One of the few uncontroversial insights of trade theory is that changes in a country’s exposure to international trade, and world markets more generally, affect the distribution of resources within the country and can generate substantial distributional conflict. Hence, it comes as no surprise that the entry of many developing countries into the world market in the last three decades coincides with changes in various measures of inequality in these countries. What is more surprising is that the distributional changes went in the opposite direction from the one suggested by conventional wisdom: while globalization was expected to help the less skilled who are presumed to be the locally relatively abundant factor in developing countries, there is overwhelming evidence that these are generally not better off, at least not relative to workers with higher skill or education levels. What explains this apparent paradox? Is the theory underlying the conventional wisdom too stylized to capture the reality of the developing world? Or were there other forces at work that may have overridden the effects of globalization? What are the mechanisms through which globalization affected inequality? Did the experience vary across countries, and if so, why? What are the general lessons we can draw from the experience of the last three decades? It is these and other related questions that this article aims to address.
To this end, we present a large amount of evidence from several developing countries regarding their exposure to globalization and the parallel evolution of inequality. While the evidence is subject to several measurement problems that we discuss extensively in this article, two trends emerge clearly from the data analysis. First, the exposure of developing countries to international markets as measured by the degree of trade protection, the share of imports and/or exports in GDP, and the magnitude of capital flows — foreign direct investment in particular, and exchange rate fluctuations has increased substantially in recent years. Second, while inequality has many different dimensions, all existing measures for inequality in developing countries seem to point to an increase in inequality, which in some cases (e.g., pre-NAFTA Mexico, Argentina in the 1990’s) is severe.
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