Many countries hope that global trade relations will lead to a general increase in income and living standards. However, a study based on data from the last 50 years shows that this hope has only been partially fulfilled. In fact, globalization helped reduce inequalities between different countries. Within the countries, however, the gap between rich and poor has widened. The top ten percent in particular recorded income increases.
As part of economic globalization, countries establish global trade relationships and conclude agreements to enable and simplify cross-border flows of goods and capital. In this way, global markets are created and the economies involved grow closer together. This enables companies, for example, to select the cheapest production locations and sell their products worldwide. In theory, this should lead to more prosperity for everyone. But who actually benefits from globalization?
Inequality is emerging
In search of an answer to this question, Valentin Lang of the University of Mannheim and Marina Tavares of the International Monetary Fund in Washington, DC, combined data on trade and financial flows and regulation from the past 50 years. They related these to the different speeds and regionally concentrated economic liberalization measures in the individual countries and evaluated how per capita income has changed in each case. They looked at both the average of the entire population and groups based on income.
“Economic globalization leads, on average, to significant income gains,” report Lang and Tavares. “However, these gains are distributed unequally among people around the world.” They found that inequality between different countries decreased as they became more integrated into a global trade network. However, income differences within countries have increased. “What surprised us most was that these differences arose primarily from the gains made by the richest and that the low-income groups benefited little or not at all,” says Lang.
Explanation for globalization skepticism
When the researchers looked at different income groups within each country individually, it became apparent that gains could only be seen in the group in the top ten percent. And even within the group of ten percent of the richest people, it was only the top percent that actually saw a significant increase in income. Globalization, however, had little effect on the income of other people. “The increase in national inequalities is more likely to be due to rising incomes for the rich than to falling incomes for the poor,” the researchers write.
Additionally, they found that the positive effects of globalization are strongest in the early and middle stages. “But the growth effects of further globalization diminish as the level of globalization increases. For the most globalized countries, there is no evidence of a positive growth effect of further globalization,” explains the team. “The benefits of globalization decrease as the integration process progresses, while the costs of distribution increase.”
From the researchers’ perspective, the results could also explain why skepticism towards globalization is growing, especially in highly globalized countries. “Future research could shed more light on the policy implications of the global distributional effects of globalization,” the team said.
Source: Valentin Lang (University of Mannheim) et al., The Journal of Economic Inequality, doi: 10.1007/s10888-023-09593-7