Technology, Not Globalization, Driving Income Inequality
Technological change, not globalization, has made the biggest contribution to income inequality around the world, new research from the International Monetary Fund concludes.
A chapter in the October IMF Survey asks whether there is a link between the increase in inequality seen in most countries and regions over the past two decades and the unprecedented integration of the world economy through the globalization of trade and finance.
World trade has grown fivefold since 1980, and its share of world output has risen from 36 percent to 55 percent, the articl says. Trade integration accelerated in the 1990s as the former communist countries entered the global trading system and developing countries in Asia dismantled trade barriers.
The globalization of financial flows has also been rapid. Total cross-border financial assets more than doubled as a share of output between 1990 and 2004, from 58% of global GDP to 131%. The advanced economies continue to lead the trend in financial integration, but other regions are beginning to catch up.
Using newly available income- and consumption-based data, the IMF research shows that inequality has risen over the past two decades in most regions, such as developing Asia, emerging Europe, Latin America, and the newly industrialized economies of Asia, as well as in the advanced economies. In contrast, it has declined in sub-Saharan Africa and the Commonwealth of Independent States.
According to the IMF, technological advances have made the biggest contribution to widening income inequality across the world.
The contribution of globalization is less important. Whereas trade globalization has helped reduce inequality, financial globalization—and foreign direct investment (FDI) in particular—has tended to increase it.
Interestingly, among developing countries, the effect of technological progress is stronger in Asia than in Latin America, possibly reflecting the greater share of technology-intensive manufacturing in Asia.
Policy reforms to increase access to education and training would help ensure that the increase in incomes fostered by globalization is shared more equally, the report says. Policies that broaden the access of finance to the poor would also help, as would further trade liberalization.
The chapter of the latest IMF Survey, entitled “Globalization and Inequality” is available for free download at the IMF website.
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