Does Economic Globalization affect Regional Inequality? A Cross-country Analysis

Summary

This paper investigates the relationship between economic globalization and regional inequality in a panel of 47 countries over the period 1990–2007, using a measure of globalization that distinguishes the different dimensions of economic integration. The results show that there is a positive and statistically significant association between economic globalization and the magnitude of regional disparities. Countries with a greater degree of economic integration with the rest of the world tend to register higher levels of regional inequality. This finding is robust to the inclusion of additional explanatory variables and to the choice of the specific measure used to quantify the relevance of spatial inequality within the sample countries. Our analysis also reveals that the spatial impact of economic globalization is greater in low- and middle-income countries, whose levels of regional disparities are on average significantly higher than in high-income countries.

Introduction

The territorial impact of globalization remains a hotly debated topic (e.g., Bhagwati, 2004, Stiglitz, 2002). The unprecedented levels of integration have surpassed the previous peak reached before the First World War (Findlay & O’Rourke, 2007) and are leaving a profound imprint on economic growth (Alcalá and Ciccone, 2004, Frankel and Romer, 1999), income inequality and poverty (Milanovic, 2005a, Wade, 2004), labor markets (Dreher and Gaston, 2007, Tomohara and Takii, 2011), environmental quality (Antweiler et al., 2001, Frankel and Rose, 2005), democracy and human rights (Dreher et al., 2012, Rudra, 2005), or the quality of government (Al-Marhubi, 2004, Ezcurra, 2012).

Globalization also has an important impact on regional inequality (i.e., inequality across the various regions within a country) worldwide (e.g., Rodríguez-Pose, 2012, Rodríguez-Pose and Gill, 2006). However, our understanding of the link between globalization and regional inequality is still highly partial. Previous contributions to this field have tended to measure the incidence of economic globalization using mostly different indicators of the degree of trade openness of the countries considered. While from a policy perspective, the relationship between trade openness and regional inequality is undoubtedly relevant (World Bank, 2008), the degree of trade openness is not an adequate measure to capture the incidence of other aspects of economic globalization, such as the extent of capital controls or the amount of Foreign Direct Investment (FDI). This is potentially important as it is not evident that the various dimensions of economic globalization affect regional inequality in the same way. Thus, the impact observed for one aspect may be caused by the omission from the analysis of other important aspects of economic integration. Overlooking capital controls or FDI, while focusing exclusively on levels of trade, can seriously affect our perception of the relationship between globalization and spatial inequality (Dreher, 2006).

This paper aims to overcome this omission in the literature and to provide a comprehensive analysis of the relationship between economic globalization and regional inequality. In order to achieve this aim, we use the KOF index of globalization constructed by Dreher (2006) and updated by Dreher, Gaston, and Martens (2008). This aggregate index distinguishes between the different aspects of economic integration, which allows us to adopt a broader perspective than existing studies. We are thus capable of approaching the analysis of the effects of economic globalization on regional disparities taking into account the challenges posed by integration in a more comprehensive way than hitherto and to identify who wins and who loses, not only within each country, but also across countries.

The remainder of the paper is organized as follows. After this introduction, Section 2 provides a necessarily brief review of the theoretical and empirical literature on the link between globalization and spatial inequality. Section 3 describes the different measures used in our study to quantify the incidence of globalization and regional inequality in the sample countries. Section 4 presents the empirical analysis carried out in the paper to examine the relationship between economic globalization and regional inequality. The final section offers the main conclusions from our work.