The Relationship between Globalization, Economic Growth and Income Inequality

This study investigates the relationship between globalization and income inequality by developing a new globalization index based on economic growth. In addition two other indices of globalization, non-parametric Kearney and parametric principal component analysis are used as benchmarks to compare the results. The proposed new index is decomposed into four sub components. The index is also estimated in several forms separated by different economic growth variables and in decomposed or composite forms. The main feature of this approach is that the estimation of globalization index and examination of its relationship with economic development is conducted in one step. All indices are compared in respect with their level, development and correlations. The empirical analysis is based on a panel data consisting of 61 developed and developing countries observed during the period 1995-2001. Regression analysis is used to estimate the effects of globalization on income inequality. To examine the sensitivity of the relationship between globalization and inequality, different inequality variables are employed. It is expected that the indices serve as useful tools in comparing the globalization process among countries and the evaluation of the globalization effect on the economic development and income inequality. This study is useful in the construction of new multidimensional index of globalization with different and estimated weights attached to the determinant factors. JEL Classification Numbers: C23, F20, F59, O15, O47, O57