Globalization and Income Inequality: An International Perspective

Abstract

The rise of within country income inequality and uneven real income growth across the global income distribution in recent decades coincided with a pronounced period of globalization. This thesis examines how aggreagte globalization and its dimensions, namely trade, financial globalization, and technological progress, shape international income distributions. Utilizing a unique panel dataset of 132 countries from 1991 to 2020, the study applies fixed effects models complemented by a System GMM approach, effectively controlling potential endogeneity and country-specific fixed effects. The findings reveal that globalization is associated with rising inequality on an aggregate level, with differing effects across globalization dimensions and development levels. Trade and financial globalization are both linked to increasing inequality, with trade effects found most strongly in high and low income countries. Financial globalization, particularly capital account openness, is associated with higher inequality both on aggregate and across different segments of the income distribution. Additionally, FDI inflows exacerbate inequality in low income countries by boosting the income share of the top 1% while reducing the share held by the bottom 50%. In contrast, technological progress demonstrates a more muted impact on inequality overall. Among non-globalization variables, education stands out as a powerful equalizing force across countries, showing inequality-reducing effects even at the distributional extremes. GDP per adult, used as a measure of income level, shows an inequality-reducing association for low income countries only, whereas in lower-middle income countries it is linked to higher inequality, suggesting uneven access to economic gains in these nations. The analysis offers a valuable framework for future research and policy design, addressing the unequal benefits of globalization and contributing valuable insights for a more equitable distribution of income both within and across countries.