GLOBALISATION AND GLOBAL INEQUALITY

Is Globalisation the cause of increased global inequality or the solution to it?

Is Globalisation the cause of increased global inequality or the solution to it?

Introduction

In parts of the developing world and especially in East Asia, Globalisation has been accompanied by an increase in living standard hardly imagined just a generation ago. At the same time, Globalisation has also become the focus of widespread controversy. In particular, concerns about adverse consequences for income distribution have fueled policy initiatives that threaten to turn back the clock.

An especially troubling development was the emergence of a popular backlash to Globalisation in the United States, even when the country was enjoying record growth and the lowest unemployment rate in decades. An article in The Economist “Globalisation and the Rise of Inequality,” January 18, 2007), written while the U.S. economy was expanding, highlights “a poisonous mix of inequality and sluggish wages” as the force underlying a Globalisation backlash in the United States as well as Japan and the European Union. Once America's long period of expansion reached an abrupt end, market-opening trade accords such as the North American Free Trade Agreement (NAFTA) became lightning rods for public concern about stagnating real incomes, job losses, and increased economic insecurity.

Discussion

In the midst of the global recession that followed, most Americans and their counterparts abroad continued to acknowledge the benefits of Globalisation in terms of overall productive efficiency, lower prices, and increased consumer choices. The backlash, both in the United States and worldwide, has largely been a response to the perceived redistributive consequences of increased openness, especially openness to imports and immigration. Even if a country “asa whole” is made better off, and not everyone accepts this premise, there remain concerns about the well-being of particular groups within its borders. Indeed, increased Globalisation has been accompanied by increased inequality not only in the United States but in many other countries. However, is Globalisation a major cause of increased inequality?

While there is little disagreement that Globalisation has been accompanied by increased inequality within many countries, both rich and poor, this is not the same as establishing a causal relationship. On the contrary, numerous systematic studies have concluded that the redistributive changes the public and policy makers often attribute to Globalisation are due mainly to other changes in the economy. Thus, while discussions of Globalisation frequently turn to its contribution to inequality, discussions of rising inequality often fail even to mention Globalisation or dismiss it as playing at most a minor role in explaining recent trends in income distribution. Many U.S. trade and labor economists conclude that the primary cause of increased wage inequality is that the rate of skill-biased technical change has exceeded the growth rate of skilled labor. However, most technical change is not exogenous but the result of profit-motivated investment. By altering the incentives firms face, openness to trade may promote development and adoption of new production methods. The rate of skill-biased technical change may also respond to increases in the availability of skilled labor, ...