A recent International Monetary Fund working paper entitled “Rising Income Inequality: Technology, or Trade and Financial Globalization?” provides a fascinating look at the almost universal phenomenon of rising income inequality. The abstract outlines the central conclusions of the paper:
We examine the relationship between trade and financial globalization and the rise in
inequality in most countries in recent decades. We find technological progress as having a
greater impact than globalization on inequality. The limited overall impact of globalization
reflects two offsetting tendencies: whereas trade globalization is associated with a reduction in inequality, financial globalization—and foreign direct investment in particular—is associated with an increase. A key finding is that both globalization and technological changes increase the returns on human capital, underscoring the importance of education and training in both developed and developing countries in addressing rising inequality.
The authors of this paper, Florence Jaumotte, Subir Lall, and Chris Papageorgio, do a remarkable job of looking at the roles of the interacting forces of technology, trade globalization, and financial globalization in producing this inequality. Growth of inequality, they show, is widespread around the world, but with significant variations:
...inequality has risen in all but the low-income country aggregates over the past two decades, although there are significant regional and country differences. In addition, while inequality has risen in developing Asia, emerging Europe, Latin America, the Newly Industrialized Economics, and the advanced economies over the past two decades, it has declined in some sub-Sahara African countries. ....among the largest advanced economies, inequality appears to have declined only in France, whereas among the major emerging market countries ..., trends are more diverse, with sharply rising inequality in China, little change in India, and falling inequality in Brazil.
The data on income distributions across countries show that rising inequality generally is explained by the richer quintiles (20% of population) taking a larger share of total income at the expense of the middle income quintiles. The lowest income quintile’s share of total income tends to be rather constant. Thus, in most countries around the globe, it is generally the middle class that is being most negatively impacted by the combined forces of globalization and technology. However, on the positive side, the data indicate that average real per capita incomes have risen almost everywhere for all quintiles over the past two decades of rapid globalization.
The authors do an empirical analysis of national inequality rates using a variety of parameters in order to determine the role of financial globalization, trade globalization, and technology in producing these rates. They find that, in general, technology plays a larger role than the two forms of globalization in producing inequality. Interestingly, financial globalization works to increase inequality, trade globalization works to decrease inequality, and the two effects nearly cancel.
The authors suggest that technology and financial globalization (typically foreign direct investment -FDI) work in tandem because FDI tends to take place in higher skill and higher technology sectors. Thus those with higher level skills are disproportionally rewarded as a consequence of both technological innovation and FDI.
The takeaway from all of this would seem to be the value of education. The authors report that “an increase in the average years of education in the population reduces inequality”. However they also note that increases in dispersion in the level of education -i.e.increases in the fraction of the population with secondary and higher education - lead to increases in inequality. Again, even higher levels of education equip people to move into the upper quintiles, thus distorting the income distribution.
We have discussed some of these issues before as they relate to the US, and the situation regarding the value of higher education at the micro level is rather complicated. See e.g. Real income vs educational level-a problem for higher education, July 25, 2007 and Offshoring moves up the education ladder, March 7, 2006.
This is a very valuable and interesting report which deserves a thorough reading.
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