coefficient of the interactive variable, they show that when economy is liberalized, government spending in democratic and authoritarian societies increase in different rates (5-28% in authoritarian states; 10-33% for democratic societies) by adopting sample of 65 countries from 1950 to 1990. With regards to the study of Adsera and Boix, it could be concluded that under the conditions of trade openness, democratic countries could be less unequal in income distribution than that in authoritarian societies, because of larger government spending.

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3.2 Case Studies

There is some research that analyzing the effects of international integration and democracy on inequality by application of case study analysis of individual country. The case study analysis might provide understanding on channels of effects of trade openness and democratic institutions on inequality.

3.2.1 East Asian countries (South Korea and Taiwan)

The case study of East Asian countries could provide understanding about the effects of trade openness and democracy on inequality. Interestingly, these countries have experienced constantly high economic growth (about 7 per cent per annual), as well as relatively low levels of income inequality during 1965-90 (Birdsall, Ross and Sabot, 1995). In particular, the case of East Asian countries might match with the prediction of Heckscher-Ohlin trade theory - trade openness could mitigate income inequality in developing countries - because of wage gap reduction. This can be seen from work of Wood (1997: 42), which states that after more outward-orientation had been implemented, the wage gap between skilled and unskilled labors in South Korea and Taiwan was narrowed. The narrowed wage gap could be resulted from outward-orientation policies that stimulated demand for unskilled workers, leading to higher wage of unskilled labors (Wood, 1997). Additionally, the decline in income inequality in South Korea and Taiwan could be resulted from the democratic transitions forcing both countries governments to increase their size via expansion of social spending. Empirically, in Taiwan and South Korea, after democratization processes took place, the public spending on education and social security had increased in terms of absolute dollar per capita expenditure in the periods of 1965-94 (Chan, 1997). Particularly, in South Korea, the expanded education could also be pro-equity policies since the budget on education service has been largely spent to primary and secondary education while only 10 percent of the budget has been spent on higher education. Additionally, the expansion of education can be prominent roots of income inequality and wage gap in South Korea (Birdsall, Ross and Sabot, 1995; Woods, 1997). It could be concluded that in both countries, the expansion of public spending tends to be pro-equity. In short, it could be said that trade openness and democratic transitions could be the roots of a decrease in income inequality in Taiwan and South Korea. The reason is that

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openness and democracy mitigate inequality via reduction wage inequality and expansion of social spending on education.

3.2.2 Post-reformed China

Although China is located in the same geographical location as South Korea and Taiwan, its economic experience tends to be different from those neighbor countries. The difference could be seen from the situation that Chinese economy has been experienced constantly spread of income disparity since the 1980s when several reformation policies were implemented (Kanbur and Zhang, 2005). This situation could be illustrated by the increase of the Gini coefficient from 28.6 percent in 1979 to 37.2 in 2000. In the case of post-reformed Chinese economy, greater trade openness4, which is one of reformation policies, could be one of the important factors of an increase in income inequality. The reason could be that greater trade openness led to the widening in regional gap, according to some studies. For instance, Zhang and Zhang (2003: Table 2) states that the regional gap could be illustrated by the difference in GDP per capita in 1992-1998 between Eastern coastal areas and inland areas, which reached 3055 and 1489 Chinese Yuan, respectively. They also demonstrate that greater trade openness coincides with the change in regional Gini coefficient, which increased from 0.19 in 1980, to 0.26 in 1998. The openness-led regional inequality in post-reformed Chinese economy could be resulted from the unequal participation in international trade activities between coastal and inland areas. This statement could be supported by the facts that, during 1992-1998, coastal areas are the regions that possess the lion share of international trade (88.08%), while inland areas possess small share of international trade (Zhang and Zhang, 2003). Also, the change in income inequality in post-reformed China might be determined by political factors, which seem to be non-democratic. Although China could be classified as an authoritarian state, there has been an election for village committee since the late 1980s (Shen and Yao, 2008). Some studies argue that village committee election could mitigate income inequality via expansion of public investment and changing in tax structure. For example, Zhang et al (2004: 2869) report that election make village committees tend to shift tax burden from households to village enterprises. Concurrently, the committees are forced by electoral processes to increase the share of public investment and reduce the wasteful

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) .
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4.2.2 Economic specification

Like previous studies, this section utilizes Gini coefficient as the dependent variable since Gini coefficient could clearly illustrate the situation income inequality in the domestic level. The baseline equation is as follows.

ct

X1 X 2 X3 X 4 X5
ct 2 ct 3 ct 4 ct 5 ct

ct

Where c and t index countries and years, respectively. equation.

is constant term of the

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).
11 10

10

11

12

The construction of dummy variables for free and not-free societies relies on the classification of in Tables

and Charts in Freedom in the World 2010 by Freedom House (2010a).

12

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).

25

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.
13

4.3 Econometric results

The values of coefficients and standard errors of each explanatory variable in the regressions are illustrated in Table 4.1. All of regressions in Table 4.1 use Gini coefficient as a dependent variable. However, due to the limitation of page space, this section has to separate the Table 4.1 into two parts in different pages. Also, this section has to display explanatory variables in form of codes, instead of variables full names. The definition of explanatory variables codes is shown in the below.
14

13

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.

26

Code Trade Govav Democ Autho Freesoc Notfreesoc TradeGDP

= = = = = = = =

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

27

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 GDP2 PriEdu SecEdu Land Con

= = = = = =

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

28

Table 4.1 (First part)

Regression Trade Govav Democ Autho Freesoc Notfreesoc TradeGDP TradeLand TradePri TradeSec GovDemoc GovAutho GovFreesoc GovNotfree TradeDemoc TradeAutho TradeFreesoc TradeNotfree GDP GDP2 PriEdu SecEdu Land Con R2 48.005* (15.474) -3.072* (0.956) -2.320** (0.931) -0.029 (1.263) 1.124*** (0.630) -137.768** (62.169) 0.327 46.182* (15.538) -2.959* (0.960) -2.264** (0.932) -0.406 (1.326) 0.684 (0.724) -132.919** (62.235) 0.336 28.027*** (15.364) -1.626*** (0.959) -2.51* (0.841) 0.080 (1.143) 0.249 (0.654) -74.558 (60.216) 0.399 40.898** (17.438) -2.654** (1.076) -1.348 (1.444) 0.252 (1.988) 1.933*** (1.035) -113.757*** (68.111) 0.377 43.759* (15.002) -2.799* (0.927) -1.970** (0.831) -1.078 (1.250) 0.727 (0.497) -123.348** (60.298) 0.365 38.476** (15.524) -2.450** (0.957) -1.944** (0.837) -0.918 (1.209) 0.825*** (0.494) -106.56*** (62.535) 0.376 -13.005* (3.293) -2.414** (1.146) -3.644 (2.515) -1.337 (2.438) -50.159*** (29.329) -14.041 (19.718) 1 5.843*** (3.209) 2 4.026 (3.209) 20.712 (18.427) 3 119.852* (29.709) 6.996 (16.198) 4 19.124 (12.025) 22.903 (17.966) 5 6

34.220** (16.550) -1.068 (1.791) -4.906* (1.864)

59.461** (25.783) 4.891 (3.960) -3.446 (0.453)

*, **, *** = significant at 1%, 5% and 10% level, respectively

29

Table 4.1 (Continued part)

Regression Trade Govav Democ Autho Freesoc Notfreesoc TradeGDP TradeLand TradePri TradeSec GovDemoc GovAutho GovFreesoc GovNotfree TradeDemoc TradeAutho TradeFreesoc TradeNotfree GDP GDP2 PriEdu SecEdu Land Constant R2 46.822* (15.701) -3.029* (0.981) -2.062** (0.845) -0.909 (1.279) 1.289*** (0.740) -132.773** (62.535) 0.380 39.884** (16.244) -2.572** (1.006) -2.130** (0.856) -1.007 (1.240) 1.169 (0.744) -109.555*** (64.477) 0.404 37.652** (16.109) -2.461** (0.995) -1.509 (0.974) -0.978 (1.322) 1.222 (0.741) -96.760 (64.861) 0.365 26.250*** (15.484) -1.699*** (0.950) -1.470 (0.952) -0.956 (1.259) 0.925*** (0.501) -58.175 (62.902) 0.381 -19.641* (6.661) -11.247 (11.499) -25.149* (8.797) -8.279 (15.050) 28.201*** (16.055) -1.860*** (0.979) -1.751*** (0.932) -0.836 (1.200) 1.066 (0.719) -63.164 (64.407) 0.406 -62.088*** (31.849) -18.214 (31.451) 7 1.753 (2.868) 32.020*** (17.102) -0.403 (1.882) -4.894* (1.841) 8 18.769* (6.728) 25.051 (17.107) 4.348 (2.948) -2.110 (3.403) 9 0.943 (2.9280) 30.493*** (18.068) 10 11 23.110** (8.864) 20.068 (16.359)

59.223** (29.049)

-2.106 (1.835) -4.844** (2.380)

5.352 (4.055) -2.753 (4.512)

4.272 (3.498) -2.450 (4.137)

*, **, *** = significant at 1%, 5% and 10% level, respectively

30

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

15

15

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.

31

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.

32

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).
16

16

As mentioned already, this kind of societies could be referred to societies with consolidated democratic institutions.

33

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.

34

5. Case study of Thailand

Firstly, this section provides background information on Thailand. Generally, Thailand has been widely recognized by several academics as the economy with fast rate of economic growth but highly unequal income distribution. Empirically, on the one hand, Thai society has constantly experienced decent economic growth rates, which reach approximately 6 per cent per annual during 1970-2005 (Warr, 2008); on the other hand, Thailand simultaneously experienced with higher income inequality, which could be illustrated by increasing in Gini coefficient from 0.413 in 1962 to 0.515 in 2006 (see Ikemoto and Uehara (2000) for data in 1962-98, and Laovakul et al (2008) for data in 19882006). The change in Gini coefficient in past 50 years is shown in Figure 5.1. Figure 5.1: Gini coefficient, 1962-2006

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.

35

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.).

Figure 5.2: Income share by quintile (percentage of national income), 1981-2006

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

36

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
17

that attempted to

establish participatory democracy, which could enable public to control politicians and bureaucrats (Klein, 1998).

Figure 5. 3: Trade volume as percentage of GDP, 1985-2005

Source: World Databank, World Bank (2010a).

17

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.

37

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.

5.1 Trade Openness

Greater trade openness could be one of the causes of a change in income inequality in Thailand in mid 1980s to mid 2000s, since it could be related with change in earning inequality, like other countries. According to Ikemoto and Uehara (2000: 434), in the 1980s, Thai economy depended on an export of labor intensive commodities, yet still has widened its earning disparity as the trade had broadened. Unlike Thailand, Taiwan could be able to narrow its income gap by exposing its economy to international trade. One of the reasons could be that trade openness increases demand for the skilled labors, i.e., professional, technical and administrative officers, of export companies. Ikemoto and Uehara (2000: 434) states that increased demand for skilled workers led to a rise in earning of the skilled labors, so the risen skilled labor earnings widened wage gap between skilled and unskilled labors, especially production workers. According to NSO (2007), in 1992, the income of skilled labors was higher nearly 3 times than income of unskilled labors, while in 1986 the income of the skilled labors was higher 2 times than the unskilled workers. However, although trade openness was expanding, the wage inequality between skilled and skilled workers declined in the 2000s. According to the study of Buula-or and Kripornsak (2008: Table 1), although the ratio of employment of high-skilled to low-skilled workers increased during 2002-06, the relative wage of high-skilled to low-skilled labors decreased from 3.04 in 2002 to 2.89 in 2006. Nevertheless, Buula-or and Kripornsak (2008: 82-84) explains that the decreasing in relative wage might not be related to factors of trade openness, since the decreased relative wages could be the consequence of an excess supply of high-skilled labors, which was caused by sharp increase in number of degree graduates. In addition, as stated in theoretical perspectives section, trade openness might not only impact a change in earning inequality, but also impacts inequality between regions. The

38

general information on regional inequality in Thailand during the period of early 1980s to mid 2000s is illustrated in Table 5.1.

Table 5.1: Relative per capita household income by regions

Bangkok = 100 Region Greater 18 Bangkok Centre North Northeast South

1981 100 59.9 49.2 34.6 52.0

1986 100 52.2 43.6 28.5 47.6

1988 100 48.1 40.8 30.3 42.9

1990 100 44.7 38.1 24.1 36.0

1992 100 38.7 30.3 22.4 33.2

1994 100 47.4 36.0 27.4 39.3

1996 100 42.9 34.3 26.3 36.3

1998 100 44.8 35.0 26.8 37.3

2000 100 50.2 31.2 26.5 42.7

2002 100 48.7 31.5 29.1 42.0

2004 100 56.7 36.2 32.3 49.4

2006 100 56.8 36.6 32.4 55.2

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.

18

Greater Bangkok region includes Bangkok and three surrounding provinces (Nonthaburi, Phatum Thani and Samut Pakarn).

39

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.

40

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.

5.2 Democratic Institutions

As mentioned earlier, the presence of well-developed democratic institutions is usually associated with a lower income inequality through a pro-equity expansion of public sector. The detail of a proportion of government expenditure to GDP and the amount of government expenditure is illustrated in Table 5.2 below.

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.

41

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

42

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

43

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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Appendix 1 List of countries in cross-national analysis (First part)

Algeria Argentina Armenia Australia Austria Bahamas, The Bangladesh Barbados Belarus Belgium Bolivia Botswana Brazil Bulgaria Burkina Faso Burundi Cambodia Cameroon Canada Central Africa Republic Chad Chile China Colombia Costa Rica Cote d'Ivoire Czech Republic Denmark Djibouti Dominican Republic Ecuador Egypt El Salvador Estonia Ethiopia Fiji Finland France Gabon Gambia Georgia Germany Ghana Greece Guatemala Guinea Guinea-Bissau Guyana Honduras Hong Kong Hungary India Indonesia Iran Iraq Ireland Israel Italy Jamaica Japan Jordan Kazakhstan Kenya Kyrgyz Republic Laos Latvia Lebanon Lesotho Lithuania Luxembourg Macedonia Madagascar Malawi Malaysia Mali Mauritania Mauritius Mexico Moldova Mongolia

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Appendix 1 List of countries in cross-national analysis (Second part)

Morocco Mozambique Myanmar Namibia Nepal Netherlands New Zealand Nicaragua Niger Nigeria Norway Pakistan Panama Papua New Guinea Paraguay Peru Philippines Poland Portugal Puerto Rico Romania Russian Federation Rwanda Senegal Seychelles Sierra Leone Singapore Slovak Republic Slovenia South Africa South Korea Spain Sri Lanka St. Lucia Sudan Suriname Sweden Switzerland Taiwan Tanzania Thailand Trinidad and Tobago Tunisia Turkey Turkmenistan Uganda Ukraine United Kingdom United States Urugray Uzbekistan Venezuela Vietnam Yemen Yugaslavia (Serbia) Zambia Zimbabwe

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