Income Inequality and Globalisation - Assignment Example

Income Inequality and Globalisation Introduction In the 20th century, income inequality was observed to be gaining momentum as a rising and arguably as an inevitable phenomenon within the global economy. One of the reasons which have often been argued to cause such discrepancies can be identified as the impact of globalisation created on trade practices engaging various economic structures. It is in this context that the increasing degree of globalisation involved various trade practices among developed and developing countries, possessing dissimilar economic characteristics. Certainly, the differing trade policies and practices performed within distinct nations were strongly influenced by the globalisation or uniformity of labour laws, exchange rates and various other global economic characteristics which further led to income inequality. However, merger of the trade practices between developed countries and developing countries have been observed to lead towards price equalisation within the working premises which indicates that globalisation may not always give rise to price inequality. However, it has often been observed that trade liberalisation due to globalisation effects, plays a vital role in segregating the global labour policies in two distinct dimensions, i.e. skilled labours and unskilled labours. Recent trend in the global economy further depicts that developed countries, which comprise skilled labours at a large proportion are able to attract higher wage rates in the global platform; while, countries with greater proportion of unskilled labours (e.g. the developing nations such as Bangladesh, Sri-Lanka, and China among others) are observed to gain lower income following the global economic demands. Contradictorily, the global demand for skilled and un-skilled labours also differ substantially which further influences the wage rates or rather the income generated by the populaces in developing and developed economies. Hence, it can be argued that globalisation, may not directly but indirectly, influences income inequality in the global platform possessing a strong even though partial control on employment practices of various nations (Fan & Cheung, 2004). The current issue identified in relation to income inequality and the role of globalisation as a causing factor in this regard stands upon three vital components, i.e. internationalisation of trade practices, demand fluctuations in the global labour market and the alterations in the employment policies of various countries being influenced by their distinct socio-economic characteristics. Based on this context, the essay intends to critically evaluate the viewpoints put forward by various economists and explained with reference to the previously applied theories of international trade. Stating precisely, the sole intention of the evaluation presented in this essay is to explain the role of globalisation as an influencing factor of income inequality in the current day context. Current Trends of Globalisation Effects on Income Inequality Over the past decades, many economists have been debating and claiming that increasing degree of trade relations between developed and developing countries can be identified as one of the major aspects which gave rise of income inequality. Furthermore, economists have also argued that trade relations practiced within nations in the current day context are highly influenced by globalisation trends and thereby, globalisation can also be addressed as a vital reason for income inequality (Freeman, 1995). Where on one hand, the advantages of globalisation can be identified as reduced trade barriers, and implementation of modern technologies; conversely, its disadvantages can be identified as inequality in payment of wages to workers being grouped as skilled and unskilled. To be illustrated, implementation of modern technologies can be observed to play a vital role in reducing the demand for the unskilled workers in the global platform which is further giving rise to income inequality amid different economies (Batterson & Weidenbaum, 2006). Recent studies (Atkinson, 2003; Alderson & Nielsen, 2002; Sala-i-Martin, 2002), based on the understanding of this particular issue in the current day context, have revealed that nations react in a distinct manner towards controlling income inequality, fundamentally depending upon their divergent social as well as economic features. For instance, the current trends have revealed that US, as a developed nation is also facing the problem of income inequality which has further been recorded to augment with significant rapidity over the past few decades. This particular issue, within the context of US business environment can further be illustrated with reference to the distribution of the organizational wages i.e. in accordance with the rising significance of higher level officials such as the Chief Executive Officers and skilled mangers in comparison to the ground level labourers or front desk employees. It is worth mentioning in this context that the recent trends depict a continuous increment in the wages paid to the skilled employees designated in the decision-making or managerial positions, but contradictorily, it also reveals that the low-skilled workers are receiving lesser wages at a stagnant rate. This particular discrimination currently noticeable within the working environment has been immensely contributing towards the rising income disparity within the national context (Tu, 2005). Such disparity can be evidently observed with reference to the graph presented below. Source: (Tu, 2005) From the above illustrated chart, it can be observed that the ratio of income earners who are recorded as top wage earners in the nation in relation to those who are witnessed as the bottom level or lowest wage earners have increased substantially over the past decades since 1940. However, the ratio can be observed to gain immense rapidity since the 1980s and the 1990s which till date continues to grow, remarking substantial rise in the income disparity of US economy (Tu, 2005). A similar scenario can also be observed in relation to the current employment policies and wage distribution practices of UK. Irrespective of being the other most prominent develop economy, UK also had to witness challenges in controlling income disparity within its national context. The below graph shall be quite useful in evidently revealing the income distribution trends within the national context of UK. Source: (Atkinson, 2003) As can be observed from the above presented graph, UK had to witness steep increase in its income disparity ratio particularly during the period of 1980s and 1990s, the same decade when US had to witness similar challenges. Additionally, quite similar to the current trends of US economy, the UK economic context is also observed to witness a continuous increase in terms of the national income disparity ratio (Atkinson, 2003). Hence, in this regard it can be affirmed that both the developed nations share common features which in turn influences their reaction towards international trade and wage disbursement in a similar way. Therefore, in the current phenomenon, globalisation can be termed as a major driver of income inequality within the context of developed nations. In the similar context, considering the challenges witnessed by the developing nations such as China and Brazil, a strong influence of rising globalisation trends within the economies can be observed. For instance, the recent trends in China depict the nation to become increasingly involved with international trade affairs. For instance, in its recent performances since the 1990s, China had been enjoying rapid augmentation in its import and export activities, as can be observed with reference to the below diagram (Yue, 2010). The Total Value of Imports and Exports in China (hundred million dollar) Source: (Yue, 2010) Similarly, Foreign Direct Investment (FDI) inflow has also increased substantially over the past few decades within China, fundamentally owing to its liberalised trade policies and flexible barriers which facilitated international investors to penetrate the Chinese market (Yue, 2010). The rise in FDI flows enjoyed by China over the past few decades can be apparently observed with reference to the below graph. FDI in China from 2000 to 2005 Source: (Yue, 2010) As can be apparently observed from the above graph it can be affirmed that the economy was able to generate an increased flow of FDIs within the nation during the mid 2000s which could have fostered the wealth distribution within China by a greater extent in comparison to its prior performances. However, the study of the wage distribution and increment statistics within the Chinese business environment reveals that the urban regions, facilitating skilled labour force, has enjoyed a greater percentage of hikes in terms of wage rates during the same period of mid 2000s whereas the wage rates in rural areas witnessed no or minimum increments (Yue, 2010). This particular finding can be apparently observed with reference to the below chart. Wage of Labor in Rural and Urban Areas (1978-2002) Source: (Yue, 2010) On the contrary, the study of Brazilian economy depicts that the country was able to enjoy a decline in its income disparity ratio over the past few years. To be illustrated, the statistical review of the changes in terms of income distribution witnessed within the Brazilian economy reveals that the nation has enjoyed a continuous decline in its disparity ratio since the initial phase of the 21st century (The World Bank, 2012). This change can be comprehensively observed with reference to the below chart where a comparison of Brazil and 17 Latin American countries has been provided. Source: (The World Bank, 2012) While elaborating on the causes of such decline when other economies were witnessing an increasing rate of income disparity, studies revealed that Brazil had been focusing on its educational prospects simultaneously focusing on trade relations with developing countries. Hence, one of the major distinctions that can be identified in relation to the trade policies of Brazil and other developing nations indicate that developing nations were much focused on their alliances with developed economies while Brazil was focused on its trade relations with developing nations where the demand for skilled workforce was observed to grow at a steady pace. This rendered ample scope to Brazil so as to build a network of skilled labour force throughout its economy and thus diminish the income disparity ratio (Hailu, 2009). Summarising these aspects, it can be affirmed that trade relations, international business policies and other globalisation drivers create a significant impact over the income disparity ratio witnessed in national contexts. However, the role of national socio-economic policies is also inevitable in this regard. Discussion Globalisation tends to encourage a uniform platform for the growth of competent economies where nations can intend to utilise their true potentials to satisfy the global needs which shall further assist in creating a balance between the demand of skilled and unskilled labour forces. As stated by Heshmati (2003), globalisation is a broad concept which can be defined from differing perspectives such as social, philosophical or political. However, from an economic perspective, globalisation is termed as the developmental process which tends to facilitate free movement of commodities and capital across different countries which is often referred as international trade. It is in this context that globalisation causes strong influences over the trade practices, labour mobility and flow of wealth within a national context which further influences income distribution within the economies (Heshmati, 2003). According to Baccaro (2008), openness of trade practices should be developed or considered by the countries in accordance to the performance or contribution of the workers irrespective of their classification as skilled and unskilled labour forces. From a similar concern, Wood (1995) stated that income inequality and gap between the skilled and unskilled workers can be reduced amid the developed and developing nations through the introduction of various training and educational schemes within the population to facilitate uniformity and balance in terms of wealth distribution. In order to justify the point of view, Wood (1995) further explained that these initiatives will also help nations to maintain equal demand for skilled and unskilled labour in order to overcome the rising trade barriers i.e. inequality of employment opportunities. When concerning to the reasons behind such issues, Jaumotte & et. al. (2008) affirmed that the rising inequality is being witnessed amid various nations fundamentally owing to the implementation of modern technologies and continuous innovation which demands skilled labour forces in the global employment market causing distinction between the labour forces. To be precise, unequal distribution of employment opportunities due to the global trends can be considered as a major cause of unequal income earnings which further leads to disparity in wealth distributions processes (Krugman & Obstfeld, 2003). With reference to the above context, two major reasons for income inequality witnessed by the developed as well as developing economies can be identified. For instance, the disbursement of wages and the education facilities rendered to the populaces are regarded to be the two most crucial factors in influencing the income earning capabilities of the labour forces within a country. As stated by Krugman & Obstfeld (2003), the Ricardian Model assumes that the main components of trade in the international context comprise import and export activities performed by economies. Contextually, countries which tend to enjoy a greater degree of autarky in producing particular goods are most likely to export the commodities to other less self-sufficient economies or international markets, being partially substantiated by the inflow of other commodities in terms of imports. However, continuous trade liberalisation policies can facilitate the demand for exported goods by a nation in the global arena which further shall lead to the expansion of production function within the exporting country for a particular commodity. This in turn strongly influences the allocation of resources within the national context where labours are mostly transferred from other industry sectors to the export-oriented industry premises. Consequently, improper distribution of labour forces causes an inevitable impact over the demanded manpower and industry capital as well further leading to the polarisation of skilled and unskilled workforces and thereby creating income inequality (Xu, 2003). Hence, it can be affirmed that globalisation has a crucial impact on income inequality owing to its significance in international trade relations. Furthermore, as depicted by Xu (2003), trade liberalisation (which depicts a direct impact of globalisation on the economic trends), wage inequality and non-traded endogenous goods are rationally interlinked. It is fundamentally owing to the reason that trade practices performed by a particular nation tends to pose a significant impact on commodity prices, which in the modern day context, not only acts as a major determinant of customer spending power but also tends to impose a crucial impression on the income distribution of the economy. This particular situation can be further explained with reference to the Heckscher-Ohlin Model which assumes that international trade imposes a direct impact on the resource allocation and labour demand within the economic context. From an overall perspective, it can be thus stated that because globalisation tends to impose a direct impact on international trade operations engaging different nations and likewise, influencing the resource allocation and the quantity of labour as well as capital demanded, the phenomenon might have an indirect influence over the income inequality witnessed within a national context (O’Rourke, 2003). Empirical evidences provided by Helpman (2009) also depicts a similar concern that globalisation plays an indirect but inevitable role in influencing income distribution within nations to which, developed economies and developing economies react differently. The role of multinational corporations is considered to be crucial and quite evident in this context which not only satisfies the assumptions of a Heckscher-Ohlin Model but also exhibits the rationality of Ricardian theory. For instance, the US economy was recorded to account 62% earnings of the total income generated by the economy in 1970 while only 34% of its imports were generated through these organisations. Such dependency on multinational organisations have often been accused to be a major reason of income disparity as it tends to exhibit monopolistic competition trends which further influences the flow of capital, labour as well as other resources such as technology in the global arena causing polarisation of skilled and unskilled labours (Helpman, 2009). Conclusion From an overall perspective, it has been observed that the rising trends of globalisation in 20th century have significantly led towards the unequal distribution of income within national contexts which further tends to impose a threat to national growth. In relation to this aspect certain economists have been debating the role of globalisation as a major determinant of income disparity in the modern day context. Contextually, the recent trends reveal that developing countries such as the US and the UK are witnessing the problem of rapidly increasing income inequality within its national contexts. Similarly, the developing countries such as China and Brazil also depict a strong influence of international trade practices on their income disparity ratio even though the responses of the two economies were observed to be quite dissimilar. For instance, China was observed to witness significant increase in its income disparity ratio, while Brazil was observed to enjoy a declining income inequality rate in comparison to other developing nations. Studies based on such responses further depict that it has been fundamentally influenced by the trade liberalisation policies that both the developing nations deciphered dissimilar responses towards the issue of income inequality. A similar perception was also observed with reference to two most referred international trade theories, i.e. the Ricardian theory and the Heckscher-Ohlin Model. With concern to both the cases, it can be thus affirmed that globalisation has a significant impact on income disparity witnessed by different nations in the 21st century era. References Alderson, S. & Nielsen, F., 2002. Globalization and the Great U-Turn: Income Inequality Trends in 16 OECD Countries. American Journal of Sociology, Vol. 107, No. 5, pp. 1244–1299. Atkinson, A. B., 2003. 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