On the relationship between globalization and income inequality: Does institution matter?

• Published date: 01 May 2022
• Author: Oluwanbepelumi E. Osode,Chimere O. Iheonu,Risikat Dauda
• Date: 01 May 2022
• DOI: http://doi.org/10.1002/pa.2433

ACADEMIC PAPER

On the relationship between globalization and income

inequality: Does institution matter?

Oluwanbepelumi E. Osode

1

| Chimere O. Iheonu

2

| Risikat Dauda

1

1

Department of Economics, University of

Lagos, Lagos, Nigeria

2

Department of Economics, University of

Nigeria, Nsukka, Nigeria

Correspondence

Oluwanbepelumi E. Osode, Doctoral student

in the Department of Economics, University of

Lagos, Lagos, Nigeria,

Email: oluwanbepelumi@gmail.com

The purpose of the study is to examine the impact of globalization and institutional

quality on income inequality as well as examining the influence of institutional quality

on the relationship between globalization and income inequality. The study employed

instrumental variable quantile regression which accounts for simultaneity/reverse

causality. This method enabled us to determine how the existing level of income

inequality affects the impact of globalization and institutions on income inequality.

Findings revealed that the impact of globalization on income inequality depends on

the measure of globalization utilized, while the impact of institutional quality on

income inequality depends on the initial level of income inequality. More precisely,

we found that trade globalization significantly reduces income inequality in the pres-

ence of improved institutional quality in countries where the initial levels of income

inequality are low, while it increases income inequality in the presence of improved

institutions in countries where the initial levels of income inequality are high. Fur-

thermore, in the presence of improved institutional quality, foreign direct investment

and official development assistance (financial globalization) significantly increase

income inequality in countries where the initial levels of income inequality are high

and low, respectively. Policy recommendations based on these findings are

discussed.

1|INTRODUCTION

Current global economic trends supported by the findings of numer-

ous studies advocate for globalization because it propels long run eco-

nomic growth in countries. It also fosters regional and global

economic integration across borders (Goldberg & Pavcnik, 2007;

Kang-Kook, 2014; Ajide & Osode, 2017). Despite its attendant bene-

fits, globalization also come along with distributional cost of income

inequality, particularly in developing countries who struggle to reap

these benefits even after several years of integrating economically

with other countries of the world (Goldberg & Pavcnik, 2007). Inter-

estingly, a bourgeoning literature has empirically investigated the

impact of globalization on income inequality; however, their findings

has been inconclusive as to the nature of this relationship. While

some studies conclude that globalization increases distributional

income inequality in countries, others lend support to the premise

that it does in fact reduce income inequality (Goldberg &

Pavcnik, 2007; Feenstra and Hanson, 2003; Feenstra, 2008; Lundberg

& Squire, 2003; Frank, 2009; Zhou et al., 2011; Ogunyomi, Daisi, &

Oluwashikemi, 2013). This lack of consensus in the literature necessi-

tates the need for fresh evidence on the subject matter to ensure the

adoption of appropriate policies to tackle income inequality.

This is particularly important in developing economies such as

countries in Sub-Saharan Africa (SSA) characterized by high level of

income inequality and weak institution. As such, to better understand

the implication of globalization on income inequality in these coun-

tries, a number of issues should be considered which have been

largely neglected in the literature. Firstly, globalization should be

viewed as both financial and trade globalization rather than either of

the two. According to Santos-Paulino (2012), trade liberalization

impact income equality negatively in developing economies. This view

is also supported by Feenstra (2008) who posited that although there

is expectation of low-skilled workers to enjoy wage increase because

of increasing globalization; however, it might also worsen income

Received: 12 May 2020 Accepted: 21 August 2020

DOI: 10.1002/pa.2433

J Public Affairs. 2022;22:e2433. wileyonlinelibrary.com/journal/pa © 2020 John Wiley & Sons Ltd 1of9

https://doi.org/10.1002/pa.2433