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Unformatted text preview: 31 31 GLOBALIZATION AND INEQUALITY This chapter examines the relationship between the rapid pace of trade and financial globalization and the rise in income inequality observed in most countries over the past two decades. The analysis finds that technological progress has had a greater impact than globalization on inequality within countries. The limited overall impact of globalization reflects two offsetting tendencies: whereas trade globalization is associated with a reduction in inequality, finan- cial globalization—and foreign direct investment in particular—is associated with an increase in inequal- ity. It should be emphasized that these findings are subject to a number of caveats related to data limita- tions, and it is particularly difficult to disentangle the effects of technology and financial globalization since they both work through processes that raise the demand for skilled workers. The chapter concludes that policies aimed at reducing barriers to trade and broadening access to education and credit can allow the benefits of globalization to be shared more equally. T he integration of the world economy through the progressive globalization of trade and finance has reached unprece- dented levels, surpassing the pre–World War I peak. This new wave of globalization is having far-reaching implications for the eco- nomic well-being of citizens in all regions and among all income groups, and is the subject of active public debate. Previous issues of the World Economic Outlook have analyzed the impact of glo- balization on business cycle spillovers and labor markets (April 2007), on inflation (April 2006), and on external imbalances (April 2005). This chapter makes a further contribution to the study of globalization by examining the impli- cations for inequality and the distribution of income within countries, with a focus on emerg- ing market and developing countries (often referred to as developing economies in the remainder of the chapter). The debate on the distributional effects of globalization is often polarized between two points of view. One school of thought argues that globalization leads to a rising tide of income, which raises all boats. Hence, even low-income groups come out as winners from globalization in absolute terms. This optimistic view has parallels with the Kuznets hypothesis from the development literature, which pro- posed that even though inequality might rise in the initial phases of industrial development, it eventually declined as the country’s transi- tion to industrialization was completed. 1 The opposing school argues that although globaliza- tion may improve overall incomes, the benefits are not shared equally among the citizens of a country, with clear losers in relative and pos- sibly even absolute terms....
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This note was uploaded on 03/10/2010 for the course ECON 1092 taught by Professor Suntif during the Spring '07 term at St. Louis College of Pharmacy.
- Spring '07