Spatial dependence of global income inequality: The role of economic complexity

There is extensive literature investigating the macroeconomic sources of income inequality. To our knowledge, this literature ignores the spatial dimension of global income inequality, specifically the relationship between economic relatedness and income inequality. Using panel data for 129 countries from 1964 to 2013, we show that income inequality in a country is affected by the income inequality and economic complexity of its trading partners. We find that (1) a country’s income inequality is positively correlated with the average income inequality among its top trading partners; and (2) that trade with economically more complex countries is correlated with reductions in income inequality.