Globalisation Reduce Income Inequality

Globalisation has been perceived as a solution to reduce income inequality across the globe. This could be explained by improvements in infrastructures and communications, which allow the developing countries to close the gap with the richer developed countries. Moreover, the theory of comparative advantage also supports this stand. However, the article suggested that despite this supposedly positive global phenomenon, inequality has instead worsened within many developing countries. One possible explanation to this issue could be the problem of outsourcing, where there is a distinctive difference with regards to the rise in productivity between the skilled and unskilled workers. The article also utilised economic theories such as the Kuznets

This is consistent with findings by International Monetary Fund (IMF) and World Bank, which have tended to support the notion that globalisation tend to lead developing countries towards increasing growth and hence income equality (IMF, 2000; World Bank, 2010). The theory of comparative advantage further suggests that with poorer countries producing goods requiring large amounts of unskilled labour, there should be an increase in demand for these unskilled workers, resulting in wage boosts for them. On the other hand, their skilled counterparts in these countries would not be that coveted, and hence, their wages would increase less or remain unchanged. For instance, in recent decades, some countries have substantially transformed themselves from economic backwardness to engines of economic growth and prosperity (Elmawazini & Nwankwo, 2013). This is due to the technological boom in the 20th century and the rise in globalisation, causing a tremendous rise in world output, as well as a shift in the geographical areas in which production takes place, hence prompting theories to suggest that inequality should fall as a result of this global

One such theory would be the Kuznets Hypothesis. Kuznets (1955) hypothesised that income inequality would usually worsen in the early stages of economic growth but after reaching a peak level, the income inequality would then decline at the later stages of economic growth. This theory is also commonly termed as the Kuznets inverted-U hypothesis, and is depicted in Figure 2. As a country is developing, the Gini coefficient will rise initially, reach a peak value, before falling as the country continues its development. The Kuznets Hypothesis is also consistent with the development process proposed by Lewis (1954), otherwise known as the Lewis two-sector model. Lewis described the structural transformation from traditional subsistence agriculture to a more modern industrial economy. Such growth tended to start in the modern industrial sector, and as the movements of surplus labour from agricultural to modern sector began, the inequality would start to occur. However, when the traditional agricultural sector disappeared as the country began to develop further, the income inequality within the country would hence decrease. Therefore, these theories illustrate the fact that globalisation will indeed contribute to the rising inequality in poor countries in the short run, though in the long run, globalisation may actually help to reduce the problems of income