Globalization and Income Inequality in Latin America

Ivan Mendoza

Globalization and Income Inequality in Latin America and The Caribbean

Introduction

Over the past two decades, “developing countries have gradually committed themselves to more engagement with the global economy by following the path of trade liberalization and openness toward international markets” (J.D.K. Chap. 10 p.416). As a result, “many developing countries have experienced increases in within- country income inequality. The growing income inequality has coincided with the period of increasing exposure of countries to globalization through an increased of trade flows and investment across international borders. These development have sparked a large debate in the academic and policy circles about the effects of globalization on income inequality within- countries” (J.D.K. Chap. 10 p.564). This paper will discuss whether globalization has contributed to within- country income inequality by focusing on one aspect of globalization, mainly the countries’ trade flows, specifically exports.

Test- Hypothesis

Considering that “the interest of developing countries might be more in line with those of the developed/ advanced countries, reflects the integration of emerging and developing countries to the global economy through a rapid pace of trade globalization to create opportunities that will create speed economic growth and development. This wave of trade liberalization has had a great impact on the income inequality within developing countries. Therefore, I argue that globalization should lead to an increase of the income inequality within emerging and developing countries, in other words, an increase in total trade (exports) is highly related to the increase of the income inequality within a developing country.

Method and Data Collection

In order to test the hypothesis that an increase in exports is highly related to the increase of the income inequality of developing countries, I will examine the economic growth and trade of emerging and developing countries, with emphasis on the region of Latin America and the Caribbean. Some of the countries in the region have experienced rapid economic growth and development, but “in the last years this growth has slowdown” (WEO p. 56), so examining their growth is a good way to study the effects of globalization and the within-country income inequality. Also, we might find other aspects of globalization that are associated with income inequality. In order to test the hypothesis, I collected data to show the economic performance of 32 developing countries in the Latin America and the Caribbean region covering the period of 1996-2013. This data has been collected from reliable sources such as World Economic Outlook (October 2014) released by the International Monetary Funds (IMF) and the World Development Indicators (WDI) report from World Bank (WB). This data contains the dependent variables and the expansionary variable along with other supplemental data.

Moreover, to accomplish the objective of this paper; providing some evidences on the effects of globalization on income inequality within developing countries I will be using the following data table: (i) the Real Gross Domestic Product (GDP) table, which shows the annual percentage economic performance for the selected developing countries, (ii) the Trade table, which shows the sum of exports and imports percentage in terms of GDP percentage, this reflects the integration of the countries in the global economy. (iii) the Exports of good and services table, since exports is a component of trade and GDP, it shows the effects of trade on GDP because if exports is positive, then GDP increases, (iv) Gini Index, which is the standard measure for income inequality.

Relationship between the variables

Considering the effects of globalization on the income inequality within a country, we have trade as the variable for globalization and “the amount of income inequality within a country is generally measured by using the Gini Index. The Gini Index ranges from 0 to 100, where a value of 0 indicates that everyone has the same income (that is, perfect inequality) and a value of 100 indicates that all the income is earned by one individual (that is, maximum inequality)” (p. 564). However, since most of these countries economy depends on trade, as we can see on the Trade (% GDP) table (high percentage means they import more than what they export/produce) to simplify the relationship between globalization and income inequality, I will using the Export of goods and services, which is one of the components of trade. So, using the data of Exports (% GDP) as the expansionary variable and Gini index as the dependent, we can see for the selected countries that have experience decrease in Exports shares, can be associated with a decrease of income inequality. For example, in countries such as Colombia, Dominican Republic, El Salvador, Paraguay and Peru after 2006 their exports have gone through a period of highs and lows along the same range and inequality has moved accordinly to the change in exports, but most of the time it’s been going down. Although inequality has gone in most of the selected countries, in cases such as Costa Rica and Panama, there’s been period where Exports goes increase and the Gini index still goes down. This shows that the impact of Exports (trade) on income inequality is not significant as expected and that there might be other components of globalization affecting income inequality.

Conclusion

In conclusion, the evidences show that there is positive relationship between trade liberalization and the income distribution within developing countries in the Latin America and the Caribbean; As Exports (trade) increases/ decreases the level of income inequality, according to the Gini Index, increases/ decreases. However, we found that there is not a significant change on income inequality when Exports changes.

Discussion

Moreover, this finding provides an exploratory support to other hypotheses that other components of globalization might have a greater impact on within- country income inequality. “Other factors that drive income inequality are the importance of technology in virtually all sectors of the global economy, and the advances in information and communication technology (ICT) that helped make globalization possible.” (J.D.K. Chap. 14 p. 564).

Source: World Economic Outlook (IFM p.189) https://www.imf.org/external/pubs/ft/weo/2014/02/pdf/text.pdf

Trade (% of GDP)

Country Average20062007200820092010201120122013

(1996- 2005)

Antigua and Barbuda37.6 119.7117.4116.3 105.1106.0104.897.8…

Argentina 25.2 36.2 36.2 36.7 30.6 32.5 33.9 29.9 29.3

Bahamas, The 102.3 100.1 100.7 100.0 87.5 90.2 101.0 107.7…

Barbados 88.8 94.4 94.4 99.6 86.0 96.9 93.0 96.8 …

Belize 115.2 122.8 122.3 131.9 107.7 115.6 124.3 … …

Bolivia 51.4 74.5 76.1 82.9 68.6 75.5 82.5 85.1 …

Brazil 22.4 25.8 25.2 27.1 22.1 22.8 24.5 26.6 27.6

Chile 61.0 71.9 75.8 81.0 66.8 69.8 72.9 68.4 65.5

Colombia 35.1 38.2 36.3 38.1 34.3 33.7 38.7 38.2 37.4

Costa Rica 92.6 104.4 102.2 100.6 84.0 79.1 79.2 78.7 73.9

Dominica 101.7 89.8 93.1 99.4 87.3 90.9 86.9 88.6…

Dominican Rep. 77.5 68.0 66.7 64.7 52.5 57.2 60.4 59.1 57.6

Ecuador 49.5 59.7 62.6 68.1 52.1 62.1 66.0 64.0 63.6

El Salvador 65.8 71.8 74.2 76.6 61.9 68.8 74.6 69.7 72.2

Grenada 99.5 80.1 82.4 77.7 69.4 70.9 74.0 73.3 …

Guatemala 55.9 66.8 67.9 64.1 57.1 62.1 64.0 61.0 58.6

Guyana 203.2 … … … … … … … …

Haiti 47.8 59.5 52.2 56.9 56.7 73.7 67.6 61.4 …

Honduras 114.3 133.1 135.1 135.7 96.9 109.4 122.2 120.6 117.5

Jamaica 90.0 100.8 101.3 113.6 86.9 80.9 83.9 83.4 …

Mexico 51.3 56.4 57.1 58.1 56.0 60.9 63.7 66.4 64.2

Nicaragua 60.4 76.8 82.6 87.8 77.9 85.5 95.8 101.0 92.9

Panama 144.5 146.2 145.4 149.0 138.7 139.7 158.3 154.8 137.7

Paraguay 93.6 107.8 103.5 103.5 96.3 106.6 102.7 99.9 92.7

Peru 36.6 51.1 53.9 56.6 46.4 50.0 55.2 51.7 48.4

St. Kitts and Nevis 103.2 88.4 83.6 86.6 72.9 77.2 74.6 80.3 …

St. Lucia 116.1 112.7 105.1 114.5 101.0 113.0 106.7 103.6 …

St. Vincent and

the Grenadines 103.4 88.0 89.8 92.2 86.0 84.0 84.6 85.7 …

Suriname 66.3 … … … … … … … …

Trinidad and Tobago 99.2 118.7 102.3 107.1 90.9 92.4 151.0 … …

Uruguay 43.1 62.0 59.2 65.2 55.3 53.4 54.0 55.8

Venezuela, RB 49.9 58.7 56.2 51.8 38.5 46.1 49.6 50.4 …

Source: World Development Indicators.

http://databank.worldbank.org/data/views/reports/tableview.aspx?t=tableview&savedlg=1

Exports of good and services (% of GDP)

Country Average20062007200820092010201120122013

(1996- 2005)

Antigua and Barbuda 65.0 48.0 45.1 46.4 46.6 46.1 47.6 46.3 …

Argentina 14.0 20.4 19.8 19.9 17.4 17.5 17.8 15.8 14.5

Bahamas, The 43.2 44.7 46.7 46.0 39.9 40.9 43.6 44.8 …

Barbados 42.3 44.9 45.3 46.0 41.5 46.3 39.3 42.5 …

Belize 52.5 61.1 61.1 62.3 51.6 58.2 61.2 … …

Bolivia23.2 41.8 41.8 44.9 35.7 41.2 44.1 47.3 …

Brazil 11.3 14.4 13.4 13.7 11.0 10.9 11.9 12.6 12.6

Chile 31.2 42.4 43.8 41.5 37.2 38.1 38.0 34.2 32.6

Colombia* 16.0 17.6 16.5 17.8 16.0 15.9 18.7 18.3 17.7

Costa Rica** 45.3 49.1 48.7 45.4 42.3 38.2 37.2 37.2 35.1

Dominica 44.9 37.8 35.8 35.9 32.4 35.7 33.8 38.8 …

Dominican Rep.* 36.2 30.0 28.8 25.5 22.2 23.0 25.0 25.1 26.0

Ecuador* 24.0 30.3 31.9 34.2 25.2 28.7 31.5 30.9 30.5

El Salvador* 25.6 25.7 25.9 26.9 23.2 25.9 28.0 25.6 26.4

Grenada 39.1 23.0 24.9 23.0 22.6 21.8 23.7 24.1 …

Guatemala 22.5 24.9 25.6 24.7 24.0 25.8 26.6 24.9 23.7

Guyana 94.9 … … … … … … … …

Haiti 12.6 14.5 13.2 12.7 14.1 12.1 13.4 13.3 …

Honduras 51.0 56.1 53.5 51.3 39.5 45.8 51.3 50.4 47.9

Jamaica 37.5 40.1 39.7 41.9 34.5 31.3 30.4 30.4 …

Mexico 25.4 27.6 27.7 27.9 27.3 29.9 31.2 32.631.7

Nicaragua 20.0 27.0 29.0 31.3 30.9 35.9 40.1 43.0 40.5

Panama** 73.9 76.7 76.1 78.7 75.5 70.6 79.3 79.8 71.0

Paraguay* 51.6 58.7 56.7 54.0 51.5 55.1 52.6 51.3 49.7

Peru* 17.5 30.2 30.5 28.4 25.2 26.6 29.7 26.6 23.7

St. Kitts and Nevis 42.2 37.4 33.7 31.3 23.9 28.8 31.3 34.3 …

St. Lucia 53.7 43.2 39.9 45.3 46.1 50.2 43.2 44.7 …

St. Vincent and

the Grenadines 43.8 34.7 31.0 30.2 28.5 26.9 27.5 27.6 …

Suriname 24.5 … … … … … … ……

Trinidad and Tobago 54.3 81.4 65.2 71.4 52.3 58.9 88.1 … …

Uruguay21.3 30.3 29.1 30.2 28.0 27.2 26.8 26.2

Venezuela, RB 30.2 36.5 31.1 30.8 18.1 28.5 29.9 26.2 …

Source: World Development Indicators.

http://databank.worldbank.org/data/views/reports/tableview.aspx?t=tableview&savedlg=1

Change in Income Inequality is the Selected Countries

http://databank.worldbank.org/data/views/reports/chart.aspx#

Works Cited

Frieden, Jeffry, and Lake, David, and Kenneth Schultz. Chapter Ten-“Development: Causes of the Wealth and Poverty of Nations”, World Politics: Interests, Interactions, Institutions. 2nd Ed. New York: W. W. Norton, 2012. p. 386-418. Print

—. Chapter Fourteen-“The Future of International Politics”, World Politics: Interests, Interactions, Institutions. 2nd Ed. New York: W. W. Norton, 2012. p. 534- 577. Print

IMF (International Monetary Fund). World Economic Outlook. Washington, DC. 2014.

https://www.imf.org/external/pubs/ft/weo/2014/02/pdf/text.pdf

IMF (International Monetary Fund). Chapter Four: Globalization and Inequality. World Economic Outlook. Washington, DC. 2007.

http://www.imf.org/external/pubs/ft/weo/2007/02/pdf/c4.pdf

World Bank (WB). World Development Indicators. Trade (% of GDP)

http://databank.worldbank.org/data/views/reports/tableview.aspx?t=tableview&savedlg=1

World Bank. World Development Indicators. Exports of goods and services (% of GDP)

http://databank.worldbank.org/data/views/reports/tableview.aspx?t=tableview&savedlg=1

World Bank. World Development Indicators. Gini Index. Created 12/12/2014

http://databank.worldbank.org/data/views/reports/chart.aspx#