Does Globalization Affect Inequality? An Analysis of Vietnamese Data.

• Author: Phan, Phuc Van
• Position: RESEARCH NOTE

The relationship between economic integration and income inequality is extremely contentious due to its complicated impact across key channels of globalization. This paper analyses the distributional effects of globalization through foreign direct investment (FDI) inflow and foreign trade (FT) volume. Data collected from Vietnam over the 2006-16 period provide evidence in support of the government's advocacy efforts to join the global economy. The two-step system generalized method of moments is used to construct the key estimate for this analysis with two cases: simultaneous effect and single causal effect. The findings show that while FDI worsens inequality FT counteracts this effect to a greater magnitude, and the aggregate impact of globalization on inequality is negative. As openness is found to be generally beneficial to Vietnam s economy in terms of income distribution, this study also examines potential policies related to the country's globalization ambitions.

Keywords: Globalization, inequality, foreign direct investment, foreign trade, Vietnam.

Note received: January 2021; revised: November 2021; accepted: February 2022.

1. Introduction

   Today, globalization characterizes the salient features of most modern economies. The increasing interdependency among countries is evident from the flow of goods and services, trade liberalization policies, multinational cooperation, investments, outsourcing, and economic sensitivity owing to the volatility in exchange rates and migration. Conventional analyses of the effects of globalization examine the share of imports and exports to GDP, foreign direct investment (FDI) (in/out) flows and exchange rates based on rich data sources (Goldberg and Pavcnik 2007). And it is generally agreed that extending global integration is key to economic development. The miracles of East and Southeast Asia, too, are partly rooted in the vagaries of globalization; FDI inflow and foreign trade are among the most crucial driving forces behind the regions' rapid growth (Adolf 2013).

   Nevertheless, the absence of a complete consensus on the globalization-inequality link has led to an intense debate over the nature of the relationship between these two aspects of development. Surprisingly, although there is an in-depth understanding of the fact that trade openness and financial integration affect growth and poverty, neither a fully negative nor fully positive impact of globalization on inequality has been empirically proved. Likewise, the most suitable measure of inequality is also a matter of disagreement; various quantifications, rich data and disputable proxies for living standards hinder the development of a unified framework for research on inequality (Mills 2008; Ravallion 2018). Another issue is that most globalization-related determinants of inequality appear to be very country-specific. This is because it is believed that putting curbs on the probable economic repercussions of openness should be grounded in a thorough analysis of individual countries (Goldberg and Pavcnik 2007).

   This paper investigates whether or not economic openness affects Vietnam's income distribution. The country is an interesting case study given its size and the fact that its economy has been exposed to the effects of globalization for some time now. Perceiving that reaching global markets is imperative for rapid development, policymakers in Vietnam have proactively secured the country's accession to prominent regional as well as global economic cooperation organizations such as the World Trade Organization in 2007, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership in 2019, and the European Union-Vietnam Free Trade Agreement in 2020. The process of economic liberalization, however, is being carried out on an ad hoc basis as it is simply presumed to stimulate the country's growth and national income (Kikuchi, Yanagida and Vo 2018) without a comprehensive assessment of all its multifaceted effects.

   Starting in the late 1980s, the introduction of economic reforms in the country (Doi Mai, Renovation) stimulated FDI inflow and foreign trade. After being stagnant for almost fifteen years, the volume of FDI began rising from 2006 onwards, reaching a peak of around US$9.5 billion in 2008. Despite a slight fall in the following years, FDI levels recovered, amounting to an all-time high of US$11.8 billion in 2015 (Figure 1). With respect to foreign trade activities, despite insufficient data prior to 2000, it is generally accepted that imports and exports followed the same trajectory, with total trade reaching double the size of the national GDP between 2006 and 2016 (Figure 2).

   In the context of income distribution, Vietnam is an appealing case, considering the extent to which the country has achieved swift economic success without extreme inequality. There was stable and moderate inequality in the nation between 1993 and 2016 (World Bank 2012; UNU-WIDER, World Income Inequality Database (WIID4) 2019). Indeed, the Gini coefficient of per capita household expenditure was 35.6 in 1993, peaked at 39.3 in 2010 and returned to the initial level at 35.3 in 2016 (Figure 3). However, an important caveat to this optimistic representation of income distribution is the rise in the spatial (rural versus urban communities) and ethnic (minority versus majority groups) dimensions of inequality (Benjamin, Brandt and McCaig 2017). It is therefore important to understand exactly how much economic integration has benefitted remote regions and ethnic minorities in Vietnam.

2. Literature Review

   The literature on the link between globalization and inequality offers a fairly mixed picture. In macroeconomics, conventional wisdom suggests that globalization widens the income gap in developed countries but dampens intercountry inequality. For the wealthiest group of nations, globalization wipes out lower-skilled professions, and thus labour-based income in the lower end of the distribution levels off, whereas the capital-related income rises. In contrast, labour-based earners in developing countries gain from international cooperation in terms of extended labour-intensive job opportunities and increased wages (Bourguignon 2018; Milanovic 2016).

   Ravallion (2018), however, argues that the effects of globalization, irrespective of the inductive reasoning, are exaggerated to some degree. Baybars and Greaney (2017) have documented a complicated link between integration and inequality in Asia-Pacific countries, where some nations have found the experience positive but others negative. Policymakers must therefore be wary of both anti- and proglobalization implications when it comes to income spread. Along with globalization, two other factors--institutional changes (financial deregulation, political transition, welfare policies) and technological innovations--are vital to analysing national inequality.

   This discussion in this section is confined to the globalization-inequality nexus in a developing country specifically Vietnam. On the one hand, there is growing evidence of worsened inequality stemming from exposure to economic openness (Goldberg and Pavcnik 2007). In other words, achieving equitable growth appears to be less viable in the era of widespread economic integration (Artuc, Porto and Rijkers 2019). A particular cause of increased inequality arises from globalization favouring people at the top and perhaps widening income gaps across different socio-economic cohorts. Erauskin and Turnovsky (2019) further find that economic integration ultimately raises inequality owing to its pro-rich consequences regardless of country-dependent features of globalization. In fact, a stratification among...