Rudra Prosad Roy and Saikat Sinha Roy
ADB WP No. 763, 2017
Abstract: The process of transition from a low-income to a high-income country involves a structural transformation of the economy along with a change in the distribution of income and wealth in the economy. We examine how this process of structural change impacts inequality for a sample of advanced, emerging, and transition economies. Trade liberalization, through a reduction in tariff and removal of nontariff barriers, aids the process of structural transformation and simultaneously changes the income distribution in an economy. We investigate whether structural change impacts inequality. Using a panel of 217 countries during the period 1991–2014 and the generalized method of moments (GMM) method of dynamic panel data analysis, we found that the process of structural change increases income inequality, while trade liberalization and foreign direct investment inflows help to reduce it. Income distribution is found to be more equal to infrastructure development. The econometric results are robust and have important policy implications.