NCPA - National Center for Policy Analysis

Lack of Globalization Could Be The Cause of Higher World Inequality

January 10, 2002

Globalization, the increased flow of goods, capital and labor among countries, has brought protests from those who believe it increases inequality and poverty. Inequality -- the gap in income distribution between the poorest and wealthiest segments of a population -- may be measured on a worldwide basis, among countries or within countries.

Although there has been an increase in inequality between developed and undeveloped countries, anti-globalization protestors may be mistaken in blaming freer trade and investment policies. And contrary to the mistaken impression many people have, globalization is not a new phenomenon.

To resolve these issues, economist Kevin H. O'Rourke analyzed data for the last 150 years. Among his findings:

  • World inequality increased dramatically during periods of high economic integration -- according to one index of inequality, in the 1820 to 1910 period it rose by 50 percent, and between 1960 and 1992 by 12 percent.
  • This rise in total inequality was driven by an increasing inequality between countries, while inequality within countries declined.
  • The data show no evidence that globalization caused the increased inequality during these periods, and finding any relationship depends on which globalization indicator is used and which countries are studied.

The real cause of rising world inequality could be insufficient globalization. The reason is that incomes in and among open countries tend to become more equalized, while incomes lag behind in countries more closed to trade and foreign investment.

Source: "Globalization and Inequality," Economic Intuition, Summer 2001; based on Kevin H. O'Rourke, "Globalization and Inequality: Historical Trends," Working Paper No. W8339, June 2001, National Bureau of Economic Research.

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