The Processes of Globalization since 1980: More Even Distribution of Income

Globalization and Inequality

Unit Name: International Business and Global Change
Unit Code: 40083116_1213_9
Name: RUIKAI XU
Student Number: 10621841

Contents

1. Introduction

2. Definition and Measure of Inequality
2.1 Gini Coefficient

3. Recent trends in Inequality and Globalization 4.1 Cross-country comparisons of inequality 4.2 Income distribution within countries 4.3 Impact of Globalization on Inequality

4. Empirical Investigation 5.4 Key Factors on Inequality Improvement 5.5 Trade and Financial Globalization Impact 5.6 Conclusion of World Economic Outlook 2007

5. Critical Review and Conclusion

6. References

1. Introduction
The process of Globalization started from the 15th century with the geographical discover and overseas expansion (i.e. subjugation and exploitation) in the late 15th century, which gave birth to the economic globalization. From the late 18th century to the mid 19th century, economic globalization was taking place as the first industrial revolution was completed and the development of capitalist system. After that, the second industrial revolution and the development of monopoly capitalist system in the period of late 19th century to the early 20th century accelerated the process of globalization. The process of globalization also has its own difficulties during the period from World War I to the end of Cold War. After that, globalization developed rapidly from the 1980s (i.e. after the end of Cold War) and made the world different (Octavian – Dan, 2010).
One of the results of globalization is the increasing of inequality. As globalization taking place around the world either within the country or cross-country, the inequality is increasing as a consequence. In this essay, it will be shown how the distribution of income is more unequal during the process of globalization since 1980. The definition and measures of inequality is represented in the first part of this essay. After that, the recent trends in inequality and globalization are drawn from the second part with the impact of globalization. There will be some evaluation on both trade and financial globalization which comes with a conclusion of key study (i.e. World Economic Outlook 2007) in the following chapter 4. In the last chapter before the final conclusion, there are some critical reviews with same conclusion of inequality increasing but comes from different ways. Thus a conclusion of this essay is summarised by both World Economic Outlook 2007 and self researches.
2. Definition and Measures of Inequality
Inequality has its differences with poverty but also relate to it. Inequality is a much wider concept than poverty as inequality is defined with the aggregate population rather than the poor. By contrast, poverty only focuses on the poor people with a living standard under the poverty line. Most inequality measures do not rely on the mean of distribution. This mean independence characteristic is considered as a desirable characteristic of inequality measure. Inequality measures are often calculated by distributions as income rather than expenditures such. Basically, a measurement of inequality on distribution indicates the gap between individuals making most of their income and those who making very little of income in a given country. The simplest way to measure inequality is that dividing the entire population into quintile from the poorest to the richest and figure out the proportion of income accrue to each level.
2.1 Gini Coefficient
Gini Coefficient is a most widely used measure of inequality. As based on the Lorenz curve, it is a cumulative frequency curve which contrasts the distribution of a particular variable (e.g. income) with the uniform distribution which indicates the equality. In the Gini Coefficient, there are cumulative percentages of individuals on the horizontal axis where the percentage rises from the poorest to the richest and cumulative proportions of expenditure or income on the vertical axis.
3. Recent Trends in Inequality and Globalization
3.1 Cross-country comparisons of inequality
Globalization can be segmented into two parts which are trade globalization and financial globalization.
As the trade globalization developed, since 1980 the worldwide trade has been grown by 5 times in the real term with an increase in the share of GDP from 36% to 55% (IMF, 2007). All of the developing countries and emerging markets has catch up or even exceed the high-income countries by their trade openness as they are aggregated by income group or region. There was a wider confluence of low-income and middle-income countries’ trade system toward the traditionally developed economies’ trade system which was more open.
Financial globalization has also developed very quickly for over the past 20 years. The total cross-border financial assets increased from 58% of the total global GDP in the early 90s to 131% in 2004 which is almost doubled. As most of the advanced economies in the world are continued to be integrated from a financial side, the other regions in the rest of the planet have increase their cross-border asset and liability step by step. Of note, the liability structures have also been changed. The share of FDI in total liabilities increased in all the emerging market from 1990 to 2004 with a percentage increase from 17 to 38. As the share of portfolio equity liabilities in total liabilities increased as well from 2% to 11% over the same period, it is still far less than the FDI increase (IMF, 2007). Moreover, the government borrowing requirements reduction within the emerging markets and developing countries leads to a falling share of debt in total liabilities.
3.2 Income distribution within countries
According to the Gini Coefficient, ‘inequality has risen in all but the low-income country aggregates over the past two decades’ (IMF, 2007). The inequality increased in some economies in the world from 1980 either in developing countries or developed countries such as Asia, Europe, Latin America, and the NIEs. However, it has also declined in other areas like sub-Saharan Africa and the CIS. Within the developed countries, France is the only economy where inequality has declined since 1980. And China, as one of the emerging market countries, inequality within it has risen quickly in that period. India increased its inequality only a little while other emerging market countries like Brazil, Mexico and Russia have a falling inequality (IMF, 2007).
However, measures of inequality shown above do not represent all characteristics of inequality within the particular country. For example, an aggregation of rural and urban inequality indicates that China has rising its inequality less sharply than what has been presented in the previous method. Rising Gini Coefficient could cause by a huge increase on the rich quintiles upon the middle-income while the lower quintiles (i.e. poor) changes a little. The fact is that the income of poorest has risen much faster than any other quintiles in sub-Saharan and the CIS countries because it was raised from a very low base. In an absolute sense, most of the poor are not worse off or even better off but not a obvious better off because the base was too low (i.e. rise may be significant in numbers, but due to the very low base number, the income may increase from a very low level to a better one which is still relative low).
In summary, income has been grown for all quintiles from poorest to richest as a result of globalization during the past two decades. Therefore, there was a reduction of income inequality in low-income (i.e. poor) quintiles in developing countries while income inequality in middle-income and high-income countries (i.e. developed countries) is still rising.
3.3 Impact of Globalization on Inequality
There is a link between trade liberalization and income inequality which called the Stolper Samuelson theorem. It indicates that if the trade openness increased in a developing country by reduces its import tax (i.e. tariff) and most of the labour force within this country is low-skilled, it would lead to an income increase on those low-skilled labour force and relatively reduce the high-skilled workers’ earning and thus the income inequality of this country will reduce. Assume that the import tax falls initially, the price of importable high-skilled product will reduce and so does the wage of high-skilled producer. At the same time, the price of exportable low-skilled product will increase and so does the low-skilled worker while the country has a relatively large amount of this kind of workers. As a result, income inequality will be reduced as the low-skilled workers’ income increases while the high-skilled labour forces’ earning declines. In case of the developed countries with surplus of high-skilled factors increase in trade liberalization will lead to a higher income inequality.
Moreover, tariff reductions are also able to cut the prices of noncompeting traded goods (i.e. goods which are only imported rather than produced domestic). As a result of that, it could lead to an increase on real income of a particular country by reduce the goods’ price rather than increase wages or reduce prices of other goods. If this kind of noncompeting good is highly consumed by the poor in a particular country, the tariff reduction and thus a price reduction could lead to an improvement of inequality (i.e. less spending on such kind of good by poor) and vice versa.
More generally, tariff reduction for noncompeting goods which are not produced in domestic but highly consumed by the low-income population could result in a lower inequality in either developing or developed countries.
On the financial side, if Foreign Direct Investment (FDI) movement has been increased from the developed countries to developing countries, it could increase the demand for skilled workers in both developing and developed economies. And thus inequality in both of developing and advanced economies would increase.
4. Empirical Investigation
4.1 Key Factors on Inequality Improvement
The first factor is the role of technology. Technology development could increase the skills gap and thus benefits more on developed countries. Due to the technology development, the demand of low-skilled workers and products and premium on highly skilled activities will decrease and thus influence the income distribution in both developing and developed countries. The share of ICT capital (i.e. the technical capital as a percentage of overall capital) has increase in the past two decades and risen rapidly since 1990s.
Education is also an important factor. If two countries are under a same technology level, the country with higher extent on education will has a lower income inequality as the highly educated population are able to do a relative high-skilled activities rather than the other one. According to the average school yeas increase across all regions, the education level increased in both developing and developed economies while there is still a large gap between advanced economies and developing countries.
In addition, income distribution can be affected due to employment movement in different sector. A movement from agricultural sector to either secondary (i.e. industrial) or tertiary (i.e. service) industry is able to improve the income distribution by increasing the income level of labour forces. With a rapid decreasing on the share of agricultural employment in developing Asia and other developing economies, income inequality does improved.
4.2 Trade and Financial Globalization Impact
The trade globalization impact is that income inequality has been reduced due to increasing agricultural exports especially in developing countries. With an increase in the agricultural productivity due to the labour force shift from agricultural to industrial and service sector, inequality can be reduced as well. Moreover, reduction on import tax could also reduce the income inequality.
For a developed country, increasing imports from developing countries could reduce inequality both in the developed country and developing country. Increase imports such agricultural products from developing countries could reduce income inequality in the developed country by shift more labour force from agricultural sector to industrial and service sector and in developing country by increase its agricultural exports. Also, as import agricultural products from developing countries, the price of the noncompeting goods in advanced economies will decrease. As a result of that, real income of poorer segment of the population in developed countries will increase and thus the inequality reduces.
On the other hand, inequality rises as an impact of financial globalization (i.e. FDI). FDI tends to take place in both developing and developed countries as it increases the demand for relatively higher skilled workers. FDI needs high technologies and high skilled labour forces where advanced economies are taking more advantages. Although the technology and education have their own improvement (technological progress and higher education) during last two decades, there is still a huge gap of technology and education between advanced economies and developing countries. The fact is that due to financial globalization, technological progress and thus greater financial deepening, advantages are mainly taken by the top quintile of population (i.e. the richest).
4.3 Conclusion of World Economic Outlook 2007
Income inequality has been increased overall in both advanced economies and developing countries in all income level. The income of richest increases as the income of others reduces. The impact of technological progress is quite huge during last two decades while the globalization affects less on inequality because the impact of trade globalization and financial globalization has been offset.
The impact of trade globalization shows that income inequality can be reduced in both advanced economies (i.e. increase import from developing countries) and developing countries (i.e. increase export of agricultural products and reduce import taxes).
FDI make the income inequality bigger as the demand for high skilled labour force in developing countries increased by the increasing FDI inflows and the demand for low skilled workers declines in advanced economies by the increasing FDI outflows.
Financial deepening also provides a negative effect on the income inequality improvement with greater access to education and labour force movement from primary industry to the secondary and tertiary industry.
5. Critical Review and Conclusion
Globalization does increase the income inequality. In a global view, the globalization increase the income inequality between Southern and Northern Hemisphere as most of the developed countries are located in the Northern Hemisphere. Developing countries (most of them are Third World countries) in the Southern Hemisphere are facing an embarrassing situation - that no matter they take part in the process of globalization (i.e. increase market openness) or not, inequality will be increased anyway.
Theoretically, the liberalization of capital and commodity movement will benefit both developing and developed countries around the world by the process of globalization and thus reduce inequality between poor and rich. But it is not true in the real world. The main benefit will taken by the investors. For example, if a company which come from an advanced economy set up an investment or project (e.g. manufactory) in a developing country, it would lead to a capital movement into that country as FDI increases. Increasing investment could increase domestic income level of that developing country. But at the same time, as the investment increases, it also leads to a growth of domestic economy and thus increases the price of commodity. For the rich population it will not be a problem because they have earned more when the price goes up. But for the middle- and low-income segments, the fact is that the increase in income always fall behind the increase in economy growth (i.e. increase in inflation) and thus the increase in price level. Therefore the inequality becomes worse.

6. References
1. World Bank (2005) Poverty Manual, All, JH Revision, Available: http://siteresources.worldbank.org/PGLP/Resources/PMch6.pdf Last Accessed 05/12/2012
2. Andrew McKay (2002), Inequality Briefing: Defining and Measuring Inequality, Available: http://www.odi.org.uk/sites/odi.org.uk/files/odi-assets/publications-opinion-files/3804.pdf Last Accessed 02/12/2012
3. Octavian - Dan Rădescu (2010), The Process of Globalization in the World Economy, Available: www.jaes.reprograph.ro/articles/radescu.pdf Last Accessed: 30/11/2012
4. International Monetary Fund (2007), Globalization and Inequality. In: World Economic Outlook October 2007 p.135-160

References: 1. World Bank (2005) Poverty Manual, All, JH Revision, Available: http://siteresources.worldbank.org/PGLP/Resources/PMch6.pdf Last Accessed 05/12/2012 2. Andrew McKay (2002), Inequality Briefing: Defining and Measuring Inequality, Available: http://www.odi.org.uk/sites/odi.org.uk/files/odi-assets/publications-opinion-files/3804.pdf Last Accessed 02/12/2012 3. Octavian - Dan Rădescu (2010), The Process of Globalization in the World Economy, Available: www.jaes.reprograph.ro/articles/radescu.pdf Last Accessed: 30/11/2012 4. International Monetary Fund (2007), Globalization and Inequality. In: World Economic Outlook October 2007 p.135-160