IMF income inequality

IMF income inequality - WP/08/185 Rising Income Inequality...

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Rising Income Inequality: Technology, or Trade and Financial Globalization? Florence Jaumotte, Subir Lall, and Chris Papageorgiou WP/08/185
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© 2008 International Monetary Fund WP/08/ 185 IMF Working Paper Research Department Rising Income Inequality: Technology, or Trade and Financial Globalization? Prepared by Florence Jaumotte, Subir Lall, and Chris Papageorgiou 1 1 We thank Nancy Birdsall, Francois Bourgignon, Stijn Claessens, Daniel Cohen, Timothy Callen, Charles Collyns, Angus Deaton, Jörg Decressin, Gordon Hanson, Simon Johnson, Ayhan Kose, Petia Topalova, Shang-Jin Wei and seminar participants at the Federal Reserve Board, Getulio Vargas Foundation, Sao Paolo, IMF, Indian Council for Research and on International Economic Relations, Paris School of Economics, New Economic School, Moscow for their comments on earlier versions. We are particularly grateful to Shaohua Chen for generously providing extensive inequality data and suggestions. Stephanie Denis and Patrick Hettinger provided excellent research assistance. Authorized for distribution by Jörg Decressin July 2008 Abstract This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. We examine the relationship between trade and financial globalization and the rise in inequality in most countries in recent decades. We find technological progress as having a greater impact than globalization on inequality. The limited overall impact of globalization reflects two offsetting tendencies: whereas trade globalization is associated with a reduction in inequality, financial globalization—and foreign direct investment in particular—is associated with an increase. A key finding is that both globalization and technological changes increase the returns on human capital, underscoring the importance of education and training in both developed and developing countries in addressing rising inequality. JEL Classification Numbers: F13, G32, O11, O15, O16, O33 Keywords: Income inequality, mechanisms, trade globalization, financial globalization, technological progress, FDI. Author s E-Mail Address: [email protected] , [email protected] , [email protected]
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2 Contents Page I. Introduction ............................................................................................................................ 3 II. A Look at Cross-Country Trends .......................................................................................... 5 A. Income Inequality ..................................................................................................... 5 B. Trade Openness, Financial Openness and Technological Progress .......................... 7 III. Empirical Analysis ............................................................................................................... 8 A. Specification .............................................................................................................. 8 B. Results ..................................................................................................................... 10 C. Robustness ............................................................................................................... 12 IV. Discussion .......................................................................................................................... 13 V. Conclusion .......................................................................................................................... 16 Appendix I. Variable Definitions and Data Sources ................................................................ 17 Appendix II. Income Country Groups and Estimation Sample ............................................... 20 References ................................................................................................................................ 33 Tables 1. Income Inequality Panel Regressions…………………...……...…..……………………21 2. Quintile Income Shares Regressions……………………..………..…………………….22 3. Income Inequality Panel Regressions (Regional Heterogeneity).…………………….…23
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