Effects of Globalization on World’s Income Distribution

Subject: Economics
Type: Analytical Essay
Pages: 4
Word count: 1035
Topics: Finance, Macroeconomics, Microeconomics

Globalization has played a significant role in income distribution around the world. The term globalization refers to the transfer of goods, services and capital across the borders freely. It is a process which is continuous and has made numerous market economies spread across the world. There is no specific phenomenon which is related to globalization but it is considered as an aspect which has led to the integration of technologies, markets and nations to a point that individuals and corporations are in a position to access the world more deeply, economically and faster (Milanovic, 2005). The aim of this paper is to examine the effects of globalization in the world’s income distribution and address the policies which the U.S government should adopt to deal with the issues regarding globalization. Globalization is an external factor which has highly benefited many countries. For the last 200 years, the world was unequal but with globalization, the income gaps have been reduced among developed and developing countries. The World Bank divided countries in three groups depending on the level of income they have; these three groups include high, middle and low income countries. While populations and countries change with time, it has been recorded that the countries which have high income usually contribute $43 trillion; this is equivalent to 69% of global income and comprises of only 16% of the population. On the other hand, the low income countries contribute $400 billion, which is equivalent to less than 1% of the global income and comprises of twelve percent population (Milanovic, 2005). With globalization, the less developed countries can now export and import good on their own. Moreover, they can be expected to be receivers of direct foreign and portfolio investments from the countries which are rich in capital. According to the Hekschler –Ohlin-Samuelson model, the countries with low income will tend to export the intensive products from low skills because their abundant factor is the low skill and therefore the products prices will be low. The foreign investors will also tend to invest in the intensive processes, which are of low skills. The high income countries have skill intensive products and can enjoy the reduced labor costs from employees from less developed countries. Translating this to income distribution, the inequality in low income countries will go down. Moreover, modernization has improved education in the low income countries hence an increase in the high-skill people reducing the wage difference between the low and high income countries (Kai & Hamori, 2009). The following figure illustrates the global growth incidence curve (Lakner & Milanovic, 2015).

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Globalization has led to a noteworthy correlation between income inequality and FDI in the globe. This has been caused by the rise of foreign direct investment among countries leading to significant impact distributive consequences among numerous economies (Milanovic, & Lakner, 2013). According to Mundell (1977), FDI in the low income countries has a significant effect in reducing these inequalities in relation to income distribution. The major reason that this scholar gave was that there is an increase inflow of foreign direct investments especially from the high income countries to the low income countries which means that there is an increase in the marginal physical product. This has, in turn, contributed to an increase in the nominal wages as well as real wages hence lowering inequality in the developing nations. All those claims are based on the neo classical economic theory. Dependency theory differs from the neo classical theory. It argues that the dependency by  low income nations on high income nations has led to social implications and negative economic for the low developed countries, especially in the long term. This has been based on fact that FDI penetration in the low class or middle class countries has hampered economic growth, leading to an increase in inequality in income through creating dualism and disparities in some economies as well as their prolific structures (Milanovic, 2005). The middle class people have faced inequality in terms of income distribution. Globalization has led to technologies which have made it possible and easy for people to communicate to the outside world. However, this has made the market in these countries, especially America, easily accessible. This has led to high competition to the middle class workers leading to high competition because many people are preferring to outsource cheap labor. This has led to negative impact to these people (Milanovic, 2005)

Globalization has been highly beneficial to the world economy in terms of income distribution, but there is a need to closely monitor its nature. Perfect globalization has led to development of India, china, Arabs and Persia among others. It has raised the living standards of the low income earners as well as the high income earners. Moreover, globalization has led to high technology which means loss of jobs for the middle class people. This has contributed to low income on these people hence low living standards. The middle class people, especially in America, have been negatively affected by the effects of globalization in income distribution. It is vital for the government of United States of America to come up with policies to combat these problems.

It is vital that America adopt policies, which will take care of the middle class people. For example, they can come up with a labor policy which restricts the number of foreign employers who are employed in America. This will ensure that Americans have enough job opportunities. It is also important to create more employment opportunities to accommodate as many people as possible.

In conclusion, globalization has contributed to positive impacts on low income earners and has increased inequality in the middle class in the developed countries. However, different economic scholars have different views on globalization and income distribution. The world is developing and all what comes with development has to be embraced. Globalization has come with many benefits in the modern world especially in income distribution, but there is a need to be careful on the areas which have been negatively affected by the same. In a nutshell, globalization has opened gates to a larger market as well as cheap labor. This has resulted to growth of business while the workers are becoming smaller and smaller.

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  1. Columbia University, Fleming, J. M., Fonds monétaire international, Mundell, R. A., & Polak, J. J. (1977). The new international monetary system. New York: Columbia University Press.
  2. Kai, H., & Hamori, S. (2009). Globalization, financial depth and inequality in Sub-Saharan Africa. Economics Bulletin29(3), 2025-2037.
  3. Milanovic, B. (2005). Can we discern the effect of globalization on income distribution? 
  4. Evidence from household surveys. The World Bank Economic Review19(1), 21-44.
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