The graph below shows globalisation (KOF index) over time in NZ and the global average.
The rise of globalisation has been accompanied by a debate over whether it comes at the cost of growing inequality. Globalisation is increasingly linked to inequality but often with divergent and polarized results. Critics of globalisation argue it exacerbates inequality both between and within countries. Others argue that globalisation has closed the inequality gap by lifting millions out of poverty. I define globalisation and inequality, how they are measured, and review the extant literature on globalisation and inequality.
Globalisation can be defined as four interrelated structural shifts that roughly occurred since the 1980s.[1] First, the internationalisation of markets and subsequent decline in the importance of borders including changes in laws, institutions, or practices that make various transactions easier or less expensive across borders. The growth of international regulatory institutions and political agreements to facilitate capital flows have liberalised and internationalised financial markets, resulting in more financial openness. Second, the toughening of tax competition that is often accompanied by neoliberal tendencies. The mobility of labour and capital is the antecedent to competition. Central neoliberal measures to enhance competition include deregulation, liberalisation, and privatisation. Third, the rising worldwide interconnectedness through Information and Communication Technologies have accelerated the liberalisation of financial transactions and communication. Fourth, there is increasing relevance and volatility of markets.
What is inequality? Classic sociological approaches to inequality characterise it as a multidimensional construct based not only on economic status, but also social and cultural domains.[2] However, studies that expand upon economic inequality are rare, so I will narrow the scope of my research to economic inequality.[3] Economic inequality is the unequal distribution of income or wealth in society. Income refers to money received by a household over some period, including wages, salaries, and government payments. Wealth refers to the stock of assets held by a household. In some ways, wealth is more important for understanding economic inequality because wealth generates income, so income inequality in part depends on wealth inequality.
Most studies of economic inequality use the Gini Index.[4] The Gini Index is a number that varies between 0, when everyone has the same as everyone else, and 1, when one person has everything and everyone else has nothing. Although the Gini Index is widely applied, some methodological issues make it difficult to interpret when comparing different countries. The central difficulty is whether the Gini Coefficient is calculated using household-consumption data or income-survey data. Income-survey data includes wages, self-employment income, income from assets, income from production for households’ own consumption, social transfers, and income deductions such as direct taxes. Consumption data covers money spent on finished goods and services. Both data sources have limitations: different states use different techniques to measure consumption data and incomes of the very poor and the very rich are underreported in income surveys.[5]
Beyond the actual measure, there is also a question of whether inequality is studied as the unequal distribution of income within or between countries or both. Between-country inequality measures use countries as units of observation. Within-country inequality research studies individuals within the nation-state. As we shall see, the effect of globalisation within countries differs from the effect of globalisation between countries. One difficulty with measuring inequality between countries is whether to weight countries based on population size or to treat them as equal units.
A final problem for studying globalisation and inequality is how we compare different currencies across borders and time. There are two main approaches to calibrating incomes to a common comparative currency: purchasing-power-parity (PPP) adjusted income or market-exchange-rate adjusted income.[6]
Why might globalisation affect inequality? The neoliberal or globalist argument says that globalisation has alleviated income inequality because increasing economic interdependence allocates resources more efficient as countries specialise in line with their comparative advantage.[7] This has lifted millions in the developing world out of poverty, reducing global inequality. Conversely, the standard anti-globalist argument asserts that globalisation has exacerbated inequality and global poverty, while wealthy countries and corporations pilfer the developing world.
A review of the extant literature shows the evidence is argued in all directions. Inequality trends depend on which combination—out of many plausible combinations—of measures and countries we choose. Several studies suggest that world income inequality has been rising in the past two to three decades. World income distribution has become more unequal when incomes are measured at market exchanged rates and expressed in USD.[8] Similarly, studies of PPP-income polarization find income inequality increased when polarization is measured as richest to poorest decile. Milanovic, for example, finds the gap between the top and bottom declines has increased because the top decile has pulled up from the median while the bottom decile has fallen away from the median.[9] Furthermore, between country PPP-income inequality has increased since at least 1980 using GDP per capita and the Gini coefficient, when countries are weighted equally.
On the other hand, studies using population-weighted PPP-income show inequality has been constant or falling since 1980.[10] This is the result that the neoliberal argument celebrates. However, this result is probably skewed by the relatively high weight of China and India, where inequality has sharply declined over the past 20 years.[11] Wade finds that when China and India are removed from the data set, this measure shows a pronounced widening.[12] This means that falling inequality is not a general feature of the world economy even by the most favourable measures.
Several studies find that world PPP-income inequality has increased over a period within the last 20-30 years, factoring in both between- and within-country distributions. When we examine relative gain in real per capita income at different points of the global income distribution income, we see the gains of globalisation have been unequally distributed.[13] As shown in figure 3., the percentage gains are strongest among the middle class in emerging economies (point A), who are called the “global middle class” by Milanovic, and the global 1% (point C), called the Plutocrats. The gains are the least around the 75–90th percentile of the global income distribution (point B). According to Milanovic, most of the groups around point A—the global middle class—are in emerging economies, especially Asia, whereas most groups around point B are the lower middle class of the rich world.[14] Consequently, we can infer that income inequality has increased mainly in middle- and high-income countries, and less so in low-income countries.
There are three problems with this finding. First, overall income growth is understated because of changing selection. The globally poor in 1988 and 2008 are not necessarily the same groups of people. Second, different countries are included in the 1988 and 2008 datasets. According to Adam Corlett, when a consistent set of countries is used, there is a global average income growth of 32 percent rather than 24 percent, and slow growth rather than stagnation for those around point B.[15] Third, uneven population shifts suppress the recorded income growth as part of the global distribution. Because the population of poorer countries has grown disproportionately and the population share of developed economies has shrunk, average incomes have been dragged down. However, if we take these figures at face value, it seems that within-country inequality is declining in developing countries but increasing in developed countries.
Finally, whatever we conclude about relative income inequality, absolute income gaps are widening. Milanovic’s data shown in figure 3. below show that 25 percent of absolute gains in income between 1988 and 2008 went to the richest 5 percent of the world population.[16]
Having reviewed the trends in global inequality, we arrive at the puzzle of whether globalisation has affected inequality. Because the data on global inequality are somewhat inconclusive, it may seem like a moot point to consider whether globalisation has a causal relationship to inequality. Yet we have seen there is an association between globalisation and an increase in income inequality in developed countries. According to Mills, globalisation has enhanced financial openness, trade, foreign direct investment, ICT capital investment and use, and the migration and mobility of labour. In industrialised countries this has exacerbated income inequality because of deindustrialisation, the weaker bargaining position of labour, capital flight, increased premium on high skills for knowledge-based industries, shift from higher wages in the industrial sector to lower wages in the service sector, and the rise in higher-skilled workers income. In developing countries, however, globalisation has decreased inequality due to industrialisation, capital arrival and new jobs, increased premium on lower skills for labour-intensive industries, increase in wages for lower-skilled workers, and a reduction in higher-skilled workers' income.[17]
[1] Steger, Globalisation: A Very Short Introduction; Mills and Blossfeld, “Globalisation, uncertainty and the early life course. A theoretical Framework.”