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How Does Globalization Affect Income Inequality? A Panel Data Analysis

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Abstract

One of the major issues on the state of income inequality is the effect of globalization through foreign direct investment (FDI). It is well known that FDI inflows create employment opportunities for unskilled labor intensive countries. Hence, during recessionary (expansionary) periods, FDI outflows should cause an increase in a developing (developed) country’s unemployment rate, worsening income inequality. This study differs from the previous literature by employing the key variables FDI, trade volume, and GINI coefficient for a panel of three groups of countries (developed, developing, and miracle countries). We estimated panel cointegration coefficients via FM-OLS. Our results show that the effects of trade liberalization and FDI on income distribution differ for different country groups.

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Notes

  1. There is fierce competition for more FDI through creating lower tax possibilities-in Special Economic Zones like China-and preventing labor unions to sustain the low-cost labor incentives.

  2. Thus, we also survey studies that analyze the relationship between human capital inequality and globalization.

  3. Under the Heckscher-Ohlin Theorem, nations tend to export goods whose production requires relatively abundant and cheap factors.

  4. It is well known that labor is less skilled in developing countries.

  5. Contrary to the Heckscher-Ohlin Theorem.

  6. Francois and Nelson (2003) refer to Marshall (1890, Book 4, Ch.13, p.2) as, “…while the part which nature plays in production shows a tendency to diminishing return, the part which man plays shows a tendency to increasing return.”

  7. These common case(s) are referred as “common factors” in the related literature such as Pesaran (2007).

  8. There are several first generation and second generation panel unit root tests. However, we prefer to use the ones that have been very common in the recent literature. Breitung and Pesaran (2008) is an excellent survey of nonstationary panel data analysis.

  9. Pesaran (2007) used a different technique to test for the stationarity of the panel data. Instead of basing the test on the deviations from the common factors, he calculated the ADF regression with the cross sectional averages of lagged levels and first-differences of the individual series.

  10. Pesaran (2007) also proposed a truncated version of the test in order to avoid undue effects caused by small sample size.

  11. McCoskey and Kao (1998) test is shown to work poorly in small sample cases and does not allow to for cross sectional dependency.

  12. Since the amount is negligible, we do not employ FDI outflow data for developing or miracle countries.

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Acknowledgments

We would like to thank Pınar Deniz for her excellent research assistance.

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Authors and Affiliations

  1. Department of Economics, Marmara University, Goztepe Kampusu, Kuyubasi, Kadikoy, Istanbul, 34722, Turkey

    Sadullah Çelik

  2. Department of Business Administration, Middle East Technical University, Sogutozu, Ankara, 06531, Turkey

    Ulkem Basdas

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  1. Sadullah Çelik
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  2. Ulkem Basdas
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Correspondence to Sadullah Çelik.

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Çelik, S., Basdas, U. How Does Globalization Affect Income Inequality? A Panel Data Analysis. Int Adv Econ Res 16, 358–370 (2010). https://doi.org/10.1007/s11294-010-9281-0

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