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Ghana Institute of Management and Public Administration, P.O. Box AH 50, Achimota, Accra, Ghana
Received 15 June 2007; received in revised form 17 September 2007; accepted 20 October 2007
Available online 15 January 2008
Abstract
This paper examines the impact of globalization on income inequality for a cross-section of 62 developing
countries over a period of 17 years (19852001). The results of the study indicate that globalization explains
only 15% of the variance in income inequality. More specically, the results show that (1) strengthening
intellectual property rights and openness are positively correlated with income inequality; (2) foreign direct
investment is negative and signicantly correlated with income inequality but this is not robust to different
model specications; (3) the institutional infrastructure is negatively correlated with income inequality. The
studys ndings and the reviewof the literature suggest that globalization has both costs and benets and that
the opportunity for economic gains can be best realized within an environment that supports and promotes
sound and credible government institutions, education and technological development.
2008 Society for Policy Modeling. Published by Elsevier Inc. All rights reserved.
JEL classication: FO2; I30; K19
Keywords: Globalization; Income inequality; Intellectual property rights; Developing countries
1. Introduction
The past two decades can be described as the era of globalization. Although there is no consen-
sus on the denition of globalization, a common term that is synonymously with globalization is
integration, in terms of people, capital, ideas, technology, and services (Houck, 2005). Empirically,
globalization translates into greater mobility of the factors of production (capital and labor) and
greater world integration through increased trade, foreign direct investment (FDI), and enforce-
ment of intellectual property rights [IPR] (Milanovic, 2005; Wade, 2001). Though many studies
7
3
5
Table 2
Regression coefcients for the impact of globalization on income inequality
1 2 3 4 5 6
OPEN 0.005
**
(0.002) 0.017
***
(0.004) 0.009
***
(0.004) 0.011
**
(0.005) 0.005 (0.006) 0.010
*
(0.005)
IPR 1.137
***
(0.255) 1.177
***
(0.327) 1.155
***
(0.363) 1.227
***
(0.379) 1.155
***
(0.363) 2.045
***
(0.399)
FDI 0.009 (0.021) 0.115
**
(0.047) 0.051 (0.067) 0.054 (0.071) 0.051 (0.067) 0.059
*
(0.047)
LGCAP 0.804 (1.302) 4.632
***
(1.180) 5.156
***
(1.392) 2.717
**
(1.112) 1.713 (0.927)
GOV 0.047
**
(0.021) 0.019 (0.046) 0.002 (0.042) 0.017 (0.043) 0.049
*
(0.027)
INST 0. 040
**
(0. 017) 0. 043
***
(0. 014) 0. 039
***
(0. 014) 0. 038
***
(0. 012) 0. 036
*
(0. 017)
POP 0.000
**
(0.000) 0.000
***
(0.000) 0.000
***
(0.000) 0.000
***
(0.000) 0.000
**
(0.000)
SEC 0.012 (0.021) 0.013 (0.022) 0.000 (0.020)
LGCAPSQ 25.315 (22.197)
ASIA 1.274
***
(0.409)
LA 0.920 (0.734)
SSA 0.557 (0.601)
IPR*AS 0.006 (0.004)
IPR*LA 0.505 (0.709)
IPR*SSA 2.568 (0.622)
Constant 0.120
***
(0.028) 0.229
*
(0.120) 0.314
***
(0.084) 0.350
***
(0.081) 0.416 (0.622) 0.129 (0.091)
N 175 155 136 136 136 155
R
2
adjusted 0.15 .18 0.47 0.60 .49 .28
Note. t-statistics in parentheses.
*
Signicant at the 10% level.
**
Signicant at the 5% level.
***
Signicant at the 1% level.
S. Adams / Journal of Policy Modeling 30 (2008) 725735 731
has a signicant positive effect on income inequality in almost all the model specications. This
nding is consistent with the assertion that not only do developing countries not benet from
strengthening the IPR system, but that they may be worse off with the benet accruing to more
developed or innovating countries. Furthermore, it is possible that some corporations will focus
their resources on defending their original innovations rather than developing new products and
therefore limiting their output below socially desirable levels leading to negative consequences
on consumer welfare (Shapiro & Hassett, 2005). Controlling for regional differences does not
change the coefcient on the IPR variable (Column 4). Further, the cross product of the IPR and
regional dummies show that none of the interaction terms is signicantly correlated with income
inequality (Column 6), which indicates that strengthening IPR does not exert different effects in
developing countries. OPEN is also positive and signicantly correlated with income inequality,
suggesting that increased integration into the world economy negatively affects the distribution
of income in developing countries.
FDI, however, is negative and in a fewcases even signicantly related to income inequality. The
implication is that increased ow of FDI may have a positive effect on the distribution of income
in developing countries. It is important to note, however, that many studies have suggested that
FDI has been more productive in Asia than in other regions of the world (Agosin & Mayer, 2000;
Fry, 1993), which suggests that FDIs effect may be sensitive to regional differences. As noted in
Column 5, when the regional groups are controlled for, the FDI variable is no longer signicant
supporting the assertion of Tsai (1995) that FDIs effect on income inequality is sensitive to the
type of countries included in the study.
The LGCAP and its power term (LGCAPSQ) have the correct signs but the LGCAPSQ is not
signicant and therefore we do not nd support for a curvilinear relationship between the level of
development and income inequality for the sample of countries over the study period (Column 4).
With respect to the other explanatory or control variables, the institutional, population, govern-
ment consumption, and human capital variables are negatively correlated with income inequality,
while the level of development is positively correlated with income inequality. The effect of the
institutional variable is one of the most robust ndings to different model specications, which
suggests that the country conditions in particular, may be more important in inuencing the dis-
tribution of income than any domestic or international policy per se. Though the human capital
variable is never signicantly related to income inequality, it is important to note, however, that
when it is included in the regression, the explanatory power of the model improves signicantly
as seen in the increase of the adjusted coefcient of determination from less than 0.20 (Columns
1 and 2) to a high gure of 0.60 (Columns 5). This result might mean that though human capital is
an important element in reducing income inequality; most of the countries of the studys sample
have not reached the minimum threshold of skill needed to positively affect the distribution of
income.
5. Policy implications and concluding remarks
The impact of globalization on income inequality has been generally examined in the literature
with only a fewfocusing specically on developing countries. Further, many of these studies have
focused on two main channels of globalization, including trade and FDI. This paper contributes
to the literature by examining a third and important component of the globalization processthe
protection of intellectual property rights.
The results of the study show that trade liberalization and strengthening of IPR have a negative
effect on the distribution of income, while FDIs effect on income inequality is sensitive to the type
732 S. Adams / Journal of Policy Modeling 30 (2008) 725735
Table 3
IPR and Gini values in the 1990s
Region IPR Gini
SSA 2.66 46.9
LA 2.36 49.3
AS 2.11 35
Source: Authors calculation based on Ginarte and Park (1997) and Deninger and Squire (1996).
of countries included in the studys sample. Even more important, the study nds that the overall
country conditions in terms of the institutional infrastructure and skill level are key determinants
of income inequality. These results have policy implications.
First, it is important to note that though Latin American and African countries, for example,
are known to have more open economies and higher IPR protection compared to Asian countries,
the level of income inequality is lowest in Asia (Table 3).
Further, Asian countries have been more proactive in making use of TRIPS exibilities
(UNCTAD, 2007). India, for example, has taken WTO exibilities concerning IPR rules to refuse
patents on existing medicines. Indeed, India recently won a case against Novartis, that led a law-
suit against India challenging the constitutionality of Section 3(d) of the provision of Indian Patent
Lawthat states that patent monopolies will be awarded for only truly innovative medicines rather
than minor changes of existing medicines (Odell, 2007).
Similarly, Thailand has established a program to help it provide cheap medicines to people
with AIDS by issuing compulsory licenses on several patented medicines to ensure that they
are available at more affordable prices than they would otherwise be (Action for Global Health,
2007). The WIPO (2003) report indicated that Singapore and Korea have also adopted a proactive
approach to patent policy such that it promoted patent licensing, joint ventures, and strategic
alliances to encourage local inventions as well as foreign direct investment. Indeed, The WTOs
Doha Declaration in 2001 accepts governments rights to use compulsory licensing as a means
to facilitate access to cheaper medicines through import or local production (Commission on
Intellectual Property Rights, 2006).
Second, though IPR protection has been recognized as part of the infrastructure supporting
investments in R&Dleading to innovation and subsequent economic development (Kanwar, 2006;
World Bank, 2005, and World Intellectual Property Organization (WIPO), 2003), it is also known
that strengthening IPR has costs (Horii & Iwaisako, 2007; Maskus, 2000a). Even more critical
is the argument that the current global IPR system favors the holders of intellectual property,
which invariably happens to be the developed countries over the users of intellectual property
that are mostly the LDCs. This is not surprising as the number of global patents originating in
the 50 countries identied by the UN as LDCs has dropped from an average of 66 per year in the
early 1990s to just 10 per year between 2000 and 2004 (UNCTAD, 2007). Incidentally, the US
net surplus of royalties and fees increased from $14 billion in 1991 to $22 billion in 2001, while
developing countries suffered a decit of nearly $7.5 billion in 1999 alone. The discussion above
is consistent with the assertion of Helpman (1993) that if anyone benets from patent protection,
it is certainly not the South.
Third, the effectiveness of the IPRs systemis dependent onhowit impacts oninnovation, market
structure, and technology transfer (Naghavi, 2005), and hence the need to enhance the skill level
or absorptive capacity of domestic rms in improving their productivity. This requires investment
in information and communications technology, and education and job training to enhance the
S. Adams / Journal of Policy Modeling 30 (2008) 725735 733
entrepreneurial capability of both individuals and rms in the production of goods and services
to partake fully in the benets that globalization brings. Bernanke (2007), for example, has noted
that the greatest cause of inequality in the era of globalization can be attributed to the very high
returns to education and consequently, policies that maximize opportunities for education and
job training will help to reduce income inequality. Obviously, workers with more education and
training will be better able to adapt to the fast paced changing demands in the workplace in the
21st century.
Finally, globalization is not completely responsible for income inequality within and across
countries. As shown in Column 1, the studys results show that the three-globalization variables
explain only 15%of the variance in income inequality. This nding is consistent with the assertion
of Stewart and Berry (2000) that though globalization might negatively affect the distribution of
income, other country conditions, including labor laws, strength of unions and a variety of gov-
ernment safety net provisions might modify or accentuate the impact of globalization on income
inequality. Rather, the evidence suggests that countries that have grown rapidly and improved
their standard of living have not only opened up their economies for trade and FDI but have also
maintained macroeconomic stability (Rodrik, 1999).
The challenge for developing countries is how to reform their IPRs regime to maximize their
gains, while limiting the potentially adverse effects of improved protection and to facilitate access
of local entrepreneurs to the IPR system as has been done in India, Thailand, and South Korea. It
has also been argued the developed and those developing countries that have achieved substantial
growth rates have all ne tuned their IPRs system to match their development needs, rather
than blindly implementing a wholesale IPRs policy (CIPR, 2002; Dolfsma, 2006; Kumar, 2002;
Maskus, 2000a). These studies suggest that there has generally been an association with weak
rather than strong forms of patent protection in the formative period of economic development
and the IPRs regimes strengthened as countries became signicant producers of innovations and
new technology as seen in Korea and India.
In discussing the ndings and implications of the study, it is worth mentioning the limitations
of the study. First, the time period is not long enough to make conclusive statements about the
effect of globalization on income inequality. Data constraints made that impossible. Second, the
changing macroeconomic and political events in the various developing countries suggest that we
might not be able to capture all the factors that might inuence income inequality. The limitations
and the inconsistency of the other studies reviewed suggest that many more country-specic
studies are needed to validate the more global studies. Further, as more consistent data on income
inequality becomes available for many developing countries, it will be possible to evaluate the
long-run effects of globalization on the distribution of income
We conclude by asserting that globalization is neither inherently good nor bad for developing
countries, as current debates seem to suggest. Instead, globalization has both costs and benets.
However, the opportunity for economic gains can be best realized within an environment that
supports skilled resources, sound and credible government institutions, and technological devel-
opment. Without these fundamentals, the pursuit of economic gains through trade liberalization,
establishing incentives to attract FDI, and strengthening of IPR will not be achieved for develop-
ing countries. Clearly, the literature reviewed and the ndings of this study call for IPR regimes
norms to be ne-tuned to establish a balance between intellectual property protection and eco-
nomic development of developing countries. Globalization, even though may be biased against
developing countries, has created a situation in which countries with the appropriate policies
might be able to succeed in bringing about economic development as is the case for most of the
Asian economies.
734 S. Adams / Journal of Policy Modeling 30 (2008) 725735
Appendix A
List of countries in study sample
Algeria Ecuador Malaysia Senegal
Argentina Egypt Mali Sierra Leone
Bangladesh El Salvador Mauritania South Africa
Bolivia Ethiopia Mexico Sri Lanka
Botswana Ghana Morocco Swaziland
Brazil Guatemala Mozambique Tanzania
Burkina Faso Guyana Nepal Thailand
Burundi Honduras Nicaragua Tunisia
Cameroon India Niger Uganda
Central African Rep Indonesia Nigeria Uruguay
Chile Iran Pakistan Venezuela
China Jamaica Panama Vietnam
Colombia Jordan Paraguay Zambia
Costa Rica Kenya Peru Zimbabwe
Cote dIvoire Madgascar Philippines
Dom Rep Malawi Rwanda
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