NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Does Globalization Make the World More Unequal?

"The nations that gained the most from globalization are those poor countries that changed their policies to exploit it, while the ones that gained the least did not, or were too isolated to effectively change economic and political policy... An integrated world economy would be less unequal than today's barrier-filled, partly globalized world economy."

The world economy has become more unequal over the last two centuries. That inequality is characterized by widening economic gaps between nations, but not necessarily within nations. During this same period, the world economy has become more integrated globally. This leads some economists to suggest a relationship between global economic integration and economic inequality.

In Does Globalization Make the World More Unequal? (NBER Working Paper No. 8228), authors Peter Lindert and Jeffrey Williamson find that increasing globalization has probably mitigated the effects of inequality between nations that participate in global markets. The nations that gained the most from globalization are those poor countries that changed their policies to exploit it, while the ones that gained the least did not, or were too isolated to effectively change economic and political policy.

In analyzing economic data from 1820 to the present, the authors reach five conclusions. First, the dramatic widening of income gaps between nations probably has been reduced by globalization of commodity and factor markets, at least for countries that integrated into the world economy. Second, within labor-abundant countries before 1914, opening up to international trade and factor movements lowered inequality. Third, within labor-scarce countries prior to 1914 opening up to international trade and factor movements raised inequality, a powerful effect where immigration was massive. Fourth, all effects considered, more globalization has meant less world inequality. Fifth, world incomes would still be unequal under a scenario of complete global integration, just as they are in any large integrated national economy, such as those of the United States or Japan. But, they would be less unequal in such an economy than they would be in one that is fully segmented.

Citing huge integrated economies such as those found in the United States, Japan, and the European Union, the authors consider whether a corresponding huge world economy with only negligible barriers to trade, migration, and capital movements would make for a more unequal world economy. They conclude that such an integrated world economy would be less unequal than today's barrier-filled, partly globalized world economy.

The authors acknowledge the fear that many have that such a globalized world would have vast regions with inferior education and chaotic legal institutions and would be more unequal than societies found in economies such as the United States or the European Union. However, the authors conclude that the source of that inequality would be poor government and non-democracy in the lagging countries, not the effects of globalization.

-- Les Picker


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