Policy Reform and Income Distribution

The paper analyses the relationship between within-country income inequality and policies of domestic liberalization and external globalization. The models used to provide the rationale for such reforms—such as the Hecksher-Ohlin model—usually predict a decline in inequality. However, the evidence shows that inequality often rose with the introduction of such reforms. The paper tries to explain this discrepancy by identifying the conditions under which the models’ conclusions do not hold. Indeed, such models are based on a simplifi ed view of reality and restrictive assumptions, and their predictions do not necessarily hold in conditions of institutional weakness, structural rigidities, ineffi cient markets, asymmetric information and persistent protectionism. JEL classifi cation: D31 (Personal Income and Wealth Distribution); D33 (Factor Income Distribution); E69 (Macroeconomic – Aspects of Public Finance, Macroeconomic Policy: Other); F02 (International Economic Order; Economic Integration: General).