Saturday, October 10, 2009: 9:10 AM
One of the well known debates circulating around the state of income inequality is whether globalization has been a positive or negative factor. In the last two decades, a major result of globalization has been foreign direct investment (FDI). FDI inflows create employment opportunities for unskilled labor intensive countries as the operations that need less skilled labor are shifted to such low-wage-cost economies. However, during times of recession one of the main effects of FDI is to cause an increase in a developing country’s unemployment rate since the outflow of FDI leaves the lower wage earning labor with the threat of job loss. An identical result is also valid during boom periods for developed countries where FDI usually flows out. Both of these mechanisms should lead to an increase in income inequality. Nevertheless, there is hardly any consensus in the literature on this puzzle as these rather contradictory but also complementary arguments depend on the selected group of countries. This study re-examines this issue by employing the key variables FDI, trade volume and GINI coefficient for a panel of countries. We split the countries into three groups as major FDI inflowing and fast growing countries, namely China, India, Korea, Malaysia, Singapore and Thailand; major FDI outflowing and developed countries, namely, France, Japan, United Kingdom and United States; and developing and moderately FDI inflowing countries, namely, Argentina, Brazil, Chile, Colombia, Croatia, Czech Republic, Hungary, Mexico, Poland and Turkey. We employ the rather new techniques of panel cointegration and our preliminary results show that globalization has different effects for different groups of countries.