Economics
Opinion Article
December 14, 2020

The Impact of Globalization on Inequality

Since the European discoveries, several waves of globalization have shaped the way we live today. The most recent one started around the 80s/90s of the previous century and was pushed by several circumstances. First of all, the economic reforms implemented in China around that time by Deng Xiaoping, who ruled the country as paramount leader* between 1978 and 1992 and the fall of the USSR in 1991 brought economic development and openness to vast territories,changing its interaction with the rest of the world. In addition to these two events, the improvements in communication and transportation technologies were key aspects that enabled all the process, boosting global trade and capital movement between countries. For instance, according to the World Bank, exports of goods and services grew from US$4.1 trillion in 1980, to US$23 trillion in 2015, at constant on 2010 prices

Since the beginning of the process until now, globalization has taken a lot of people out of poverty due to those infusions of foreign capital and technology in less privileged areas of the globe, bringing them economic development and spreading prosperity. Still, according to the World Bank, the global population living with less than US$1.90 per day in this condition decreased from 36% in 1990 to 10% in 2015. The two countries that most contributed to this outcome were China, where this indicator fell from around 66% to 1% in the same time-frame; and India, where poverty affected almost 49% of the population in 1987, shrunk to 21.2% in 2011. Undoubtedly, this is positive and a significant advance towards the United Nations’ sustainable development goal of eradicating poverty.

However, even though poverty has shrunk at a global level, the increasing wealth created and the benefits of globalization are said not to be distributed fairly.

Source: Equity master

This chart was elaborated by Branko Milanovic, an economist recognized for his work and research in inequality and income distribution, and depicts the variation in real income according to each percentile of the global income distribution between 1988 and 2008. It can be seen that, during this time frame, the ones who saw their income increase the most was the population living in emerging countries and also the richest citizens of the world. On the other hand, the middle classes of developed countries and the extremely poor virtually remained the same, with some even getting worse off. 

When looking for answers that may explain why this has happened, the novelties brought by this recent wave of globalization should be considered. The reductions in transportation costs and trade barriers created an atmosphere of incentives for capital owners to move the production segment of the supply chain from developed countries to others with better cost advantages, mainly regarding labor, in order to pursue competitiveness. Therefore, these new opportunities have benefited the global elite, as well as the population of where these jobs were created. On the other hand, this has led developed countries to experience major job losses and its working class to see their real wages/income stagnated over time, and even decreased.

Even though globalization may have contributed to more inclusiveness and less poverty at a global level, smoothing differences between the richer and the poorer countries, the fact is that, when considering each nation's internal situation, it may be a different story. 

Source: World Inequality Database

These graphs clearly show that inequality in the United States as well as in China increased. In both countries, whether real incomes increased or not, the share of national income received by the bottom 50 percent of the population fell. In comparison,the top 10 percent saw their share of income increase. This being said, it is quite clear that inequality should be a priority for national governments.

*Paramount leader: an informal term for the most prominent political leader in the People's Republic of China, not necessarily involving an official position.

This content was originally published in The Awareness News.

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