Credit: Andonian Timothée / Iméra
Globalization and Income Inequality
Summary of the research project
Although Russia’s invasion of Ukraine marked the end of globalization, the world economy has benefited from globalization for the past 30 years. I would like to examine how globalization has affected the world economy from the following three economic points of view.
1)World Financial Markets: Many studies report that the despite the globalization of financial market, investors did not take advantage of their potential benefits and gave greater preference to domestic assets over international positions in their investment portfolios. This bias, known as “home country bias,” presents a major puzzle in financial economics. The measure of home country bias (HBR) is commonly defined as follows:
Some study reported that in the case of equity, on average, the HBR was about 0.63 across the world. A main drawback of HBR is that it does not cover a wide range of financial asset holdings. An interesting question is whether the measure of home bias is still high given the wide range of financial asset holdings. I propose the following new measure:
The beta is often called “saving retention rate in Country i.” Gross domestic savings provides a more accurate indicator of home country bias because it covers a wide range of financial assets, including deposits, insurance, and securities. Dynamic panel estimation is then applied to measure the impact of changes in domestic savings on domestic investment behavior. The average beta for OECD countries is estimated at 0.54. Thus, a strong home country bias still exists.
2) Domestic Effect of Globalization: The Balassa-Samuelson effect is a key concept to study the domestic effect of globalization. It implies that as economic development is accompanied by greater inter-country differences in the productivity of tradable goods, differences in wages and service prices increases, and correspondingly so do differences in purchasing power parity and exchange rates. This effect leads to country-specific differences by stage of economic development. In developed countries, the movement of people from the non-tradable goods sector to the tradable goods sector equalizes wages across sectors. In emerging economies with huge populations, on the other hand, the wage gap between sectors is much larger. We observe this phenomenon through globalization.
3) Structural Changes: Over the past several years, we have witnessed an increasing number of studies that indicate the declining of the labor share. One of the important findings is that a fall in the labor share will be driven largely by between-firm reallocation rather than a fall in the unweighted mean labor share within firms. To explain this fact, the “superstar-firm” theory has been presented. Namely, under globalization, the most productive firms with a low labor share become increasingly dominate the industry, the aggregated labor share will tend to fall. In other words, only a few superstar firms like GAFA will survive in the long run. Wages at superstar firms will be extremely high, while wages at other firms will be incomparably lower. In other words, income inequality will get worse.
As described above, economic analysis allows for a deeper analysis of the effects of globalization.
Harutaka Takahashi received his PhD in Economics from the University of Rochester in 1985 and taught for two years in the Department of Economics at the University of Saskatchewan in Canada and for 32 years in the Department of Economics at Meiji Gakuin University in Japan. He retired from Meiji Gakuin University in 2019 and is currently a research fellow at the Graduate School of Economics at Kobe University.