Income Inequality in Globalization Context: Evidence from Global Data

This paper empirically investigates the relative effectiveness of economic globalization, trade openness, and financial openness on income inequality in low-, middle-, and high-income countries for the panel data over the period from 1991 to 2020 by endogenizing economic growth, urbanization, agriculture, industry, and service sectors’ value-added as % of GDP as control variables in income inequality function. The results emanating from the panel pooled mean group-autoregressive distributed lag (PMG-ARDL) test provide evidence of a significant long-run relationship among the variables. Interestingly, economic globalization reduces income inequality for high- and middle-income countries and increases it in low-income countries. On the other hand, trade openness reduces income inequality in high- and middle-income countries but increases it for low-income countries. In contrast, financial openness lessens income inequality in low-income countries but increases it for middle- and high-income countries. We find that urbanization increases income inequality in low-, middle- and high-income countries. We also find that economic growth decreases (increases) income inequality in high (middle and low)-income countries. Moreover, it is found that industrial and service sectors’ output decrease (increases) income inequality in high (middle and low)-income countries, whereas agricultural output improves (deteriorates) income distribution in middle- and low- (high) income countries. In light of these findings, we suggest that the governments of low-income countries need to focus more on improving the level of globalization and trade openness to improve their economic conditions in long run. Both high- and middle-income countries should also improve their financial openness so that effective utilization of overseas finance will flourish their overall economy.