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Business and Finance

The Effect of Globalization on National Income Inequality

Research Question of the Article: Does the globalization adversely affect national income inequality? Especially the poor of the developing nation?

Main Arguments and Theories: Bussmann, Oneal & de Soysa (2005) analyze the effect of ‘globalization’ on ‘national income inequality’ with case study of seventy-two countries for the year 1970-90. The paper focuses on the accumulation of foreign direct investment stocks, and their subsequent impact. The research finding did not show any evidence of globalization adversely effecting income inequality at national level; neither, Foreign Direct Investment (FDI) has an adverse effect on the income inequality level of developing nations. However, the ratio of FDI to GDP is unrelated to Gini index in the eight statistical tests. The statistical tests and regression analysis involving OLS techniques with pooled time series data suggest that the lower one-fifth (poorest) population’s income is uncorrelated with FDI; although, economic importance of FDI for low- and middle-income is often discussed as part of the globalization debate. Additionally, research findings also suggest that the greater inequality associated with trade-based measures of openness are also not related. Moreover, MNCs and International commerce has no relationship with increasing marginalization of the lowest twenty-percent income group. Investigating effects of multinational corporations in the research study suggest that there is limited support for the Kuznets curve. Additionally, income inequality is curvilineal related in cross-national estimations, and not in individual time-series, vis-à-vis average real income. Lastly, socialist state with relatively equal distribution of wealth have to do so at the expense of economic growth.

The data on foreign investment and inequality is assists for assessment of the political, economic, and social indicators stating wellbeing of the nation, and population’s standard of living. The research findings suggest that globalization is not contributing factor for increasing the inequality levels in terms of national income. For example, the ratio of FDI to GDP does not relate to the distribution of incomes, in developed and developing region of the world. Additionally, the poorest one-fifth of the society does not receive the effect of FDI, and neither the alternative measures for openness of the economy which are associated with higher income inequality. Alternative measures include Sachs and Warner’s (1995) measure of free trading policies, trade-to-GDP ratio. However, FDI has the potential to increase the incomes of people below poverty line in developing countries when the FDI increases average incomes without adversely affecting the income distribution in the country. Similar results for trade are also evident from the statistical analysis of the research paper.

Closing Thoughts: The research highlights on the existing literature indicating promotion of globalization as contributing factor towards growth in average incomes of people living in developing countries; although, people living below poverty line in those countries can have adverse effect, if not appropriately integrated. However, authors conclude with future research opportunities exploring alternative economic strategies that benefit the poor, such as increasing the absolute income of poor with increase in respective share of national income. On the other hand, strategy of increasing national economic growth rate also benefits the poor with its unique consequences. The paper also concludes with categorical statement mentioning lack of justification for the claim that global economic integration adversely affect the poor. Interestingly, globalization has managed to reduce income inequality at international level. Lastly, dual economies have high inequality, and the relative labor productive in the sector of agriculture has unequal association.

Discussion Question: Does globalization adversely effects for the people living below poverty line, and positively effects the population earning average income level? Is it just to say that globalization mostly damage poor in real terms?

Works Cited

Bussmann, Margit, John Oneal, and Indra de Soysa. “The effect of globalization on national income inequality.” Comparative Sociology 4.3-4 (2005): 285-312.

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