Sunday, November 4, 2007

Globalization and Inequality

. Sunday, November 4, 2007

The World Economic Outlook (an IMF publication) dedicates a full chapter to exploring globalization's impact on income inequality. "Over the past two decades, income growth has been positive for all quintiles in virtually all regions and all income groups during the recent period of globalization. At the same time, however, income inequality has increased mainly in middle- and high-income countries, and less so in low-income countries."

The study highlights the distinct causal forces exerted by trade and foreign direct investment. Trade and trade liberalization reduce inequality; foreign direct investment increases inequality.

The bottom line, however, is that technological change rather than globalization per se is the main cause of rising income inequality.

2 comments:

Sensemania said...

Wouldn't income inequality have risen less without globalization and keeping technological advances constant? Asked another way, doesn't globalization perpetuate income inequality through erasing certain jobs that would stay in developed countries otherwise (telephone services, basic manufacturing)?

Thomas Oatley said...

Yes, this is precisely what the IMF study finds--foreign direct investment increased income inequality by reducing the demand for (and thus wage of) relatively low-skill workers in the US and EU and increasing the demand for relatively higher-skilled workers in developing countries.

But, the impact of FDI on income inequality is much smaller than the impact of tech change.

Globalization and Inequality
 
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