Relationships between democracy, trade and inequality: Case of emerging markets

In today's economies, where income inequality is increasing, fair sharing of the income is as important as ensuring continuity in production and income increase. While there were significant increases in the world trade volume after the 1980s, on the other hand, the transition to democratic regimes came to the fore in Europe, Asia, Africa and Latin America. Despite these positive developments, increasing income inequalities both within and between countries since the beginning of the 21st century have been among the most important basic economic problems. In this context, our study aimed to analyze the mutual relations between trade, democracy and income inequalities theoretically and practically. In our study, an application was made using the Gini coefficient as the income distribution variable, trade openness rates as the trade variable, and 5 basic democracy indexes compiled by the V-Dem Institute as the democracy variable. However, the results obtained using liberal democracy data were used in the context of the scope of the thesis. Data from developing countries for the years 1995-2020 were analyzed using the Kónya bootstrap panel causality analysis. The findings obtained from the test can be summarized as follows: i) While no causality relationship is observed in Brazil and Hungary, there is a causal relationship from democracy to inequality in Colombia, China, Czechia, Greece, South Korea, Peru, Turkey and South Africa, while in Colombia, causality is doubled in the liberal democracy index and participatory democracy index. On the other hand, it has been concluded that there is a causal relationship from income inequality to democracy levels in Egypt, the Philippines and Poland. ii) It was concluded that there is a causality relationship from democracy to trade in China, Czechia, India, Mexico, Peru, Turkey, and from trade to democracy in South Korea, Philippines and Poland. iii) It has been concluded that there is a causal relationship from trade openness to inequality in Chile, Colombia, Greece, Indonesia, South Korea, Malaysia Peru, Thailand and Turkey, while there is a causal relationship from inequality to trade openness in China and Mexico. iiii) When the cases where democracy and trade openness cause negative effects on inequality, it is concluded that in other countries except South Africa, trade openness increases when the level of democracy decreases, and the level of democracy increases when the level of commercial openness decreases, although democracy and trade alone reduce or increase inequality. It is a striking result of the study that the effects of democracy and trade on inequality are interconnected. In South Africa, on the other hand, there are different factors such as ethnic discrimination that underlie such high inequality. This result shows us that if democracy and trade are strengthened together, it will positively affect income distribution justice, and although the structure of the countries included in the analysis is different from each other, democracy and trade openness are important determinants of inequality. Therefore, this result shows that there is no single recipe for income distribution inequality, on the other hand, measures appropriate to the structure of each country should be taken. In addition, the fact that there is a causal relationship from democracy to inequality shows that countries can provide income justice without cost by improving their democracies.