Recent economic studies have revealed a fall in global inequality since 1989, contrasting the steady increase that had been occurring since 1820, and thus indicates a reduction in the income gap between the poor developing and the developed rich countries (Bourguignon, 2011; Chusseau and Hellier, 2012; Milanovic, 2013). These analyses have also shown, on the other hand, that over the same period – 1989 to present – domestic income inequality has increased. Domestic income inequality refers to the difference in income level between the rich and the poor sections within a country. This trend reversal coincided with the third wave of globalisation, starting in the 1980s, and as a result, suggests that the rising inequality in many developing countries may be attributed to this wave. Globalisation signifies the integration of world economies. However, this integration not only encompasses the notion of trade openness between countries, which led to export specialisation, but also capital openness, which favoured the rich, stock-owning members of developing countries. Aside from globalisation, technology has been progressing at an exponential rate, yet this advancement has been at the expense of the poor, low-skilled workers due to the skill premium. Furthermore, governmental policies, such as taxation and social security, also play a role in determining the level of inequality within a nation. Using the examples of China, India and Sub-Saharan Africa, it is therefore apparent that globalisation has been the significant driving force of increasing domestic income inequality within these developing countries in the last 30 years and globalisation has, in fact, provided the underlying foundation for the other aforementioned causes.
Examining empirical evidence by Bourguignon (2011), it is evident that since 1989, there has been a shift from a decrease in inequality within countries to an increase. Figure 1 shows us the decomposition of global inequality since the 1820s using the Theil index which enables us to decompose global inequality into its two components – inequality between countries and inequality within countries. The explanation for the sudden surge in inequality, according to Bourguignon, is that there was a change in purchasing power parity. Prior to 1989, the purchasing power parity was based on the year 1990 as opposed to 2005 post-1989. The data reveals that since 1989, inequality between countries has fallen from a Theil coefficient of approximately 0.75 to 0.6. On the other hand, inequality within countries has risen slowly from 0.21 to 0.22. With regards to developing countries specifically, Cornia and Marorano (2012) have observed that inequality has increased most prominently in South Asia and in North Africa, two regions typified by their developing economies. They also state that from a period of 1980 to 1999, of the 56 developing countries analysed, 50 of them were experiencing rising inequality. This equates to almost 90%. From 2000 to 2010, this percentage drops to 68% but this is still more than half of emerging countries facing a widening income gap. An article in The Economist (2014) revealed that the Gini index of China and Sub-Saharan Africa rose by 34% and 9% respectively between 1993 and 2008. Empirically therefore domestic income inequality within developing countries has been increasing in recent decades but what factor is attributable for this rise?
Firstly, rising inequality in developing countries can be attributed to trade globalisation as it creates trade openness which, in contradiction to theoretical models that will be discussed, favours the richer, higher-skilled workers. The essence of globalisation is that there is a reduction in trade barriers, such as import tariffs or quotas, and as a result, facilitates the exportation of a good or a service from one country to another without incurring unnecessary additional costs. Examining recent trends from the World Bank (2012), import tariffs have fallen from an average of 33.96% in 1996 to 2.69% in 2010. This enables countries to exploit their comparative advantage. Theoretically, as alluded to in an article in The Economist (2014), the theory of comparative advantage proposed by Ricardo in 1817 is where countries will ‘export what they are relatively efficient at producing’. This theory mirrors the Heckscher-Ohlin model (henceforth HO model), whereby a country will specialise in the production of a good or a service which intensively utilises the factor that it has an abundance of; as a result, trade openness caused by globalisation will raise the real return to that particular factor (UNDP, 2013). Thus in the case of developing countries; in principle, due to the abundance of low-skilled workers, these countries will specialise in the trade of exports that do not require a high level of skills. This can be seen with China specialising in low-skilled manufacturing. This in turn increases the demand for low-skilled labour and subsequently creates upward pressure on wages and should therefore lower the income gap between the rich and the poor sections of the country. So why has China seen its Gini index soar by 34% since 1993 (The Economist, 2014)? Why has a vast majority of the other developing countries also seen their Gini index rise?
According to Maskin (2015), trade globalisation has contradicted both Ricardo’s theory of comparative advantage and the HO model due to foreign direct investment. In particular, the increasing use of international outsourcing by multinational corporations (henceforth MNCs). This argument also still stands for MNCs who, rather than outsource, base themselves within an emerging country instead and hire local workers. Maskin states that due to the ease of communication between countries, MNCs are able to work easily with high-skilled workers within developing countries and as a result, has left low-skilled workers in developing countries in the lurch. Due to the skill level of the job, when an MNC from a developed country outsources their labour to a developing country, the job is taken by the rich, high-skilled members of the country rather than the poorer, low-skilled members. Batt et al. (2005) studied the Indian call centre industry and discovered that the average call-centre employee has a bachelor’s degree which supports Maskin’s argument. High-skilled workers will thus benefit from increased productivity, increased trade and ultimately, increased wages relative to low-skilled workers. This thus contributes to rising domestic income inequality. Furthermore, MNCs compound this issue further by paying their workers more than domestic firms which widens the income gap even more (Chusseau and Hellier, 2012). Hence, whilst trade globalisation tends to reduce income inequality, the injection of FDI actually exacerbates it, explaining why trade globalisation can be attributable to rising domestic income inequality within developing countries.
Another aspect of globalisation that may be attributable for the increase in domestic inequality is capital openness, also known as financialisation, due to its volatility and that it primarily benefits richer members of developing countries. Capital openness has often been amalgamated as part of trade openness, but examining it separately highlights a possible link between financial globalisation and rising inequality within developing countries. Rather than trade, financial globalisation focusses on how individuals have gained mobility insofar as being able to invest in not only domestic assets but assets outside of their country as well as being able to invest in different types of assets, as alluded to by UNDP (2013).
On the other hand, rising domestic income inequality may not be attributed to globalisation but instead, attributed to the progression of technology as it has hindered the income growth of the poor members of developing countries due to the skill premium of technology. Since 1988, technology has developed at an exponential rate, this has led to the creation of the Internet, mobile communication among others.