THE IMPACT OF GLOBALISATION ON INCOME DISTRIBUTION IN EMERGING ECONOMIES. A CRITICAL ANALYSIS OF INDIA AND MALAYSIA
Explain the impact of globalization on income distribution in emerging economies of India and Malaysia.Nations across the globe have developed progressively closer contacts since the onset of globalisation in the 1980s, but the pace of globalisation has increased significantly in recent years. Globalisation also has had income distributional consequences across and within societies. However, much of the attention and literature on the effects of globalisation on income and wages had been dedicated to Western and developed economies with interest in the effects of globalisation on income inequality in emerging economies only gaining attention in recent years. Proponents of globalisation assert that opening up a country leads to increased national income levels in emerging economies. International trade and increased foreign direct investment lead to optimal usage of natural and human resources, thus leading to increased employment opportunities and economic growth (Georgantopoulos and Tsamis, 2011). However, critics of globalisation have indicated that globalisation has the impact of increasing income inequality since the benefits of globalisation (increased incomes) are not evenly distributed. Opponents of globalisation claim that while globalisation leads to an increased national income level, the benefits are not distributed equally, with the rich often deriving more of the benefits compared to low-income people (Heimberger, 2011). These conflicting viewpoints and perspectives, accompanied by various empirical studies with conflicting findings, have generated intense discussions on the impact of globalisation on income distribution in emerging economies. Therefore, this research study will seek to provide additional empirical evidence by examining the impact of globalisation on income distribution in emerging economies with a particular focus on India and Malaysia. To achieve the latter objective, this particular research study will seek to answer the following research questions:
What is the impact of globalisation on income distribution in emerging economies?
Does globalisation lead to increased income inequalities in emerging economies?
What is the impact of trade globalisation on income inequalities in emerging economies?
What is the impact of financial globalisation on income inequalities in emerging economies?
What is the impact of technology globalisation on income inequalities in emerging economies?
Key Literature and Theoretical Background
With increased attention being directed at evaluating the impact of globalisation on income distribution in emerging economies, several studies have been undertaken to examine and understand this phenomenon. A study undertaken by Milanovic (2005) to examine the impact of globalisation on income distribution indicated that initially, it is the wealthy who benefit first from openness in emerging economies; however, as income levels increase in the long term, the incomes of the poor and the middle-class tend to increase at a proportionately faster rate compared to the incomes of the wealthy. Another study by Georgantopoulos and Tsamis (2011) on the impact of globalisation on income distribution in Hungary also indicated that opening up the national economy to international trade leads to an increase in the national income and therefore income for lower-income groups. The latter findings are supported by Mills (2009), who provides that globalisation tends to increase income inequalities in developed economies but reduced income inequalities in emerging economies in the long term. Mills (2009) notes that the reason for the decreased income inequalities in emerging economies is due to the fact that globalisation leads to industrialisation an aspect that leads to new employment opportunities, increased wages for the low-skilled labour-intensive workers and a subsequent reduction in wages for highly skilled workers thus helping reduce income inequality. The above results are in line with the Stolper–Samuelson theorem, which predicts that economic globalisation leads to reduced income inequalities in developing countries (Stolper and Samuelson, 1941). The Stolper–Samuelson theorem provides that trade openness would support the relatively abundant production factor of a country because trade specialisation normally favours sectors that are intensive in the abundant factor (Stolper and Samuelson, 1941). In the case of emerging economies, the relatively abundant factor is unskilled labour, which means globalisation and international trade leads to increased demand for the unskilled labour, an aspect that pushes their real wages up leading to reduced income inequality (Heimberger, 2012).
While the above studies have concentrated on the impact of globalisation in general, other studies have been more specific, examining the impact of financial, technological, trade and political globalisation on income inequalities. A study by Munir and Bukhari (2019) examining the impact of globalisation on selected Asian economies indicated that trade and technological globalisation help in reducing income inequalities, while financial integration leads to income inequality in emerging economies. It is critical to note that Munir and Bukhari (2019) state that while technology globalisation is ideally supposed to increase income inequality since technology advancement in emerging economies often benefits the highly skilled, there is usually knowledge spill over from the highly skilled to the lower-skilled workers, thus leading to increased productivity, and reduced income inequality since the lower-skilled workers are also able to gain from the technological globalisation. Heshmati (2004) also investigated the impact of different components of globalisation, particularly technological, economic and political globalisation. The results of the study demonstrated that technological globalisation leads to reduced income inequality, while economic integration leads to increased income inequality. Political engagement and globalisation had no effect on income inequality (Heshmati, 2004).
Another study conducted by Jaumotte et al. (2013) mirrors the above results with the findings indicating that trade globalisation leads to reduced income inequality, while financial integration and technological leads to increased income inequalities. The reason for the reduced income inequalities as a result of trade globalisation is enhanced industrialisation, increases employment opportunities and wages for the low-skilled labour-intensive workers and also leads to increased agricultural exports (Jaumotte et al., 2013). On the other hand, financial and technological globalisation leads to increased income inequalities since finance and technological integration tend to benefit those the highly skilled in emerging economies. In essence, financial and technological integration tends to favour the highly skilled and educated, which means that financial and technological globalisation in emerging economies only benefits people who are likely to already have higher incomes due to their skills and education, thus leading to income inequality (Jaumotte et al., 2013). The reason for the above results is the fact that a majority of emerging economies have an abundance of unskilled labour but inadequate capital, meaning that trade globalisation will reduce income inequalities. At the same time, financial integration will lead to increased income inequalities in line with the Stolper–Samuelson theorem and Heckscher–Ohlin model (Munir and Bukhari, 2019).
In contrast, while the above studies have either indicated that globalisation or a component of globalisation leads to reduced income inequalities in emerging economies, other study results reveal that globalisation leads to increased income inequality. An empirical study by Hajer and Mohamed (2016) indicated that globalisation helps underprivileged persons in developed countries, but not in developing countries. Hajer and Mohamed (2016) note that the latter results are in line with the Kuznets inverted-U hypothesis. The Kuznets inverted-U hypothesis provides that as a nation’s per capita national income rises, the disparity in income distribution increases in the initial stages of economic growth but the income inequality later decreases after hitting the highest degree at the intermediate level (Bohmani-Oskooee and Gelan, 2008). The latter study findings are supported by Muhammad et al. (2012), who also states that globalisation leads to increased income inequality in developing countries. The reason for the rising income inequality is that while globalisation leads to an increase in national income, the income distribution is not even with a majority of the economic benefits being derived the wealthy in both developed and developing countries (Muhammad et al., 2012). Additionally, a meta-analysis undertaken by Heimberger (2011) examining econometric literature on the impact of economic globalisation on income inequality indicated that globalisation has a small-to-moderate income inequality increasing effect. The study also did not find any econometric evidence that indicated that on average, globalisation helped reduce income inequality. One reason for the latter findings is the impact of different components of globalisation on income inequality. Heimberger (2011) notes that trade globalisation has a relatively small income inequality reducing impact. This assertion is supported by Giordano and Li (2012), who also note that the impact of trade growth on income inequality and poverty in emerging economies is small. On the other hand, financial globalisation has a significant and more substantial income inequality increasing impact (Heimberger, 2011). This finding means that the negative impact of financial globalisation on income inequality outweighs the income inequality reducing benefits of trade globalisation, therefore leading to an overall income inequality increase due to globalisation. Harrison et al. (2010) further note that some countries, such as India and Mexico, have exhibited rising income inequalities as a result of trade reforms that usually accompany globalisation, as countries try to attract foreign investments in contrast to the provisions of the Stolper–Samuelson theorem and Heckscher–Ohlin model.
Research Methodology and Expected Findings
Research Philosophy and Paradigm
This research study will adopt a functionalist research paradigm. The functionalist paradigm follows a logical and rational view which is often associated with problem-orientated in approach to research (Burke, 2007). With the research paper adopting the functionalist research paradigm, this means that the research study will also follow a positivist perspective. Positivism research philosophy aligns with the view that factual knowledge can be gained through observation and measurement with the role of the researcher being limited only to the collection of data and its interpretation (Collins, 2010).
Data Collection
This research study will rely on secondary data (quantitative) from reliable sources such as World Income Inequality Database (WIID), United Nations Conference on Trade and Development (UNCTAD), the World Bank and IMF among others. The data to be examined will be from 1990-2017. The data to be collected in this case will include the Gini coefficient, annual foreign direct investment into India and Malaysia, per capita income, GDP, regulatory quality, each countries workforce (skilled and unskilled), educational levels and trade openness.
Data Analysis
To evaluate the impact of globalisation on income distribution, the conventional Ordinary Least Squares (OLS) methodology will be employed. Three econometric models will be developed: one to establish the impact of trade globalisation on income inequality, the second to evaluate the impact of financial globalisation on income inequality and the third to evaluate the impact of technological globalisation on income inequality. Data related to the latter can easily be obtained from the sites mentioned above, meaning that there will be all the necessary data to make the relevant conclusions. The Lorenz curve and Gini coefficient will represent income distribution in this case. The panel data framework will be deployed due to its regulation for individual heterogeneity compared to pure time series and pure cross-section data. Additionally, the panel data framework offers a large number of data points, a high degree of freedom, and reduces the collinearity problem between independent variables, thus improving the performance and effectiveness of econometric estimates.
Expected Findings
The findings of this research are expected to align with the Stolper–Samuelson theorem and Heckscher–Ohlin model and the study by Jaumotte et al. (2013), with trade globalisation resulting in reduced income inequality and financial and technology globalisation resulting in increased income inequality.
Strengths and Limitations of the Study
Some of the strengths of this particular research study include the use of the panel data framework, thus reducing the collinearity problem between independent variables and individual heterogeneity and enhancing the validity of the results derived. The study will also produce exhaustive evidence to add to the current body of literature on the impact of globalisation on income inequality in emerging economies. The research study will have several limitations with the first one being that the results generated will only be representative of two countries and not all the countries categorised as emerging economies. Different countries have different social-economic dynamics (cross-country variability), and therefore, the latter results may not be representative of all emerging economies.
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