International outsourcing and latin american inequality

Latin America is associated with a high and increasing level of inequality. This trend, however, reversed during the 2000s. What explains the falling level of inequality during this decade? Many recent papers attribute this decline to changing political regimes, however I focus on external factors, specically the role of international outsourcing and foreign direct investment (FDI). I consider the share of intermediate exports from 17 Latin American countries to OECD countries to measure the extent to which intermediate production tasks were outsourced to Latin America. I find this measure to be consistently positive and significant in explaining the dynamics of inequality over the two decades ending in 2010 after controlling for education and political regimes as well as country and year fixed effects. This supports the idea that international outsourcing impacts the distribution of income in the country to which production was outsourced, consistent with more recent international trade theory. In terms of FDI, the level of FDI inows (as a share of GDP) also is positive and signicantly related to inequality. Finally, I find remittances, education and political regime all play a role in the recent dynamics of inequality in Latin America.  These results are robust to the inclusion of political regimes, levels of education, terms of trade improvements, real exchange rate fluctuations and both fixed country and time effects to control for unobservables.

This positive and signicant relationship between inequality and both the share of intermediate exports to the OECD and the inflow of foreign direct investment contributes to understanding the decline in inequality and provides preliminary empirical support for the international outsourcing theory of Feenstra and Hanson, among others. Explaining the fall in the share of intermediate exports to OECD countries and the share of FDI inows is left for additional research, but it appears clear that the decline in inequality is driven by more than changes in political regimes.