Globalization Factors in Income Distribution and Poverty in Developing Countries

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Abstract

The paper examines several globalization factors that determine income distribution and poverty in developing countries. Cross-country regression results indicate factors that make income distribution more equal and poverty lower are higher income per capita, rising number of internet users, lower telephone costs, and being among low-income countries. Those that render income distribution less equal are expanding volumes of airfreight transportation and increasing expenditures by international tourists. Poverty is negatively affected by the former but not the latter. As is consistent with other studies, foreign direct investment and trade have no effect on income distribution or poverty. However, if globalization contributes to economic growth then it will eventually lead to better income distribution and lesser poverty.

Keywords: Globalization, economic growth, developing countries, income distribution, poverty

JEL Classification: 040

I. INTRODUCTION

Income distribution and poverty within individual countries has been a major concern for globalization advocates. As globalization has accelerated in recent years, the question whether income distribution has been worsened and the poor become poorer has been debated heatedly. (Harrison, 2004). Krueger (1983) and Bhagwati and Srinivasan (2002) argue that trade reforms in developing countries should be pro-poor, since these countries are most likely to have a comparative advantage in producing unskilled-labor-intensive goods. Expanding trade opportunities should cut poverty and reduce inequality within poor countries.

However, Davis and Mishra (2004) argue that comparative advantage in producing goods made with unskilled labor is not absolute with respect to all countries but can fail vis-a-vis some countries with low-cost unskilled labor. Workers may gain from globalization depending on which sectors (import-competing or exporting) they are attached to. For instance, if globalization raises the prices of goods produced by the poor--such as agricultural products marketed by farmers--or lower those that are bought by the poor then poverty is likely to decline.

Easterly (2004) poses two opposite views. The "factor endowment" view: If poor countries are more endowed with (unskilled) labor, then relaxing constraints on global trade or factor flows will lead capital to channel into to poor countries and per capita incomes there should rise. The "productivity" view: if differences in per capita incomes stem from exogenous productivity differences across countries, rather than differences in endowment, then globalization will either have no impact on poverty or could exacerbate poverty, as capital is drawn away from low productivity countries towards high productivity regions.

Dollar and Kraay (2001), Sala-i-Martin (2002), and Prasad et al. (2004) contend that globalization could raise the incomes of the poor through a third channel: by increasing long run growth. Growing trade or capital flows could enlarge incomes of the poor by raising productivity through capital accumulation via foreign direct investment or imports of new machines embodying new technology.

At the empirical level, a number of cross-country studies find that globalization leads to increasing inequality. For example, both Milanovic and Squire (2004) and Easterly (2004) find that increasing globalization is associated with increasing inequality as the growth gains from trade have been completely offset by the adverse distributional outcomes for the poor. In addition, while the poor in the import-competing sectors are the losers following the liberalization of trade, those in the export sectors have not advanced that much because of the impediments by the developed markets.

The diverse and sometimes opposite outcomes indicate that relationship between globalization and income distribution and poverty depends not just on trade or financial globalization but on the overall response of the host country to the challenge of globalization. …