Trade openness, inequality, and internal conflict: global evidence from a dynamic panel analysis

PurposeThis study investigates how trade openness influences internal conflict, emphasizing the moderating role of income inequality. It aims to clarify whether the benefits of globalization translate into domestic peace or exacerbate internal unrest when income distribution is unequal.Design/methodology/approachUsing an unbalanced panel of 126 countries from 1999 to 2022, the study applies a dynamic panel data framework based on two-step System Generalized Method of Moments (GMM) estimators. This approach accounts for potential endogeneity, autocorrelation, and heterogeneity across countries. Robustness tests include alternative lag structures and difference GMM estimations.FindingsEmpirical results reveal that trade openness and GDP per capita significantly reduce the risk of internal conflict, supporting the liberal peace hypothesis. In contrast, higher income inequality, inflation, democracy index, market concentration, and external conflict increase conflict risk. The findings confirm the embedded liberalism thesis, indicating that trade promotes peace only when accompanied by redistributive domestic policies that mitigate inequality.Research limitations/implicationsThis study is subject to several limitations. While it offers robust empirical findings, the use of panel data limits the ability to capture country-specific dynamics and institutional nuances. Moreover, internal conflict is a multifaceted phenomenon influenced by non-economic factors not fully addressed in the model. Despite these limitations, the results provide valuable insights for policymakers, suggesting that trade openness alone may not ensure peace without addressing domestic inequality. Future research may benefit from disaggregated analyses or mixed-method approaches to better understand the country-level mechanisms linking globalization and internal conflict.Practical implicationsThe results suggest that policymakers should complement liberalization policies with inclusive welfare measures and skill-based interventions to ensure that trade benefits are broadly shared, preventing distributional grievances that may lead to instability.Social implicationsThis study highlights the social risks of uneven globalization. While trade can promote economic growth, its benefits must be distributed fairly to prevent societal fragmentation. High income inequality can erode trust, deepen social divisions, and increase the likelihood of unrest. Furthermore, democratization without strong institutions may fail to foster cohesion, especially in developing societies. These findings stress the importance of inclusive development policies that promote both economic opportunity and social equity to ensure long-term internal stability and reduce the risk of conflict.Originality/valueThis study contributes to the literature by integrating trade theory and conflict analysis within a dynamic panel framework, offering one of the few cross-country empirical examinations of how trade openness, inequality, and internal conflict interact over time.