The Effect of Globalization on Income Inequality: Panel data analysis of Emerging Economies

Abstract

This paper examines the effect of globalization on income inequality through trade openness and financial openness on a set of 15 emerging countries from 1990-2014. Along with globalization measures, the other control variables used in the study are inflation rate, unemployment rate, GDP per capita and human capital. The data was analyzed using feasible generalized least square estimation technique for panel data. The results of the study show that both financial and trade openness lead to increase in income inequality in these emerging economies. The findings related to other determinants of income inequality such as GDP per capita also points to conclusion that this variable is increasing income inequality, while inflation rate results in reduction of inequality in emerging economies. Unemployment rate has insignificant impact on inequality. However, an increase in human capital has a favorable and positive impact as it leads to reduction in inequality among the set of these emerging economies. The results are in line with the existing literature analyzing the effect of globalization on income inequality in case of developed countries