The Strategist

IMF: Globalization brings great revenues but increases inequality

03/16/2018 - 13:23

Globalization contributes to deepening inequality, although it leads to an increase in the incomes of the population. At the same time, the latter effect is more pronounced in developing countries that have recently become part of the global market. The deepening inequality is commonly found in the developed markets, according to the IMF's Working Report called The Distribution of Gains from Globalization. The social and fiscal policies of the authorities aimed at redistributing additional revenues within the country can smooth out this process, but the possibilities for such leveling are limited. via flickr via flickr
Economic globalization, including legislative liberalization of cross-border flows of capital, goods and labor, and increasing their role in the structure of the economy, leads to a significant increase in incomes. However, they are distributed unevenly both between and within countries, noted Valentin Lang of the University of Zurich and IMF analyst Marina Mendes Tavares, who studied the effects of globalization at various stages of its development for 147 countries in 1970-2014. On the one hand, there is convergence between countries due to increased incomes in the poorest of them, on the other - additional incomes are disproportionately distributed in favor of the richest citizens within countries.

At the external level, globalization has a positive but weakening effect over time: in countries in the early or middle stage of integration, it significantly increases the rate of economic growth. However, as countries continue to be included in the global market, this effect is reduced and gradually fades away. Thus, most low- and middle-income states, whose economies tend to be more closed, will benefit from further globalization (with the domestic policy unchanged). At the same time, for countries with high incomes, further deepening of economic ties with the outside world does not lead to a significant increase in income. This is reflected in the dynamics of globalization: the current "rich" countries began the process of integration earlier than middle- and low-income countries in the 1970s, and reached a peak level of integration into the world market in the late 2000s. Now, they are experiencing stagnation or even move in the opposite direction. Middle-income countries began to lift economic restrictions on cross-border flows in the early 1990s, low-income countries in the middle of the same decade, and continue this process to this day, the IMF notes.

However, property inequality as a result of globalization is growing within the countries, since most of the additional income is concentrated in the hands of the most affluent stratum, and has virtually no effect on the incomes of the poorest part of the population. The IMF also believes that these negative effects are more pronounced in the most integrated economies, while globalization can reduce the overall poverty in developing countries. Although over time internal inequality is expected to increase, this trend is partly offset in practice by the fiscal and social policies of the authorities in the globalized high-income countries. To ensure more inclusive growth, both direct reallocation of income (taxes and social payments) and investments in education that increase the competitiveness of citizens in the labor market, the IMF notes. Still, these measures are not able to completely compensate for the growing inequality. The fund recommends that low-income and middle-income countries significantly increase its redistribution as globalization intensifies, especially as the associated economic growth creates additional resources for this.

The results are consistent with one of the main trends of recent decades. Global inequality is increasingly determined by property stratification within countries, and economic globalization is one of the reasons for this phenomenon.