Utah State University DigitalCommons@USU Economic Research Institute Study Papers Economics and Finance 2006 Globalization and Income Distribution Inequality Within Countries Lei Zhou Utah State University Basudeb Biswas Utah State University Tyler J. Bowles Utah State University Follow this and additional works at: https://digitalcommons.usu.edu/eri Recommended Citation Zhou, Lei; Biswas, Basudeb; and Bowles, Tyler J., "Globalization and Income Distribution Inequality Within Countries" (2006). Economic Research Institute Study Papers. Paper 321. https://digitalcommons.usu.edu/eri/321 This Article is brought to you for free and open access by the Economics and Finance at DigitalCommons@USU. It has been accepted for inclusion in Economic Research Institute Study Papers by an authorized administrator of DigitalCommons@USU. For more information, please contact [email protected]. Economic Research Institute Study Paper ERI #2006-08 GLOBALIZATION AND INCOME DISTRIBUTION INEQUALITY WITHIN COUNTRIES By Lei Zhou Basudeb Biswas Tyler J. Bowles Department of Economics Utah State University 3530 Old Main Hill Logan, UT _84322-3530 July 2006 GLOBALIZATION AND INCOME DISTRIBUTION INEQUALITY WITHIN COUNTRIES Lei Zhou Basudeb Biswas Tyler J. Bowles Department of Economics Utah State University 3530 Old Main Hill Logan, UT 84322-3530 The analyses and views reported in this paper are those of the author(s). They are not necessarily endorsed by the Department of Economics or by Utah State University. Utah State University is committed to the policy that all persons shall have equal access to its programs and employment without regard to race, color, creed, religion, national origin, sex, age, marital status, disability, public assistance status, veteran status, or sexual orientation. Information on other titles in this series may be obtained from: Department of Economics, Utah State University, 3530 Old Main Hill, Logan, UT 84322-3530. Copyright © 2006 by Lei Zhou, Basudeb Biswas, Tyler J. Bowles. All rights reserved. Readers may make verbatim copies of this document for noncommercial purposes by any means, provided that this copyright notice appears on all such copies. GLOBALIZATION AND INCOME DISTRIBUTION INEQUALITY WITHIN COUNTRIES Lei Zhou Basudeb Biswas Tyler J. Bowles ABSTRACT The issue studied in this paper is whether globalization affects income inequality within countries. Using the newly created Kearney (2002, 2003, 2004) data and the principal component analysis (PCA), we create two globalization indices. The Gini coefficient of a country is regressed on the indices respectively. One of the globalization indices is the equally weighted index. The other is derived from PCA. Sixty countries were involved in this study, including both developed and developing countries. The main conclusions obtained from the analysis can be summarized as follows: there is a negative relationship between the globalization index and the Gini coefficient for all 60 countries in the study and the relationship is robust. Therefore, there is evidence supporting the claim that globalization help reduce income distribution inequality within a country. Previous studies suggest that education and urbanization are two major factors affecting income distribution within a country. In this analysis, increasing the educational level significantly reduces income inequality within a country, especially for developed countries. However, urbanization shows little explanatory power in the regression models. 2 ABSTRACT The issue studied in this paper is whether globalization affects income inequality within countries. Using the newly created Kearney (2002,2003, 2004) data and the principal component analysis (PCA), we create two globalization indices. The Gini coefficient ofa country is - regressed on the indices respectively. One of the globalization indices is the equally weighted index. The other is derived from PCA. Sixty countries were involved in this study, including both developed and developing countries. The main conclusions obtained from the analysis can be summarized as follows: there is a negative relationship between the globalization index and the Gini coefficient for all 60 countries in the study and the relationship is robust. Therefore, there is evidence supporting the claim that globalization helps reduce income distribution inequality within a country. Previous studies suggest that education and urbanization are two major factors affecting income distribution within a country. In this analysis, increasing the educational level significantly reduces income inequality within a country, especially for developed countries. However, urbanization shows little explanatory power in the regression models. 3 I. INTRODUCTION There is substantial academic and public interest concerning the effect of globalization on income inequality within a country. 1 Indeed, the failure of the Doha Rand of the World Trade Organization (WTO) negotiation is partly explained by the perception that globalization contributes to greater income inequality both within nations and across nations. In this debate, some academic research has concluded that trade is the causal force, or at least a moderate contributing source, of the rising inequality trend (Borjas and Ramey, 1994; Wood, 1995; Freeman, 1995; Richardson, 1995). However, others have observed no significant relationship between some concept of openness and income distribution (Fieleke, 1994; Edwards, 1997). Still, others have found that greater participation in international trade significantly reduce income inequality (Chakrabarti, 2000). This instant research is motivated by these seemingly conflicting results. Globalization is a difficult concept to define and measure-a necessary first step in the process of establishing the relationship between changes in globalization and income inequality. This is the focus of the current paper; it provides precise definitions and measurement of alternative concepts of globalization, followed by a rigorous empirical test of the hypothesis that globalization decreases income inequality within a nation. The following section discusses the concept of globalization and carefully defines the comparably concrete concept of income inequality. Next, the empirical model is introduced and results reported. The paper ends with a summary and conclusions . ISee Cornia (2004) for a summary of academic research into this topic. Also, the Wall Street Journal published a series of activities on this topic that is representative of the public discourse regarding globalization and income inequality. 4 II. DEFINING AND MEASURING GLOBALIZATION AND INCOME INEQUALITY Globalization Scholte (2000) has noted that there are at least five broad definitions of "globalization" in the literature. First, globalization is defined as internationalization, which refers to the cross-border relations such as trade and capital flows between countries. Second, globalization is defined as liberalization, or a process of removing government-imposed restrictions on movements between countries in order to create an open, borderless world economy. The third definition is globalization as universalization, which means the process of spreading various objects and experiences, television programs for instance, to every individual in every country. The fourth is defining globalization as westernization or modernization, which especially refers to the spreading of the social structures of modernity, e.g., capitalism, industrialism, rationalism, etc. The fifth type is globalization as deterritorialization, by which globalization means reconfiguration of geography, so that social space is no longer wholly mapped in terms of territorial places and territorial borders. In this paper, we use the Kearney data (Kearney, 2002, 2003, 2004) to measure globalization.2 This database consists of data from all four aspects of globalization: economic integration, personal contact, technology connections, and political engagement. Therefore, our measurement of globalization is beyond the tendency 2 The most recent database contains observations for 62 countries or areas, including advanced, emerging, and developing countries or areas. The data represent 85% of the world's population. 5 towards a worldwide economic environment, and it is close to the fourth or even the fifth definition mentioned above. In addition to using the Kearney Index as an indicator of globalization, we develop other indices from the Kearney (2003, 2004) database based on principal component analysis (PCA). Specifically, 15 variables are selected from the Kearney database and another globalization index is created using PCA. This multivariate analysis method helps to extract the hidden components that explain the level of globalization and inequality of income distribution of a country. It also helps to decompose the effects of globalization on income distribution. In 2002, A. T. Kearney, Inc. attempted to set up a comprehensive database and to compute a composite globalization index for many countries or areas. These data quantify globalization by combining information on the most important parts of globalization (i.e., the forces driving the integration of technology, people, and economies worldwide). The Kearney Globalization Index (KGI) proposed by Kearney (2002, 2003, 2004) is composed of four major component variables: economic integration, personal contact, technology connections, and political engagement. Each of these four component variables is a simple average