liberalizations in developing countries (Goldberg and Pavcnik, 2004; 2007) and for Latin America in particular.<sup>12</sup> The literature for the region indicates, in general, that trade liberalization had a significant but relatively small impact on skill premia, widening the wage skill gap and increasing inequality in the income distribution as a whole, although these effects typically explain only a relatively small fraction of the total increase in the skill premium. An important issue that needs to be established on a case by case basis is the factor of production that represents each country’s comparative advantage with respect to its trade partners, and will thus benefit from trade liberalization – either non-renewable resources or unskilled labor, for instance.<sup>13</sup> Besides these direct effects of trade openness, trade can also be a factor in the incorporation of capital goods complementary to skilled labor and thus introduce skill biased technical change (Acemoglu, 2003; Yeaple, 2005), which is also compatible with the evidence on the relationship between wage skills gaps and imports of machinery and equipment in the region (Acosta and Gasparini, 2007), as well as with exports (Brambilla _et al_ ., 2011). Because of the relevance of direct and indirect effects of trade on the wage skill premium, an index of average tariff levels is included in the regressions.<sup>14</sup> While trade reforms where important in the 1990s in Latin America, there were relatively less policy changes in this area during the decade of 2000s. But a more salient feature of the decade of 2000s in Latin America was the growing importance of exports in the midst of a boom in commodity prices (Baffes and Haniotis, 2011) and in the context of the emergence of new trade partners for the countries in the region, most notably China (De La Torre _et al_ ., 2011). Changes in terms of trade, were not homogeneous across the region – while they increased on average during the 2000s for South American countries and Mexico, they decreased for those in Central America.<sup>15</sup> The regressions discussed below incorporate an index of “net barter terms of trade” (source: World Bank World Development Indicators) to capture the average effect of the recent evolution of international prices in the region, although it is possible that these average effects mask the heterogeneity of

> 12 See for instance Galiani and Sanguinetti (2003) and Galiani and Porto (2010) for Argentina; Ferreira, Leite and WaiPoi (2007) for Brazil; Gill and Montenegro (2002) for Chile; Attanasio _et al._ (2004) for Colombia; and Harrison and Hanson (1999) for Mexico.

> 13 Even if a country has a comparative advantage in terms of unskilled labor, inequality can increase after trade liberalization. Atolia (2007) develops a dynamic Heckcsher-Ohlin model in which increasing inequality arises from trade liberalization in the short run because of asymmetric speeds of adjustment between the export and import sectors. The asymmetry generates a transitory capital accumulation that increases the relative wages of skilled workers because of capital-skill complementarity in production.

> 14 The authors are grateful to Miguel Szekely for sharing his series of tariffs for the region.

15 Galiani et al. (2011) study the distributive effects of terms of trade shocks. In their model, besides a non-tradable good, there are two tradable goods, one intensive in natural resources and another – an industrial good, for instance – intensive in unskilled labor. As in a typical Dutch disease model, an increase in the international price of the natural resourcesintensive good induces higher demand (and higher prices) for the non-tradable good, and a re-allocation of resources away from the production of the importable industrial good. The key to the distributional conflict within this model is the factor intensity in the production of the tradable industrial good and of the non-tradable good, and the composition of the consumption basket of the skill groups in terms of the three goods in the economy The model also highlights how these shocks introduce incentives for seeking compensation (for instance, by means of export taxes and transfers). This potential role of the tax system to cushion the impact of terms of trade shifts and re-distribute their effects reinforces the case for analyzing the country-specific political factors and the way in which the state mediates the diffusion of these shocks within the economy.

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