The Impact Of Globalization On Income Inequality

In this essay the details of the globalization like what it is, why is it done and about its implication on the world economy and the redistribution of the income will be discussed to show the impact of globalization on the distribution of income. If we consider the world scenario, the income is more unevenly divided as compared to the distribution within a country. The purpose of the essay is to check whether the globalisation process has resulted in the more even distribution of income or not.

We are considering the trends which have happened in the era of globalization after 1980. The first trend is that after 1980 the poor country has grown with a growth rate higher than the rich country. Second trend is that the history has seen a significant decline in the number of people that comes to reduction by around 400 million people. Third trend can be seen as the decline in global inequality modestly which has reversed the 200 year old trend (Tom P. Abeles, (2001) pp 3). Another trend considers that there is not much inequality of income within the countries. Last trend sees the rise in the wage inequality worldwide.

The developing countries which have the more integration with the world economy have seen the trend of faster growth and reduction in poverty because the integration is considered as a driving force for the improvement in the developing countries’ people lives

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Introduction:

Globalization can be considered as the process of free transfer of different goods, services and capital across the borders. It is a continuous process by which the different market economies spread across the globe. It does not have a specific or new phenomenon but it is considered as the integration of the markets, technologies and nations to an extent which enables corporations and individuals to access the world deeper, faster and more economically than it can be imagined alone. Globalization is considered as much important process for all economy that each and every tries to appear as economical strongest country in the global scenario. Foreign direct investment, international trade (import-export) etc are main activity under globalization which may lead to a drastic growth of the economy.

Financial flows, trade relations and mobility of labours witnesses rapid changes as an impact of globalization. It brings the national economies together and interrelate them strongly. There can be different degrees of globalization process across countries, regions and over a period of time.

This inequality in the degree of globalization leads to see the magnitude and impact of globalization according to the degree and which results in the researches to find the link between the world inequality and globalization. The connection between inequality and globalization can be understood by learning of inequality change that occurred before globalization. We can understand the connection of globalization and inequality by considering the inequality in income before the globalization and after globalization. The researches have come up with two facts that there can’t be a structural relationship between these two and there was no trend and mobility in the income inequality level before globalization (Robin Stryker, (1998) pp 22). The relationship between globalization and inequality can be investigated by using different channels like factor price convergence due to international migration, commodity price equalization and capital mobility which results in wage inequality and rate of returns of capital among different countries and convergence in capital income growth. There are some examples of globalization:

Japan was emerged based on its export industries in 1960s.

USA, Western Europe and Japan emerged as economic centres of global economy and became famous as triad economy representing the world economy.

Triad economies were the major contributor in global income, consumption, production, trade and FDI.

Definitions and Measures of inequality:

Here the term income inequality refers to the distribution of income among all the citizens of the world, distribution among countries, within countries and among wage earners. If we consider income inequality from the perspective of a country, it may be dependent on different internal and external factors. Globalization is an important external factor. This globalization process has significantly benefitted a large number of countries. For last 200 years the world has become more unequal but the process of globalization has reduced the income gaps between and within countries. The World Bank has divided countries depending on the income level into 3 groups as high, middle and low income. Though countries and populations change by time but the high income countries contribute around $43 trillion which is 69% of world income but it comes to only 16% of the population. On the same time low income countries contribute approx (Martyna Sliwa, (2007) pp 122). $400 billion which is less than 1% of the world income but accounts for 12% population. As an impact of globalization the number of people living below poverty line has come to half. The three concepts of uneven distribution i.e. inter country inequality (or concept 1), within country inequality (or concept 2) and global inequality (concept 3) can’t result in the same movement.

Concept 1 deals with divergence and convergence among countries. Earlier it was understood in terms of inequality but later on most of the researchers used cross country regression and β convergence. They considered each country/year as an observation in this regression. But this was not a proper method for the measurement of the income inequality as countries have unequal population size.

Concept 2 inequality deals by weighing the countries by its population but it is a low-cost approach as it needs only two variables i.e. mean income(GDI per capita) and population size.

This inequality creates the largest part of global inequality. Basically global inequality is composed of concept 2 and inequality that arises due to differences in income within countries.

Concept 3 inequality is basically based on household surveys since the main sources of distributional data that are considered are household surveys (A.J.C. Manders, Y.S. Brenner, (1999) pp 560). Because it is not possible to have world-wide household survey, we can take the combination of individual countries’ surveys, and personal per capita consumption or disposable per capita income can be used as welfare indicators.

This model can be written as follows:

GINIi = b 0 + b1GINDEXi + _jg jREGION ji + ui

GINI = Gini Coefficient

GINIDEX = Globalization index

REGION = J vector of regional dummies

u = error term

i = country.

The Gini coefficient is a standard measure of income inequality.

Results of key studies into changing income distribution:

There was a consistent output growth during 20th century exceeding population growth. Between 1950 and 1973, the highest growth achieved. It was seen by many economists as the initial wave of globalization. There were substantial variations in the average growth rate as during 1980-1990 growth was 3.3%pa and during 1990-2000 it was 2.7%pa. China has consistently highest growth rate with more than 10% for over 20 years. China has got the 2nd place in 25 years and has grown to 40% of the size of USA economy as compared to 10% earlier. East Asia and Pacific saw the highest growth rate while Europe and central Asia being the slowest rates of growth. But the economies with high income have grown at lower than the world average which has resulted in major global shift. USA with around 23% of world GDP, 311 million of population and around $50000 person per capita income is still the world’s largest market (Yu Hsing, (2005) pp 640). In spite of experiencing a substantial relative decline from 1950(when it was on peak) is the world’s biggest importer of services and goods. Global shift has resulted in the declining importance of the Traid economies. BRIC (Brazil, Russian, India and China) countries have emerged with substantial demand for goods and services and for inputs as well. Approx 18% of world income is coming from the BRIC economies and they accounts for 43% of world population. High growth rates and uneven income distributions will result in massive future demand. China contributes more than 10% to world economics or 14% when prices are adjusted. China is supposed to take over America before 2040 with the same growth rate. Is spite of having low per capita income, it has an emerging middle class of more than 200millions. Brazil is the largest economy but its per capita income is below the other major economies. Mexico (NAFTA) is the 14th largest economy and has 114 million of population putting it on 11th place. Venezuela has the highest per capita income and Uruguay and Chile are competing with it. Poland stands at 23rd position in the term of economy and with population of over 38 million it has around $14000 per capita income. Slovenia has a per capita income of $23610 but has a very small population that comes to around 2 million. Czech with a population of 10.6 million has $18520 per capita income. Globalization has not much benefitted African content despite of owning the natural resources which have great demand. In comparison with the richest countries it has come down to 1/20 as compared to 1/9 during 1900. Average real incomes have come down in comparison of that was 30 years ago. Sub-Saharan Africa which has 12.5% of the world’s population accounts for 1.7% of world income and is generating a per capita income of $1254. Rising commodity prices has resulted in above average growth rates recently (Serge Svizzero, Clem Tisdell, (2003) pp 1125). South Africa which is the largest economy of continent and 28th largest economy in the world have a very low per capita income of $6960 i.e. 99th position while Egypt being 41st largest economy stands at 148th position in terms of per capita income. Nigeria (oil) is the most populous -154mn and 46th largest economy in the world. Africa is also home to some of the poorest countries in the world with majority of the population living on less than $2/day.

Critical review of the key studies and their results:

If we consider the figures that we have studied, it shows that the major markets remain concentrated in the high income economies. The uneven income distribution signifies that markets like China and India which are not high income economies has a significant market existence.High growth rates are generating massive potential in emerging markets. Consumers outside the Triad will end the global downturn. The impact of globalization has the great impact on the income distribution. The globalization has resulted in the less uneven distribution. The economies which were the largest at earlier time have seen a growth rate but that growth is less with comparison to the economies which were not that large (Wilfred I. Ukpere, Andre D. Slabbert, (2009) pp 42). The medium sized or small economy has grown faster as compared to the big economies which signify that globalization has tried to evenly distribute the income which was earlier centered to the bigger economies. Globalization have distributed the income evenly on one side but had another side also as the economy like African countries which are having the most important resources which were having the good per capita income has now too behind their past and looking for a significant growth to show the presence in the world market. It means one side it helps in distributing the income equally in the world economy it creates the between countries inequality largely. The globalization process which is a global phenomenon has tried to distribute the income on a global level equally but has resulted in the wide inequality in income within countries and inter countries. Any process which is designed to have effect on the global perspective should not only consider the global scenario it should also consider the local scenario for all the economies in the world market.

Conclusions:

We have studied about the relationship between the inequality in income and globalization. The results show that globalization has a significant impact on the income inequality. It has considered the variation of 7-11 percent in income inequality among the countries.

Globalization can be considered as a potential source and leading force for income inequality across countries and over time. Identification and quantification of the effects of globalization will help the policy-makers in resource allocation and other activities. This essay shows the relationship of the globalization with the income inequality. The conclusion of the topic shows that the globalization process has impacted the income distribution to an extent where all type of economies has been affected in some ways. Some has got benefitted by the process and some has shown the downfall in the world scenario in spite of growth at their economy level.