The Relationship between Income Inequality and Globalization

In this paper we present two composite indices of globalization. The first one is based on the Kearney/Foreign Policy Magazine and the second one is obtained from principal component analysis. They indicate which countries have become most global and show how globalization has developed over time. The indices are composed of four components: economic integration, personal contact, technology and political engagement each generated from a number of variables. A break down of the index into major components provides possibilities to identify sources of globalization and associate it with economic policy measures. The empirical results show that the low rank of globalization process is due to the political and personal factors with limited possibility for the developing countries to affect. The highly ranked developed countries are sharing similar patterns in the various components distribution. The indices were also used in a regression analysis to study the causal relationship between income inequality and globalization. Globalization indices explain only 7 to 11 percent of the variations in income inequality among the countries.