Trade openness and income inequality: The moderating role of institutional quality

Abstract

This study examines the effects of trade openness on income inequality and the moderating role of institutional quality in this dynamic within the Association of Southeast Asian Nations. We find the inverted U-shaped relationship between trade openness and income inequality. At a low level of trade openness, an increase in trade openness leads to higher income inequality. Beyond a certain threshold, however, trade openness starts to decrease income inequality. Institutional quality plays a moderating role, proving essential in reducing inequality. As policies and regulations improve and mature, they support private sector growth, contributing to a decrease in inequality. We highlight the importance of institutional quality as a moderator, not only to promote economic growth but also to ensure an equitable distribution of its benefits, particularly those derived from trade openness, across society.