Academic journal article The Journal of Developing Areas

Trade Globalization, Financial Globalization and Inequality within South-East Europe and Cis Countries

Academic journal article The Journal of Developing Areas

Trade Globalization, Financial Globalization and Inequality within South-East Europe and Cis Countries

Article excerpt

ABSTRACT

This paper contributes to the empirical literature by investigating trade globalization and financial globalization as channels of inequality within South-East Europe and the Commonwealth of Independent States (CIS) countries from 1992 to 2007. In addition, the paper uses KOF (2010) index to measure the overall impact of globalization on income inequality in South-East Europe and the CIS countries. To overcome the limitations of the least squares dummy variables (LSDV) model, Parks method is used. The paper has two results. The first result is that both trade globalization and financial globalization deepen the income inequality within South-East Europe and the CIS countries. The second result is that the overall impact of globalization have adverse effect on inequality within South-East Europe and CIS countries from 1992 to 2007. These results support the hypothesis that globalization widens the income inequality within countries.

Keywords: Income Inequality, Foreign Direct Investment, Trade, Globalization, Transition Economies, South-East Europe, Commonwealth of Independent States (CIS).

JEL: F1, F2, J3, O5

Corresponding Author's Email: k.elmawazini@alumni.uottawa.ca

(ProQuest: ... denotes formulae omitted.)

INTRODUCTION

In recent years, there has been increasing concern about the relationship between globalization and global income inequality, especially inequality within countries (Milanovic, 2006a). However, this topic still needs more research for four reasons. The first one is that there is no agreement between researchers about the main determinants of income inequality (Odedokun and Round, 2004). The second reason is that there is no agreement between researchers about the optimal measure of inequality within countries (World Bank, 2005).The third reason is that there are few studies focus on the relationship between financial globalization and income inequality (International Monetary Fund (IMF), 2007, p. 32). The fourth reason is that previous studies show mixed support for the hypothesis that trade globalization and financial globalization are channels of the growth in income inequality within countries (see Atkinson et al. (2011), Milanovic (2006b) and Goldberg and Pavcnik (2007) for a survey)).

Some previous studies support the hypothesis that trade and foreign direct investment reduce the povery and income inequality within countries (See for example, Heshmati and Lee (2010), Dollar (2005), Dollar and Kraay (2001), Lawrence (1996) and Cline (1998)). On the other hand, Cornia and Sampsa (2001) show that the inequality within countries has increased from 1960s to 1990s in 48 developed and developing countries. OECD (2011) indicates that technological change, trade, foreign investment flows, and changes in labor market are the main channels of the increase in inequality (see also Cornia and Court (2001)). Similar results can be found in Dreher and Gaston (2008), Mitra and Yemtsov (2006), Lee (2002), Maddison (2001), Milanovic (2001), Mazur (2000) and UNDP (1999). IMF (2007) argues that financial globalization, especially foreign direct investment (FDI), leads to a significant increase inequality within countries, and at the same time, trade globalization leads to a reduction in inequality in 51 developed and developing countries.

We argue that empirical literature has three limitations. First, many previous studies focus on individual sub-dimensions of economic globalization (e.g. Borensztein et al. (1998) and Dollar and Kraay (2001)). Second, previous did not empirically estimate the impact of globalization on the income inequality within South-East Europe and CIS countries1. For example, IMF (2007) did not separately estimate the impact of trade and FDI on South-East Europe and CIS economies. Third, IMF (2007) divided the developing sample to three sub-samples. The first sub-sample is Latin America and the Caribbean sample. The second sub-sample is developing Asia sample. …

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