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Distributional Effects of Globalization in Developing Countries mar07_Article2 3/12/07 5:43 PM Page 39 Journal of Economic Literature Vol. XLV (March 2007), pp. 39–82 Distributional Effects of Globalization in Developing Countries ∗ PINELOPI KOUJIANOU GOLDBERG AND NINA PAVCNIK The authors discuss recent empirical research on how globalization has affected income inequality in developing countries. They begin with a discussion of conceptu- al issues regarding the measurement of globalization and inequality. Next, they pres- ent empirical evidence on the evolution of globalization and inequality in several developing countries during the 1980s and 1990s. The authors then examine the chan- nels through which globalization may have affected inequality, discussing theory and evidence in parallel. They conclude with directions for future research. 1. Introduction that these are generally not better off, at least not relative to workers with higher skill or ne of the few uncontroversial insights of education levels. What explains this apparent trade theory is that changes in a coun- O paradox? Is the theory underlying the con- try’s exposure to international trade, and ventional wisdom too stylized to capture the world markets more generally, affect the dis- reality of the developing world? Or were tribution of resources within the country and there other forces at work that may have can generate substantial distributional con- overridden the effects of globalization? What flict. Hence, it comes as no surprise that the are the mechanisms through which globaliza- entry of many developing countries into the tion affected inequality? Did the experience world market in the last three decades coin- vary across countries and, if so, why? What cides with changes in various measures of are the general lessons we can draw from the inequality in these countries. What is more experience of the last three decades? It is surprising is that the distributional changes these and other related questions that this went in the opposite direction from the one article aims to address. suggested by conventional wisdom: while To this end, we present a large amount of globalization was expected to help the less evidence from several developing countries skilled who are presumed to be the locally regarding their exposure to globalization relatively abundant factor in developing and the parallel evolution of inequality. countries, there is overwhelming evidence While the evidence is subject to several measurement problems that we discuss ∗ Goldberg: Yale University. Pavcnik: Dartmouth. We extensively in this article, two trends emerge thank the editor, Roger Gordon, and two anonymous ref- clearly from the data analysis. First, the erees for many helpful comments. This research is sup- ported by funding from the National Science Foundation, exposure of developing countries to interna- Grant SES #0213459. tional markets as measured by the degree of 39 mar07_Article2 3/12/07 5:43 PM Page 40 40 Journal of Economic Literature, Vol. XLV (March 2007) trade protection, the share of imports and/or and changes in inequality. By the mid- exports in gross domestic product (GDP), the 1990s, the economic landscape had however magnitude of capital flows—foreign direct changed, and factors other than trade liber- investment (FDI) in particular, and exchange alization, such as increased capital flows, rate fluctuations has increased substantially FDI, exposure to exchange rate fluctuations in recent years. Second, while inequality has that in turn affected exports, immigration, many different dimensions, all existing meas- etc., became increasingly more important ures for inequality in developing countries aspects of these countries’ integration in the seem to point to an increase in inequality, world market. Establishing a connection which in some cases (e.g., pre-NAFTA between these phenomena and inequality is Mexico, Argentina in the 1990s) is severe. more challenging compared to the case of We next investigate the question whether trade barrier reductions, but we discuss we can establish a causal link between the these aspects of globalization when related increase in inequality and globalization. We evidence is available. examine several mechanisms through which From a methodological point of view, we openness is presumed to have affected explore a variety of possible approaches to inequality and discuss related evidence. Our identify the impact of globalization on analysis here draws on several empirical inequality. A common theme across the studies of globalization and inequality in studies we draw upon is that they focus developing countries as well as existing sur- almost exclusively on the experience of par- veys of related topics (Ann E. Harrison and ticular developing countries within a rela- Gordon H. Hanson 1999; Adrian Wood tively short time span. While our survey has 1999; Pinelopi Koujianou Goldberg and a clear comparative aspect as we rely on evi- Nina Pavcnik 2004). We confine our discus- dence from a large set of countries, we sion to the experience of developing coun- abstain from relying on cross-country regres- tries in the last two to three decades. The sions to econometrically identify the effects primary reason for this focus is that meas- of trade policy changes or conducting com- ures of inequality are typically computed parisons of inequality measures over longer based on household survey data, and such time horizons. This focus is primary dictated data did not become available until the late by data constraints. Inconsistencies in the 1970s in many developing countries. In gen- measurement of inequality across countries, eral, the data have become more reliable changes in the household survey response over time, so that studies focusing on more rates over time as incomes rise, and frequent recent years tend to produce more credible changes in the design of household surveys results. The second reason we focus on the within the same country make inference last three decades is that, during that peri- based on cross-country evidence, or compar- od, many developing countries underwent isons of inequality measures over longer significant trade liberalization that substan- periods of time within a specific country, tially increased their exposure to interna- potentially less reliable compared to infer- tional markets. We argue that for many ence that relies on within-country evidence countries, most notably Latin American over shorter periods of time. To delineate countries in the 1980s and early 1990s and the scope of this study, we should also point India in the early 1990s, trade liberalization out that we focus our discussion on inequal- episodes represent a major part of their ity alone and not poverty, as the latter is dis- globalization. Furthermore, we argue that cussed extensively in a recent article in this the trade barrier reductions that occurred journal by L. Alan Winters, Neil McCulloch, during this period can be exploited to estab- and Andrew McKay (2004). Finally, we lish a causal link between trade openness abstract from effects of globalization on mar07_Article2 3/12/07 5:43 PM Page 41 Goldberg and Pavcnik: Distributional Effects of Golbalization 41 inequality that may have occurred through measurement of globalization and inequality the growth channel since the evidence on respectively. In section 3, we present empiri- the causal link between trade openness and cal evidence on the evolution of globalization growth has been controversial and inconclu- and inequality in developing countries and sive to date. However, this channel is poten- identify the main facts and trends that tially important; the perhaps most significant demand explanation. Section 4 discusses the benefit of globalization is presumed to be methodological challenges one faces in that it fosters economic growth, and growth attempts to causally link globalization to itself brings about distributional changes. inequality. Section 5, the core section of the Regarding our conclusions, we identify sev- paper, examines the channels through which eral channels that may explain why the recent globalization might affect inequality by pre- experience of developing countries did not senting theory and evidence in parallel. We conform to the “naive” thinking about global- start by focusing on the narrowest measure of ization. We argue that our understanding of inequality—the wage gap between skilled and the consequences of globalization for inequal- unskilled workers (or skill premium)—and ity has improved as the theoretical framework investigate the main globalization-related underlying the empirical work expanded to explanations for its documented increase. We include trade in intermediate products, inter- then progressively move to discuss the national flows of capital, trade-induced skilled impact of openness on broader concepts of biased technological change, short-run factor inequality. Section 6 concludes. immobility, and firm heterogeneity. We also find that the effect of globalization on 2. Conceptual Issues inequality depends on many factors, several 2.1 Measuring Globalization of which are country and time specific, including a country’s trade protection pattern Globalization is a broad concept casually prior to liberalization; the particular form of used to describe a variety of phenomena that liberalization and sectors it affected; the flex- reflect increased economic interdependence ibility of domestic markets in adjusting to of countries. Such phenomena include flows changes in the economic environment, in par- of goods
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