Institute for Social and Economic Change
Working Paper: 391
Economic Globalization and Income Inequality:
Cross-country Empirical Evidence
Widening income inequality has limited the growth potential of economies in the past few decades. This paper analyses the effect of economic globalization on income inequality in both cross-country and country-specific framework using panel data techniques and policy simulations. The sample comprises of developed, developing and least-developed countries in the post-liberalization period. The results show that on the whole, globalization has helped in reducing inequality in the advanced economies but has the opposite effect in low-income economies. Trade and FDI have offsetting experiences; trade worsens income distribution whereas FDI is beneficial in all the economies and helps to reduce income inequality. FDI is found to have a greater impact on reducing income inequality. The policy simulations prove that India can reduce its income inequality by adopting the strategies of high income and middle-income nations.