Is Global Growth Becoming More Uneven?
Economic growth over the past 150 years can be broadly divided into three phases: the golden age at the end of the 19th century, the dark period during the two World Wars, and the economic recovery at the end of the 20th century. In the process of globalization, economic convergence—the phenomenon of poor countries catching up with rich countries at an accelerated pace—is closely and positively correlated with globalization. This indicates that globalization not only promotes economic growth but also helps narrow the gap between rich and poor countries. However, globalization has exacerbated inequality within many resource-rich but labor-scarce countries. Typical examples include Argentina, Australia, Canada, and the United States, where their natural resources have been more extensively developed and exported, but their domestic workforce has not benefited accordingly. From a macro perspective, economic globalization has indeed promoted global economic growth. However, from a local perspective, globalization has exacerbated inequality within countries. A significant aspect is the widening gap between rich and poor, meaning that income is not distributed equally. This article will illustrate the characteristics of the impact of economic globalization on income inequality by providing examples of typical developed and developing countries.
Globalization and Inequality
According to the classic Heckscher-Ohlin trade theory, globalization leads each country to focus on utilizing its most abundant factors of production. In theory, this means developing countries should benefit from an increase in unskilled labor, while developed countries should benefit from skilled labor. However, the reality is far more complex. The increasing inequality resulting from globalization reflects the unequal distribution of its benefits. This is particularly evident in the declining demand for unskilled labor in the US and Europe, and the changing demand for low-skilled labor in developing countries. From 1973 to the 1980s, unskilled workers in the US and some other developed countries found their real wages declining. This phenomenon occurred almost simultaneously with the accelerated pace of globalization—the growth of trade and the increase in low-skilled immigration. Even in developing countries, globalization did not bring the expected wage equality in the 1980s and 1990s. As global trade barriers disappeared and education levels rose, developing countries increasingly produced goods requiring basic skills, while developed countries focused on producing goods requiring high skills. This led to a rise in the wage ratio of unskilled workers relative to skilled workers in the South (developing countries) and a decline in the North (developed countries). This resulted in increased inequality in the North and a reduction in inequality in the South.
Economic Globalization and Income Distribution under Economic Globalization
Economic globalization refers to the flow and allocation of goods, services, technology, and capital globally, leading to increasing interdependence and interconnectedness among national economies. Under economic globalization, a country's existing resource system is impacted, with varying effects depending on the country's circumstances. This impact involves changes in the scale, nature, and structure of its industries. These changes in various aspects of industry affect national income and its distribution between capitalists and workers. To further understand income inequality, it's essential to understand how national income is distributed between capitalists and the vast majority of workers.
First, there's the creation of the "income pie." A company's income comes from selling products produced with significant investment, while workers' income comes from the compensation they receive for producing goods for capitalists. Generally, a portion of the profits from product sales by capitalists is used to pay workers. Therefore, theoretically, the distribution of national income between these two groups is inversely proportional. This leads to the reason for income inequality: although the "income pie" has grown due to globalization, the increased share of income received by capitalists has resulted in a relatively small increase in workers' income. However, we should recognize that the impact of international trade on income distribution under economic globalization appears to manifest differently within developed and developing countries, as well as between developed and developing countries. Therefore, a one-sided analysis of this issue cannot provide a clearer understanding of the advantages and disadvantages of globalization and may even mislead our views on economic globalization.
A Multi-Level Perspective on Income Distribution under Economic Globalization
Economic Globalization Exacerbates the Wealth Gap Within Developed Countries
With rapid economic development, industries in developed countries are undergoing upgrading and transformation, while the prices of some production factors required by these industries are also increasing. Capitalists, adhering to the principle of profit maximization, seek and select optimal development strategies and advantageous locations for establishing businesses in the global factor and product markets. Developing countries have lower levels of economic development, resulting in lower prices for production factors, significantly reflected in labor costs. Therefore, capitalists in developed countries tend to locate labor-intensive industries in developing countries, which not only reduces high labor costs but also allows them to take advantage of the vast markets in developing countries. The transfer of labor-intensive and other types of industries creates numerous job opportunities in developing countries but reduces job opportunities in developed countries. 1. Losing employment opportunities deprives a large portion of workers in developed countries of their source of income. This results in increased profits for capitalists due to reduced costs and increased sales, while the number of unemployed in developed countries increases, thus widening the wealth gap.
The wealth gap within developing countries is also widening with economic globalization
Developing countries, as recipients of industrial transfers from developed countries, have seen a significant increase in income despite many people gaining employment opportunities during globalization. While industrial transfers from developed countries have brought advanced production technologies to developing countries, these technologies are often controlled by a minority. This means a small minority has the opportunity to leverage their national advantages to earn more than the majority, resulting in a larger share of income for this minority, which increases with their acquired advantages.
Economic globalization has generally narrowed the wealth gap between countries
Both developed and developing countries benefit from globalization as a whole. Developed countries utilize the cheap resources and vast markets of developing countries to generate more revenue, while developing countries achieve national income growth through large-scale employment and the adoption of advanced production technologies. Overall, the wealth gap between developing and developed countries is narrowing. Comparing inequality during the period of rapid globalization with equality in previous periods, and comparing inequality before and after trade liberalization between countries or industries subjected to greater or lesser global pressures, suggests that recent globalization is related to a reduction in income inequality worldwide.
Globalization and the Pursuit of Equality: Not Linear Development
The late 19th and late 20th centuries offer two very different historical perspectives in analyzing the impact of globalization on the trend of inequality reduction. In the late 19th century, even in poorer countries with later industrialization, inequality generally showed a significant downward trend. This contrasts sharply with the situation in Latin America and East Asia in the late 20th century, where a general trend towards equality did not emerge. During the globalization period of the late 19th century, large-scale migration seemed to play a more significant role than trade in reducing inequality. However, by the late 20th century, although migration remained an important factor in some countries, such as the United States and West Germany, its impact on inequality appeared less significant, at least in publicly available economic research.
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