Globalization and Inequality

Supporters of the anti-globalization movement argue that “globalization has dramatically increased inequality between and within nations” (Mazur, 2000), and in particular that it has marginalized the poor in developing countries and left behind the poorest countries. Meanwhile, more moderate mainstream politicians argue that the poor must invest in education to take advantage of globalization (Clinton, 2000).

Such views are difficult to reconcile with a standard Heckscher-Ohlin trade model with two countries, two goods, and two factors (skilled and unskilled labor, or alternatively capital and labor). Under a simple model, globalization should benefit the poor in poor countries and reduce inequality in poor countries, and within the developing world the poorest countries and least educated workers should have the greatest opportunity to benefit from globalization. The argument goes as follows. Suppose there are two countries, the North, with a high ratio of skilled to unskilled workers, and the South, with a low ratio. Under autarky the wage of skilled workers will be relatively low in the skill-abundant North and relatively high in the skill-scarce South. Opening trade will equalize factor prices in the two countries. Hence, the wage of skilled workers will rise in the North and fall in the South, while the wage of unskilled workers will fall in the North and rise in the South. Thus inequality will rise in the rich country and fall in the poor country. The extent of, and gains from, trade will typically be greater the scarcer are skills in the South. Similar results obtain in a Heckscher-Ohlin model with capital and labor as the two inputs, assuming labor is equally distributed within each country while capital is not.

Globalization and Inequality.pdf