Does globalization exacerbate income inequality in two largest emerging economies? The role of FDI and remittances inflows

Abstract

Using the annual data from 1980 to 2013, this study explores the effects of economic globalization on income inequality for a sample of two emerging economics, China and India, by endogenizing FDI inflows, remittances inflows, sectoral output, infrastructural development, human capital formation, government size, urbanization and economic growth as relevant determinants into the income inequality model. By applying combined cointegration method of Bayer–Hanck (J Time Ser Anal 34(1): 83–95, 2013) and ARDL bounds testing of cointegration approach of Pesaran et al. (J Appl Econom 16(3):289–326, 2001); it finds that there is the existence of a long-run relationship among the variables in our inequality model for both India and China. After confirming cointegration among the variables, the long-run results based on ARDL model surprisingly revealed that economic globalization widens the income inequality in India but the same factor reduces the income inequality in China. Contrastingly, both the FDI and remittances inflows significantly contribute to reduce income inequality in China, while the same worsens the income inequality in India. In examining the role and effects of structural changes in both the economies from the changing sectoral contributions of output in total output (industry sector and service sectors) in our model, it exposes the fact that the changing sectoral growth contribution has been leading to rising income inequality in China while the same has been resulting in reduction of income inequality in India. The infrastructural development has led to rising income inequality in both the countries, while human capital formation as expected reduces income inequality for both the countries. It also observes that economic growth, urbanization and government size enable both the economies to improve in their pattern of income distribution which have significant implication for public policy of both the economies while aiming at reducing poverty and inequality.