Poverty and income distribution in Latin America: on the complementarities between trade policy and social public spending

Abstract

In this paper we evaluate the poverty and distributional effects of fiscal spending and trade policies within a simultaneous framework. We provide the first systematic analysis testing for the existence of complementarities between trade and fiscal spending policies using data from Latin America. We show that the benefits of trade openness especially for the low income and middle class household groups greatly depend on the size of the government-provided social and human capital. Conversely, the benefits of publicly-provided of social-human capital for the poor depend to a large extent on the degree of openness of the trade regime. Social-human capital has a much smaller effect on household incomes when trade is restricted and may even have a deleterious effect if trade is sufficiently restricted. Efforts to promote trade have lower positive effects for households if the per capita social and human capital is low.