INTRODUCTION

Globalization is the dominant economic phenomenon of the last 30 years. Openness in trade, investment, and financial flows has grown dramatically. Inequalities within coun­tries have also increased significantly during this period.^[329] The natural question to ask is whether there is a connection between the two.

Any exploration of inequality must begin by specifying inequality of what and inequality between whom. The focus in this chapter is on income inequality, although quite often measurement will be confined to inequality of consumption expenditure. As for inequality between whom, this can be between all individuals in the world, between nations, between individuals within nations, or between broad groupings within the nation. The focus of this chapter is inequality within developing nations. However, this in no way suggests that globalization is unimportant to inequality in developed countries. Evidence on inequality in developed countries is also referred to as relevant throughout this chapter. The inequality considered is primarily between individuals, but inequality between broadly defined groups within the nation (spatial and gender)—will also be discussed. The measure of inequality, which determines what aspect of the income dis­tribution is emphasized, is also a relevant consideration. For the most part, this chapter considers standard measures of inequality such as the Gini coefficient.

A simple framework for linking income distribution and globalization is to write income as derived from different assets and the return on those assets plus net transfers. The transfers can be further disaggregated into private and public transfers. Assets can be disaggregated into basic factors such as land, labor, and capital, although further disaggre­gation, especially of labor between different skill levels, is also sometimes useful.

As noted above, different economic dimensions of globalization can be measured by increases in trade, investment, financial flows, and migration across national borders. These are of course outcome variables, determined by more fundamental causal variables such as natural endowment differences between nations and national and global policy. The literature often slips into the practice of labeling increases in trade, for example, as the causal factor whose consequences for inequality need to be investigated. This chapter is not immune to this tendency, but the caveat must always be borne in mind.

The focus of the large and growing literature that looks to uncover the links between globalization and inequality is primarily through the effects of globalization on rates of return to assets, holding fixed the asset distributions. Even when assets are considered as mobile, the focus is on the impact of this mobility on returns to assets rather than on the distribution of assets. Within the analysis of returns, the literature is structured around gaps in returns to capital as a whole and labor as a whole, and around the gaps in returns to skilled and unskilled labor. The underlying assumption is that a widening in these gaps will increase interpersonal inequality as measured through standard indices such as the Gini coefficient. Because individuals who get their income primarily from capital gen­erally have higher incomes than those who get their income primarily from labor and because skilled individuals generally have higher incomes than unskilled individuals, this is not an unreasonable assumption to make. However, it should be stressed that one can­not read directly from factor returns to the inequality of personal incomes.

Once the market distribution of income is determined, public and private transfers will contribute to the outcome of the final income distribution. These can be equally important as determinants of inequality, and globalization can affect them as well. First, international remittances, a natural consequence of international migration, can affect inequality in developing countries. Second, the greater ability of capital and high-income labor to cross borders can also have an impact on the progressivity of public tax and trans­fer regimes and thus on final inequality. This channel from globalization to inequality also needs to be considered.

With this background, the structure and plan of this chapter is as follows: Section 20.2 begins with the state of play in the three decades after World War II, from the 1950s through to the 1970s. The focus here will be on how the distributional predictions of the Hecksher-Ohlin (H-O) model, particularly the Stolper-Samuelson theorem, meshed with the great policy debates of the time, especially around the significance of the East Asian experience. These economies delivered a “growth with equity” miracle in a regime of trade openness at a time when other economies with import substitution regimes were either stagnating with low growth rates (like India) or were growing but with high and rising levels of inequality (like Brazil). This experience was consistent with the prediction that in economies that were abundant in unskilled labor, opening up would lead to a nar­rowing of the gap between unskilled labor on the one hand, and skilled labor and capital on the other hand. The East Asian experience was crucial to informing the debate and to persuading the international financial institutions and, in turn, many developing country governments to open out their economies in the 1980s and 1990s.

Section 20.3 provides a thumbnail sketch of the evolution ofwithin-country inequal­ity in the 1980s, 1990s, and 2000s, with a particular focus on the impact of openness.^[330] The bottom line is that openness seems to have been associated with increases in pretrans­fer inequality. Clearly, this pattern from the 1980s onward questions the validity of the basic H-O framework in explaining the inequality consequences of trade, especially because inequality rose both in economies that were relatively labor abundant and in those that were relatively labor scarce. The section then turns to a range of new theories, particularly those emphasizing heterogeneity of workers and firms and market-based selection effects intensified by trade. Such a perspective, it turns out, is more successful in explaining the stylized facts of openness and inequality in the last three decades.

Sections 20.2 and 20.3 focus on a particular notion of openness (greater levels of trade and cross-border investment), a particular entry point to income distribution (differential rates of return to broadly defined factors of production), and a particular notion of inequality (between persons within nations). These are of course major strands in the lit­erature. However, the remaining sections of the chapter take up a number of extensions, modifications, and generalizations that have developed in the last few years from this base.

Section 20.4 focuses on an aspect of globalization that became prominent with the East Asian crisis in 1997 and occupied policy makers’ thinking strongly in the 2008 global financial crisis. How do crises induced by globalization of financial flows affect inequality within countries? There is significant literature developed on this topic based on country studies and global analysis for the crises of the 1990s and the 2000s. This section will review this literature and take stock.

Section 20.5 takes up a particular dimension of inequality—gender inequality.^[331] This is an important aspect of inequality in its own right, with substantial and significant lit­erature focusing specifically on globalization and gender inequality.

Section 20.6 addresses a dimension of inequality that is prominent in the policy discourse—spatial inequality within a country. This can be seen merely as a component or a contributor to interpersonal inequality, but doing so would miss important recent ana­lytical and policy strands in the literature—for example, how agglomeration economies interact with openness, or the political economy of uneven development within a country.

Section 20.7 begins the assessment of openness, transfers, and inequality by looking at private transfers through remittances. It also takes up the more general question of the

impact ofinternational migration on inequality in developing countries. Can migration and remittances exacerbate domestic inequality? There is some evidence that it can, and this may be a contributory factor in the association between global integration and within-country inequality.

Section 20.8 moves to public transfers and public policy in general and asks how greater mobility of capital and skilled labor in particular may constrain governments from pursuing progressive tax and transfer policies with consequences for inequality in the final distribution of income. This section also takes up the more general question of interna­tional coordination of public policy to address the impact of openness on inequality.

Section 20.9 concludes the discussion with suggestions for areas of further research. A final caveat is in order, however. This chapter is about globalization and inequality, and the focus is naturally on the links from globalization to inequality. As such, it may some­times give the impression that globalization is the main factor behind inequality increase. There are of course other forces affecting inequality, and trade and capital flows may not even be the most important factors, although they surely interact with and influence a range of structural and policy influences on inequality.

20.2.