Panel Data Analysis on Trade Openness and Economic Growth and its Impact on Income Inequality in ASEAN-5 nations

Abstract

Historically, economic growth was all that was needed to judge a nation's economy. Then globalization and trade changed the economy, and now economic growth is not enough to determine the strength of an economy. Now indicators such as income inequality have become an important factor to determine an economy's potential. In order for a developing country to be in the same category as developed countries, increasing economic growth and trade openness are not enough. Certain humanitarian aspects need to be met, such as an equal and fair distribution of income. With open trade barriers and rapid economic growth today's era also faces constantly increasing income inequality. This issue has been one that has been neglected for years as countries have opted to achieve economic growth instead of trying to limit their income inequality: This study attempts to find the impact of economic growth and trade openness on income inequality. The study measures economic growth through per capita GDP, national savings, and foreign direct investments (FDI). This study conducts a fixed panel regression with the use of robust standard errors from 1990 to 2017. The study is conducted specifically for five Asian developing countries namely: Indonesia, Malaysia, the Philippines, Singapore, · and Thailand, also dubbed as ASEAN 5. The results show that increasing trade openness and per capita GDP results in an increase in the Gini coefficient (income inequality measure). While an increase in FDI has no impact on the value of Gini coefficient, and is thus irrelevant. Whereas an increase in national savings may result in a decrease in Gini coefficient. In summary, economic growth arid trade openness does have an impact on income inequality, at least in the case of ASEAN 5 nations. This study further suggests some policies to encourage economic growth while inhibiting income inequality. One such policy is to focus on increasing national savings through taxation of higher income individuals, therefore encouraging redistribution of income.