Globalization and Income
Inequality
One Perspective



Protester before the meeting of the WTO in
Doha in 2001, “Globalization leads to the
North getting ric...
Questions of Interest



What is the relationship between
“globalization” and income inequality?
Activists say that glob...
Define
“Globalization”

Trade
FDI
Capital Flows
Multilateral Institution
(rules, structural adjustment)

Food Aid
Migratio...
Economic integration from…


Trade (goods and services)
–
–



Foreign Direct Investment
–




Level of trade, scope (...
Three Waves of Globalization

Source: Foreign capital stock/developing country GDP: Maddison (2001), table 3.3;
Merchandis...
Importance of Trade


Share of international trade in total output
(exports plus imports of goods relative to
GDP):
–
–
–...
Currently, trade is deeper, different


Merchandise trade to merchandise production –
almost 36% for the United States,
–...
What Are MNCs?




An international corporation with
headquarters in one country and branches in
a wide range of develop...
Role of Multinationals






Important since the East India company
1914 only a few MNCs – even in 1970 not as
importa...
U.S. Foreign Direct Investment
(as percent of U.S. GDP)

20
18
16
14
12
10
8
6
4
2
0

U.S. FDI Abroad
FDI in U.S.

1914

1...
Foreign Direct Investment


Mostly FDI complements trade in goods
(does not substitute) – MNCs are conduits
for trade
–
–...
FDI to Developing Countries is Resilient
(US$ billions)
FDI to Developing Countries

Global FDI

200

1600

150

1200

100...
International Capital Flows


Motivations:
–
–
–



Reduced barriers
Desire of investors to diversify
New financial inst...
Huge Increase


Cross border transactions in bonds and equities:
–
–

–



9% U.S. GDP in 1980, 223 % in 1998
Average da...
Lets Look at the Connections…


How will foreign direct investment affect incomes?
(micro side)
–
–
–



Employment
Deve...
MNCs and wages


New research that has
evaluated wages of all
MNCs in Chile, Mexico,
Colombia, Taiwan,
Venezuela, and Tur...
Graham argues that:


Ratio of compensation of foreign affiliates to
the average domestic manufacturing wage:
–

–
–
–

A...
With FDI – an antidote of displacement
of small agricultural producers




In middle income countries-hypermarkets
From...
Trade


With trade several economic impacts
–

Resource Adjustment – transitions in the labor market



–

Import compe...
China




Accession to the WTO
Small overall positive impact on mean income
But:
–
–




Rural families lose
Urban fa...
Argument About Trade and Growth





World Bank argues that trade openness
increases growth
Divide world into “globali...
Change in Trade/GDP for Selected Countries, 1977-97

Source: World Bank (2001)
Characteristics of More Globalized and Less
Globalized Developing Economies
(population-weighted averages)

Source: Dollar...
Rodrik: studies are flawed






“Open” and “closed” relate to indicators, not
to policies, and correlated with macroe...
Impact of “Globalization” on Income





Many factors may be affecting income
Developing countries not uniformly involv...
Popular View


“first, divergence in output per person across
countries is perhaps the dominant feature of modern
economi...
What did Pritchett measure?







U.S. taken as a representative “rich” economy
Took the poorest economy as a refere...
ratio
80

Ratios of Mean Income of the United States
and of the Poorest Country
71.3

70

60
51.6
50

48.3

47.0

47.4

47...
Convergence or Divergence? It Depends
ratio
40
36.33

35
30.84

30
26.19
24.99

25

22.96 22.96

25.7
22.3

20
15.65

15
9...
Gini Coefficient



Equal to one if all income in the world
accrued to one person
Equal to zero is incomes are equally
d...
Distribution of Income or Consumption

P e rc e n ta g e S h a re o f In c o m e o r C o n s u m p tio n
G in i
In d e x

...
World Individual Income and
Consumption Inequality

Soruce: Deniger and Squire 1996 World Income Inequality Database www.w...
Regional Estimates of Inequality
Gini
80

70

66.1

67.5 67.5
61.2 60.1

60

56.7
50.9

50

55.8 56.5

54.5

49.3

42.1

4...
Head Count for Extreme Poverty

Soruce: Deniger and Squire 1996 World Income Inequality Database www.wider.unu.edu/widl
Growth reduces absolute poverty



However, proper policies increase
participation
of the poor in growth
Poverty Rate Percentage In Developing Countries
100
90
80

Percent

70
60
50
40
30
20
10
0
East
Asia

Excluding
China

Sou...
Population Living below US$1 per Day
in Developing Countries
500

Millions of People

400

300

200

100

0
East
Asia

Exc...
What Do We Know?



No studies on global income inequality,
trends and causes widely accepted
Ravallion and others: no c...
What’s Important


Connections
–
–

–
–



Carefully define aspect of globalization
Identify connections to income growt...
Define
“Globalization”

Trade
FDI
Capital Flows
Multilateral Institution
(rules, structural adjustment)

Food Aid
Migratio...
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Vahdi Boydaş, Mensur Boydaş, Social Policy Women

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Vahdi Boydaş, Mensur Boydaş, Social Policy Women

  1. 1. Globalization and Income Inequality
  2. 2. One Perspective  Protester before the meeting of the WTO in Doha in 2001, “Globalization leads to the North getting richer, and the South getting poorer… This is a direct consequence of globalization, and we need to stop this from continuing…”
  3. 3. Questions of Interest   What is the relationship between “globalization” and income inequality? Activists say that globalization has resulted in further impoverishment of the poorest – is this true?
  4. 4. Define “Globalization” Trade FDI Capital Flows Multilateral Institution (rules, structural adjustment) Food Aid Migration Trade How does an increase in trade affect income? Many Factors 1. starting conditions 2. comparative advantage 3. trade policy 4. domestic policy and governance FDI and Other Issues Measurement of Income same type of analysis – data – definitions Some answers may be _______.
  5. 5. Economic integration from…  Trade (goods and services) – –  Foreign Direct Investment –   Level of trade, scope (more services) Rules for trade Multinational Corporations Capital Flows Importance of Multilateral Institutions – – Providing rules Implementing structural adjustment programs
  6. 6. Three Waves of Globalization Source: Foreign capital stock/developing country GDP: Maddison (2001), table 3.3; Merchandise exports/world GDP: Maddison (2001), table F-5; Migration: Immigration and Naturalization Service (1998).
  7. 7. Importance of Trade  Share of international trade in total output (exports plus imports of goods relative to GDP): – – – Developed countries: 32 to 38% between 1990 and 2001 Developing countries 34 to 49% (same period) Varies a lot between countries
  8. 8. Currently, trade is deeper, different  Merchandise trade to merchandise production – almost 36% for the United States, – –  Price convergence greater –  i.e., 1870 Liverpool price of wheat greater than Chicago by 60%, now difference 15% Increase in multinational corporations (MNCs): – –  3 times pre-WWI Share of imports/exports as percent of production greater Trade is often transfers between subsidiaries Firms draw on suppliers on a world-wide basis for manufactured inputs Includes trade in services
  9. 9. What Are MNCs?   An international corporation with headquarters in one country and branches in a wide range of developed and developing countries. Examples include General Motors, Coca-Cola, Firestone, Philips, Volkswagen, British Petroleum and Exxon.
  10. 10. Role of Multinationals     Important since the East India company 1914 only a few MNCs – even in 1970 not as important 60,000 parent operations and 500,000 foreign affiliates account for 25% of global output, 1/3 in host counties US based MNCs account for 19% of US GDP – Account for 63% of U.S. goods exports and 40% imports
  11. 11. U.S. Foreign Direct Investment (as percent of U.S. GDP) 20 18 16 14 12 10 8 6 4 2 0 U.S. FDI Abroad FDI in U.S. 1914 1929 Source: Bordo et al. (1999) 1960 1996
  12. 12. Foreign Direct Investment  Mostly FDI complements trade in goods (does not substitute) – MNCs are conduits for trade – – 1994 36% of U.S. exports were intra-multinational transactions Exposes services to international competition   Can deliver services through sales by foreign affiliates Increases competition in sectors difficult to exchange across borders
  13. 13. FDI to Developing Countries is Resilient (US$ billions) FDI to Developing Countries Global FDI 200 1600 150 1200 100 800 50 400 0 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Developing countries Global total Sources: World Bank staff estimates; UNCTAD, World Investment Report 2001.
  14. 14. International Capital Flows  Motivations: – – –  Reduced barriers Desire of investors to diversify New financial instruments Categories: – – – Foreign direct investment (less volatile) Portfolio (stocks and bonds) Bank lending
  15. 15. Huge Increase  Cross border transactions in bonds and equities: – – –  9% U.S. GDP in 1980, 223 % in 1998 Average daily turnover was $1.5 trillion in April 1998, compared to $0.6 trillion in April 1989 Overstates changes in ownership (trading and retrading of same securities) FDI is about ¼ of international capital flows
  16. 16. Lets Look at the Connections…  How will foreign direct investment affect incomes? (micro side) – – –  Employment Development of human capital Wages Evidence
  17. 17. MNCs and wages  New research that has evaluated wages of all MNCs in Chile, Mexico, Colombia, Taiwan, Venezuela, and Turkey – – – “foreign-owned plants pay higher, often substantially higher, wages than locally owned firms.” Relevant comparison is with locally owned firms, not U.S. firms No evidence of spillovers to increase wages of local firms
  18. 18. Graham argues that:  Ratio of compensation of foreign affiliates to the average domestic manufacturing wage: – – – – All countries – 1.5 High income countries – 1.4 Middle income countries – 1.8 Low income countries – 2.0
  19. 19. With FDI – an antidote of displacement of small agricultural producers    In middle income countries-hypermarkets From wet markets to supermarkets Supermarkets (Carre Four, Wal-Mart, etc.) – – –  Standards: food safety and quality Volume and Seasonality International supply chains Impact on local producers – – Consolidation: need for capital Displacement
  20. 20. Trade  With trade several economic impacts – Resource Adjustment – transitions in the labor market   – Import competing industries   – What kind of a social safety net exists? What impact high rates of unemployment? Can be displaced Sometimes with developed country subsidies Exporting industries   Owners of capital versus labor Difficulties in competing in international markets – Tariffs, standards
  21. 21. China    Accession to the WTO Small overall positive impact on mean income But: – –   Rural families lose Urban families gain Competition from imports Geography matters – – North east looses – feed grain production (falling relative prices) Access to infrastructure and markets matter
  22. 22. Argument About Trade and Growth     World Bank argues that trade openness increases growth Divide world into “globalizers” and non-globalizers Evaluate the growth rates and other characteristics of these groups Non-globalizers include failed states
  23. 23. Change in Trade/GDP for Selected Countries, 1977-97 Source: World Bank (2001)
  24. 24. Characteristics of More Globalized and Less Globalized Developing Economies (population-weighted averages) Source: Dollar (2001)
  25. 25. Rodrik: studies are flawed     “Open” and “closed” relate to indicators, not to policies, and correlated with macroeconomic policies, geography, institutions Once these controlled for, no correlation Relationship between trade openness and growth depends on a host of factors India and China: growth before openness
  26. 26. Impact of “Globalization” on Income    Many factors may be affecting income Developing countries not uniformly involved in the world economy Ravallion discusses that data and measurement really matter
  27. 27. Popular View  “first, divergence in output per person across countries is perhaps the dominant feature of modern economic history. The ratio of per capita income in the richest versus the poorest country has increased by a factor of 6…”  Note: from Pritchett 2001 (Bhalla, pg. 23)
  28. 28. What did Pritchett measure?      U.S. taken as a representative “rich” economy Took the poorest economy as a reference Average American 50 times richer in 1950 and 1960 Today more than 70 times as rich Also measured against the 10th poorest country
  29. 29. ratio 80 Ratios of Mean Income of the United States and of the Poorest Country 71.3 70 60 51.6 50 48.3 47.0 47.4 47.1 44.6 40 30 32.5 31.3 31.0 27.6 0 1950 1960 1970 United States / poorest country 1980 1990 Zambia Sierra Leone Burundi Tanzania Bhutan Tanzania Nigeria Lesotho Lesotho Cambodia 10 Tanzania 20 Guinea-Bissau 22.5 2000 United States / 10th-poorest country Note: Mean incomes are in constant purchasing power parity (PPP) dollars, 1993 base. The poorest and 10th-poorest countries were chosen on the basis of per capita income, 1993 PPP, for the selected years. Sources: World Bank, World Development indicators, CD-ROMs, 1998, 2001; Maddison (2001); Penn World Tables, various years
  30. 30. Convergence or Divergence? It Depends ratio 40 36.33 35 30.84 30 26.19 24.99 25 22.96 22.96 25.7 22.3 20 15.65 15 9.48 10 5 0 1960 1970 1980 1990 Ratio of mean income of top 20 to bottom 20 countries Ratio of mean income of top 20 to bottom 20 countries (1960s set of countries) Note: For each year, the unshaded bar represents the income ration of the mean-to-20 poorest countries in that year. Sources: World Bank, World Development Indicators, CD-ROMS, 1998, 2001; Maddison (2001); Penn World Tables, various years. 2000
  31. 31. Gini Coefficient   Equal to one if all income in the world accrued to one person Equal to zero is incomes are equally distributed
  32. 32. Distribution of Income or Consumption P e rc e n ta g e S h a re o f In c o m e o r C o n s u m p tio n G in i In d e x Lowest 20% Second 20% T h ird 20% F o u rth 20% H ig h e s t 20% N o rw a y 2 5 .2 1 0 .0 1 4 .3 1 7 .9 2 2 .4 3 5 .3 In d o n e s ia 3 6 .5 8 .0 1 1 .3 1 5 .1 2 0 .8 4 4 .9 U n ite d S ta te s 4 0 .1 4 .8 1 0 .5 1 6 .0 2 3 .5 4 5 .2 C h in a 4 1 .5 5 .5 9 .8 1 4 .9 2 2 .3 4 7 .5 N ig e ria 4 5 .0 4 .0 8 .9 1 4 .4 2 3 .4 4 9 .3 R u s s ia n F e d e ra tio n 4 8 .0 4 .2 8 .8 1 3 .6 2 0 .7 5 2 .8 M e xic o 5 3 .7 3 .6 7 .2 1 1 .8 1 9 .2 5 8 .2 B ra z il 6 0 .1 2 .5 5 .7 9 .9 1 7 .7 6 4 .2 S ie rra L e o n e 6 2 .9 1 .1 2 .0 9 .8 2 3 .7 6 3 .4 Econom y
  33. 33. World Individual Income and Consumption Inequality Soruce: Deniger and Squire 1996 World Income Inequality Database www.wider.unu.edu/widl
  34. 34. Regional Estimates of Inequality Gini 80 70 66.1 67.5 67.5 61.2 60.1 60 56.7 50.9 50 55.8 56.5 54.5 49.3 42.1 40 40.0 39.4 41.0 41.0 29.9 30.2 30 20 10 0 East Asia South Asia Sub-Saharan Africa 1960 Middle East and North Africa 1980 2000 Latin America Eastern Europe
  35. 35. Head Count for Extreme Poverty Soruce: Deniger and Squire 1996 World Income Inequality Database www.wider.unu.edu/widl
  36. 36. Growth reduces absolute poverty   However, proper policies increase participation of the poor in growth
  37. 37. Poverty Rate Percentage In Developing Countries 100 90 80 Percent 70 60 50 40 30 20 10 0 East Asia Excluding China South Asia 1990 Source: World Bank (2003) SubSaharan Africa Latin America 2000 (estimate) Middle East/N. Africa Europe & Cent. Asia
  38. 38. Population Living below US$1 per Day in Developing Countries 500 Millions of People 400 300 200 100 0 East Asia Excluding China South Asia 1990 Source: World Bank (2003) SubSaharan Africa Latin America 2000 (estimate) Middle East/N. Africa Europe & Cent. Asia
  39. 39. What Do We Know?   No studies on global income inequality, trends and causes widely accepted Ravallion and others: no correlation growth and income inequality –    Lots of action: hidden by averages Data and measurement really matter (Ravallion) Less absolute poverty than before Are the poor poorer?
  40. 40. What’s Important  Connections – – – –  Carefully define aspect of globalization Identify connections to income growth Remember lots of factors at play Initial starting conditions matter These caveats don’t mean current trade rules are acceptable
  41. 41. Define “Globalization” Trade FDI Capital Flows Multilateral Institution (rules, structural adjustment) Food Aid Migration Trade How does an increase in trade affect income? Many Factors 1. starting conditions 2. comparative advantage 3. trade policy 4. domestic policy and governance FDI and Other Issues Measurement of Income same type of analysis – data – definitions Some answers may be _______.
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