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Impact of Economic Globalization on Income Inequality: Developed Economies vs Emerging Economies

Abstract This paper studies income inequality and globalization by decomposing economic globalization into trade intensity and financial integration, and also by differentiating the effect of globalization across developed and developing countries. Using panel data on 26 developed countries and 52 developing countries for the 1990–2010 period when globalization was accelerated, this study finds that financial integration affects the income inequality differently from trade intensity and the effect is in contrast across two groups of countries. For example, an increase in trade intensity would widen income inequality in developed countries, but it would reduce the inequality in developing countries. And, a deepening of the financial integration would reduce the income inequality in developed countries but increase the inequality in developing countries. These results suggest that income inequality of developing countries would deteriorate with an imprudent dependence on foreign financing or a rapid opening up of their financial markets to foreign investors, or when faced with more barriers on free international trade.