international institutions, globalization and the inequality among nations

8/6/2019 International Institutions, Globalization and the Inequality Among Nations

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Progress in Development Studies 9, 4 (2009) pp. 32337

2009 SAGE Publications 10.1177/146499340900900406

International institutions, globalizationand the inequality among nations

Amitava Krishna Dutt

Department of Economics and Policy Studies,University of Notre Dame Notre Dame, IN 46556, USA

Kajal MukhopadhyayDigitas, New York, NY, 10010, USA

Abstract: In the 1950s, Gunnar Myrdal pointed out that while inequality between regions within manyeconomically advanced countries was falling due to the policies of national government, inequalitybetween countries was growing, given the absence of anything resembling a world government.Since then, international institutions such as the United Nations (UN), the International MonetaryFund (IMF), the World Bank (WB) and the World Trade Organization (WTO) have grown in sizeand scope. This paper uses econometric techniques to argue that these institutions, by liberalizingand increasing international trade and capital ows, have not had the effect of reducing inequalityacross nations and may, in fact, have exacerbated it.

level; ( ii) promote macroeconomic stabilityby affecting global liquidity; and ( iii) improvethe distribution of global income amongcountries. Moreover, they can coordinate theinternational policies of individual countries.This paper examines the distributional role of

international institutions in the global economy,by which they can affect the inequality amongcountries.

An earlier version of this paper was presented at a Symposium on International Institutions and International PoliticalEconomy, Centre for the Study of International Institutions, Faculty of Social and Economic Sciences, University of Innsbruck, Innsbruck, Austria, 12 May 2004.

I IntroductionInternational institutions have an important roleto play in the world economy. Analogous to therole played by the state in individual countries,international institutions can: ( i) improve theefciency of the global economy by addressing

market failures, for instance, those due toimperfect competition, externalities and publicgoods that are relevant at the international


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324 International institutions, globalization and the inequality among nations


The role that international institutionscan play in promoting equality among nationswas discussed almost half a century ago byGunnar Myrdal. Myrdal (1957) drew atten-tion to the large disparities that existed in

the levels of income per capita between richand poor countries, and pointed out thatthese disparities were increasing over timedue to the fact that what he called spreadeffects (by which growth in rich countriesstimulated growth in poor countries) wereweaker than backwash effects (by whichgrowth in rich countries made growth moredifcult in the latter). He contrasted theseinequalizing trends in the world economywith the experiences of rich countries, within

which regional disparities tended to fall overtime. He argued that in rich countries, suchas those of Western Europe, state policieswhich are directed toward greater regionalequality have been initiated: the market forceswhich result in backwash effects have beenoffset, while those resulting in spread effectshave been supported (Myrdal, 1957: 3940).He argued that, in the absence of a worldstate, such a created harmony could not beestablished in the global economy. Writing onlya few years after the formation of the UnitedNations (UN) and specialized agencies suchas the International Bank of Reconstructionand Development (IBRD), he pointed out wehave hardly more than the faintest beginningsof something like an international authoritywhich could perform for the world as a wholethe task of the national state in an individualcountry (Myrdal, 1957: 63).

Since the publication of Myrdals book,

international institutions such as the UN,International Monetary Fund (IMF), theWorld Bank and the World Trade Organization(WTO) have grown considerably in size, scopeand influence. The growth in influence of international non-government organizations,and their coordination at international con-ferences, has led some observers to see inthem the beginnings of a global parliament.

The implication of these developments forglobal inequality and especially the inequalitybetween the rich North and the poor South istherefore of great interest.

We now also have a more systematic body

of data examining trends in the inequalityamong countries than was available at thetime of Myrdals writing. This data has beenanalyzed by many economists, and a consensusseems to have emerged that the inequalityamong countries has been growing over time.Different methods of examining internationalinequality, usually measured in terms of percapita purchasing-power parity-adjustedincome or product, in terms of standard in-equality measures such as the log variance,

the Gini coefcient and the Theil index, andgrowth rate comparisons such as those takingaverage growth rates of rich, middle and low-income countries, or regressions of growthrates on initial income or product levels, showthat inequality between countries has beenincreasing. There is also evidence that thedistribution of countries according to incomelevels is bimodal with a thinning middle andwith the twin peaks moving apart. Moreover,the mobility of countries between differentquintiles of the distribution is very low. 1

The trend does not, in itself, imply thatthe international institutions are to blame forthis increase in inequality. Other factors, forinstance, internal changes in individual coun-tries which are independent of the activities of the institutions, or the normal evolution of theinternational economy, may have conspired toincrease inequality; indeed, it is possible thatthe increase in the inequality among countries

may have been greater had the internationalinstitutions not existed.

The purpose of this paper is to examinewhether international institutions have con-tributed to the alleged increase in the inequal-ity among nations by focusing on some of the changes in the global economy that theyhave promoted. In particular, we examinethe impact of some widely used measures of


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Amitava Krishna Dutt and Kajal Mukhopadhyay 325


globalization on the inequality across nations,that is, international trade, and internationalcapital ows.

The rest of this paper proceeds as follows.Section 2 briey reviews the activities of themajor international institutions, especially theBretton Woods institutions and the WTO, toargue that we can represent their role in theglobal economy in terms of changes in worldtrade and capital ows. Section 3 discussesthe method we use in our empirical analysis toexamine the role of international institutionsin affecting the inequality among nations.Section 4 presents our empirical results, andSection 5 concludes.

II International institutions and globalizationThe international institutions which existtoday affect the world economy in a variety of ways. To analyze the role of these institutionsin affecting the inequality among nations,we briefly consider the main internationalinstitutions which affect global economicdevelopment, and examine how we maycharacterize their role in a simple manner. Weconsider in turn the United Nations and its

related organization, the two Bretton Woodsinstitutions, that is, the IMF and the WorldBank, the WTO, and other institutions. 2

The international institution that comesclosest to being a world government is, of course, the UN. Although its main goal isthe maintenance of world peace, from itsinception, the UN has taken the view thatinternational peace and economic progressare linked, and has committed itself to socialprogress and development and to higher stand-

ards of living, especially in the developingworld. To focus its commitment to help thedeveloping world, the General Assembly of theUN has proclaimed successive developmentdecades. The second of these, adopted in1970 and called the International DevelopmentStrategy, had the explicit goal of closingthe gap between rich and poor nations byencouraging cooperation between the North

and the South in all spheres of economic andsocial life and by calling for a certain level of the transfer of resources from rich to poorcountries for development purposes. The UNundertakes numerous development projects

in Less Developed Countries (LDCs), mostof them coordinated and administered bythe United Nations Development Program(UNDP) established in 1965. These projectsare diverse in nature, ranging from agricul-ture and manufacturing, transportation andcommunications, to health, social welfare,environmental protection and communitydevelopment. There are also numerousspecialized agencies of the UN concernedwith specic sectors or issues, including the

World Health Organization (WHO), theFood and Agriculture Organization (FAO),the International Labor Organization (ILO)and the United Nations Conference on Tradeand Development (UNCTAD).

Although the UN has a huge bureaucracyand is involved with a large number of projects,the role of most of the UN agencies in affectingoverall development patterns is arguably quitelimited. Their work is aimed at individualprojects increasingly especially from the1990s to promote human-developmentobjectives. On broader development policyissues, especially concerning North-Southeconomic relations, they merely conductresearch, provide advice, formulate policy prin-ciples and announce goals. They are also oftenresource constrained and have little power toaffect policy-making in countries, especially inadvanced countries. The possible growth anddevelopment impact of the projects funded by

the UN agencies can be measured by ofcialdevelopment assistance, which includes dis-bursements of loans (net of repayments of principal) and grants made on concessionalterms by official agencies of the membersof the Development Assistance Committee(DAC), and by other multistate institutions. Bythis measure, the total development assistanceto low- and middle-income countries as a


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percentage of their Gross Domestic Product(GDP) has fallen quite consistently, during thelast two decades or so.

Arguably, the Bretton Woods institutionshave a much greater impact on internationaldevelopment. Although the precise nature of the activities of, and policy advice given by,the two powerful institutions the WorldBank and the IMF to developing (and nowpost-socialist) countries may have changedover the years, the basic principles governingthe institutions are neo-liberal in nature, andare known as the Washington consensus. 3 The goal of the institutions at their inceptiontowards the closing years of the SecondWorld War, following Keyness vision, was to

have a well-ordered international economicsystem with national governments playing amajor role in regulating national economiesand the international economic system. Thesubsequent neo-liberal stance was arguablyshaped by the dissatisfaction, especially afterthe 1970s, with earlier development experiencewhich was dirigiste in nature, and the pressuresimposed by Transnational Corporations(TNCs), international nancial market inter-ests, and the US Treasury, which wanted

greater access to global markets. We will notdiscuss all the elements of the policy advicegiven by these institutions (but see Pieper andTaylor, 1998, for a useful review) but mentionsome major issues that affect overall growthand international economic relations.

The primary purpose of the IMF is tostabilize economies experiencing balance of payments problems by reducing trade decits(especially by reducing imports) and sometimesby controlling ination. Its advice is scal and

monetary austerity and currency devaluation.The World Banks advice is more broad-ranging,since it involves structural adjustment, whichrequires that countries depart from their earlierimport substituting industrial policies, which isargued by it to have distorted the economy andled to various kinds of inefciencies. Standardrecommendations include: ( i) removal of non-tariff barriers and reduction of imports tariffs;

(ii) reduction of capital controls, includingthose on foreign exchange transactions andprot remittances; (iii) nancial liberalization;(iv) rationalization of domestic tax systems,generally by reducing taxes on the rich; and

(iv) reducing domestic subsidies, includingthose on production. In recent times, the IMFhas become involved in promoting morecomprehensive reforms beyond stabilizationin a narrow sense, pushing, for instance,capital market liberalization and wholesaleindustrial restructuring (see Stiglitz, 2002).Although what these institutions provide arerecommendations, they are obeyed becausetheir representatives supply hard currency intimes of trouble (in the case of the IMF) or

funnel funds to development projects, mostlyafter raising them from private sources (in thecase of the World Bank).

The activities of these two institutionshave a variety of effects on internationaldevelopment. First, the IMF-guided stabiliza-tion programs are contractionary and arguablylead to lower rates of growth, at least forthe short and medium run (see Killick, 1995,Stiglitz, 2002). However, the poor growthperformance of countries which requirestabilization are at least in part due to theirbalance of payments problems, and the IMFbelieves that the austerity measures are nec-essary for restoring long-run growth. Giventhe controversial nature of this effect of theIMFs activity, we do not incorporate it in ouranalysis, thereby arguably loading the dicein favour of the international institutions.Second, both the IMF and the World Bankare in the business of increasing capital ows

to developing countries, the former by provid-ing nance to tide over balance of paymentsproblems and the latter for developmentpurposes. Both institutions, however, affectcapital ows primarily not by the funds theythemselves make available, which are small,but by the private ows that they facilitate. 4 Third, the World Bank, and increasingly theIMF, has promoted reforms based on the


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Washington consensus which make economiesmore market-oriented and more open to tradeand capital ows.

The WTO oversees the more importantinternational agreements in four main areas:

(i) trade in goods; ( ii) trade in services withthe General Agreement on Trade in Ser-vices(GATS); ( ii i) intellectual property rightswith the Agreement on Trade-Related As-pects of Intellectual Property Rights (TRIPSAgreement); and ( iii) foreign direct invest-ment with the Trade-related InvestmentMeasures (TRIMS). The main purpose of theWTO is to reduce barriers international tradein goods and services. The TRIMS agree-ment also attempts to reduce restrictions

on foreign direct investment by phasing outperformance requirements imposed by hostcountries on transnational corporations,especially those related to trade, includinglocal content requirements, limitations onthe use of imported components, and exportrequirements. The TRIPS Agreement is acomprehensive multilateral agreement whichestablishes obligations on all WTO membersintellectual property rights policies where thestandards are comparable to those of the majorindustrial countries, and imposes barriers ontechnology transfers. By protecting intellectualproperty rights, it arguably has the effect of increasing trade and foreign direct investment,preventing poor countries from copying rich-country products.

In addition to those just discussed, thereare numerous other international institutions.For instance, civil society, comprising non-prot organizations and voluntary associations

dedicated to civic, humanitarian, economicand social causes, now plays an increasingrole in the global arena. During the 1990s,these organizations have promoted treaties tolimit global warming, defeated a multilateralinvestment agreement and mounted a cam-paign to cancel the international debts of the worlds poorest countries. A millenniumnon-government organization (NGO) forum

held at the UN in May 2000, to which the UNsecretary-general invited 1,400 representativesof international civil society groups to presentviews on global issues, agreed to establish apermanent assembly of civil society organ-izations. The participation of business elitesin the international economic system isalso becoming institutionalized. The WorldEconomic Forum, at Davos, Switzerland,has emerged as a forum in which many of theworlds most powerful business leaders meetwith many of the worlds senior policy-makersover roundtables and presentations, makingrecommendations on shaping global policy.The Forum also conducts and disseminates itsresearch, and has consistently been supportive

of neo-liberal policies. Although some see inthese institutions a possible foundation of aworld parliament (see Falk and Strauss, 2001,for instance), their role in affecting inter-national development does not match that of the Bretton Woods Institutions and the WTO.The more powerful business leaders, in anycase, echo the neo-liberal market-orientedapproaches of these institutions.

Based on this brief discussion of inter-national institutions, in the rest of this paper,

we will characterize their effects on the inter-national economy as promoting globalizationthrough the expansion of world trade andcapital ows. The increase in internationaltrade follows from the promotion of tradeliberalization by the WTO and the BrettonWoods institutions. The increase in capitalows follows both from the neo-liberal policieswhich bring about financial liberalization,including capital account liberalization, andthe reduction of restrictions on TNCs, and

from their efforts at increasing governmentalresource transfers and private capital ows fordevelopment purposes. Given the decline inofcial grants, the bulk of capital ows consistsof private capital ows.

Four comments by way of clarication are inorder before we proceed with our examinationof the relation between global inequality andthe role of international institutions through


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their effects on trade and capital ows. First,we do not mean to suggest that all of themajor effects of international institutionson the global economy can be captured byfocusing on international trade and capitalows. Clearly, the institutions have effectsthrough many other channels, for instance,through their contractionary macroeconomicpolicies, foreign aid in the form of grants,and by promoting various types of internalliberalization (though the latter arguably in-crease globalization as well). Second,international trade and capital flows haveincreased not just because of the activities of international institutions, but also because of technological changes which reduce the costs

of transport and communications. This is be-cause of policies that do not emanate from theinternational institutions, and also because of changes in the structures of the economies of various countries (for instance, changes in theirpatterns of comparative advantage). While ouranalysis should not take into account changesin international trade and capital ows becauseof changes in internal structures, there is noharm in taking into account changes in thetechnology of transport and communication,

since the effects of these are similar to those of changes due to the liberalizing policies pursuedby the international institutions. Third, ourfocus on international trade and capital owsimplies that our analysis can be interpretedas an examination of the effect of globaliza-tion on the inequality between nations. Thisis not surprising, because the internationalinstitutions have been among the most power-ful supporters of globalization. Rigorous em-pirical work on the effects of globalization

on the inequality among nations taking intoaccount both trade and capital ows is rare;our analysis therefore contributes to thatliterature. 5 Our analysis does not examineall the channels by which globalization canproceed, such as technology transfers andlabour movements, but these channels arenot promoted by international institutions, andat least, the last appears to be an absentee in

the recent globalization process. Fourth, ouranalysis examines the effects of internationalinstitutions through the expansion of trade andcapital ows as it has actually occurred, and notin some idealized way that it could occur. It has

been convincingly argued that in many waysinternational institutions such as the BrettonWoods Institutions (because of their votingschemes which allocate votes to countriesaccording to nancial contributions) and theWTO (because of the way decisions are madeby members and the manner in which disputesare settled) load the dice against poor countriesin their interactions with rich countries (see,for instance, Raffer and Singer, 2001). Whileour analysis does not require these criticisms

to be valid ones, and are quite consistent withwhat may be considered neutral liberalization,this discussion underscores that our analysisexamines trade and capital flows as theyactually occur, rather than in a way which isbenecial to the development prospects of LDCs.

III MethodologyThe method adopted in our work is to applyeconometric time series analysis to measuresof the extent of inequality across countries andthe degree of globalization using as large a setof countries as data allows.

We measure inequality with the standarddeviation of the logarithm of per capital in-come, a measure of inequality across nationswidely used in the literature (see Barro andSala-i-Martin, 1995). The rst two diagramsin Figure 1 show how this statistic impliesdivergence using World Bank data on per capita

real GDP gures from 1960 to 1999, and pur-chasing power parity-adjusted per capita realGDP gures from 1975 to 1999, both of whichwe use in our analysis.

Our measures of globalization focus ontrade ows as measured by the world tradeto GDP ratio and capital ows as measured bythe sum of the absolute values of the currentaccount gap to GDP ratio, the series for which


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for the periods 1960 to 1999 and 1977 to 1998,respectively, are shown in Figure 1. Theseseries have been widely used as measures of

globalization (see, for instance, ORourke,2002). The trade measure shows increasingglobalization while the capital ow measuredoes not show a clear trend, suggesting thatthe extent of globalization in terms of capitalows is not as large as often suggested by othermeasures. While the trade measure is relativelyuncontroversial, we have used the currentaccount measure of capital flows because

it reflects longer term resource transfers,abstracting from short-term hot-money ows,which are more difcult to measure and often

seen as a problematic aspect of globalization.6

An alternative measure of capital ows is theratio of world foreign direct investment (FDI)to world GDP, but this ignores other forms of long-term ows such as borrowing and equityows not included in FDI ows, and the dataare highly unreliable and problematic. Thecurrent account surplus ignores gross ows,but this may not be a problem if one wishes

Figure 1 Time series plots of the dataSource: Authors calculations.


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to focus on long-term resource transfers, as isour objective here.

Our empirical analysis is based on twotechniques of vector autoregressive (VAR)methods, namely, Granger causality (hence-

forth GC) and impulse response (henceforthIR) analyses.As is well known, Granger causality is a

test of statistical precedence in which jointsignicance of lagged values of one variable,say xt is tested on a dependent variable yt. Thetest is based on the (Ordinary Least Squares)OLS regression of yt on lagged values of both

xt and yt. The null hypothesis of xt does notGranger-cause yt is rejected if the F -test (orasymptotically a Chi-squared tests) of the

joint signicance of the coefcients of xts isrejected. In that case, one would conclude that

xt Granger-causes yt in the sense of statisticalprecedence. The causality tests can easily beextended to a system of equations (such asa VAR) with more than two variables, andpair-wise causality tests can be constructedbetween any two series.

Generally speaking, Granger causality(GC) tests have one major pitfall. If any of theseries in the VAR has unit-root, the GC teststatistic will not follow a standard distribution(see Phillips, 1995, Toda and Phillips, 1993).Toda and Phillips (1993) suggested a fully-modied VAR (FMVAR) estimation techniquewhich uses a reduced rank approach to testGC in the levels of the variables. Phillips (1995)also suggested an alternative method using

Johansen-type error correction mechanism(ECM) models with correct co-integrationrank for the non-stationary series. GC tests

under these modified techniques produceasymptotically Chi-squared test statistics.Toda and Yamamoto (1995) (henceforth TY)came up with an alternative but computationallysimpler technique for testing GC. In this paper,we use TYs modied GC tests.

To use TYs procedure for testing pair-wise Granger causality, we dene a p variableVAR( k) model as follows:

y t = c + 1 y t 1 + ... + k y tkv + u t,u t i.i.d N (0, ) t = 1, K, T , (1)

where, y t = ( y1, y2, ..., y p). In this model,the null hypothesis of non-causality from ithcomponent of y

tto the j th component

can

be expressed as the ( j,i) element of all thecoefcient matrices ( l, l = 1, ..., k) beingequal to zero. If dmax is the maximum orderof integration for all the variables in y t, thenaccording to TYs procedure, we estimateequation (1) using OLS for ( k + dmax ) lags anduse only the rst k ls to construct the Waldtest statistics.

Let S j be a ( p 1) unit column vectorwith unity at the j th place. For example, in a

3-variable VAR system (i.e., p = 3), S2 = (0,1, 0) ' . Let Sij = S j ( I k Si), where I k is theidentity matrix of order k. Now we dene thecoefcient vector of the p-variable VAR( k)system as = vec( ) where vec( ) is a columnvector obtained by stacking the rows of = ( 1, K, k). The Wald test statistic forthe null hypotheses of Granger non-causalityfrom yit to y jt can now be dened as,

W ij = T {Sij ^} [Sij

^S ij ] Sij

^

where ^ is the ordinary least square estimateof and

^ is a consistent estimate of theasymptotic covariance matrix of T ( )^ .TY showed that the W ij has an asymptotic Chi-squared distribution with k degrees of free-dom when the maximum order of integrationis dmax . We need to specify two things for thismodied GC test to work, that is, ( a) the maxi-mum order of integration of the variables inthe system and ( b) the lag length for the VAR

specication.Granger causality tests only provide dir-

ection of causality between two (or two groupsof ) variables. They do not reect whether thecausality is negative or positive in the sense thatwhether one variable causes an other variableto rise or fall over time. In general, if xt Grangercauses yt, then for a small change in xt at timet, all the coefcients of the lagged values of xt


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should jointly determine the changes in thefuture values of yt. However, IR analyses maybe used to determine the signs of the effects.

The standard method for determiningthe impulse responses in a VAR system is asfollows. Dening the VAR in the levels of thevariables, one gives unit shocks to each of the system equations and then traces the re-sponses of all the variables for the future timeperiods. Generally, impulse responses are thedynamic effects of the changes in the variablesin a system.

Phillips (1998) showed that if a VARsystem includes variables in levels that arenon-stationary, then the impulse responsesmay converge to a random walk process in

the long run giving misleading estimates of the responses. He suggested using FM-VARor some other reduced rank approaches suchas ECM based on co-integration to plot theimpulse responses. Some researchers haveargued that the short-range estimates (withinplus/minus ve periods or so) of the impulse

responses are generally robust to the non-stationarity of the variables.

In this paper, we use the ECM basedmethods for dening the VAR and the impulseresponses. Further, we use generalized impulseresponses (Pesaran and Shin, 1998) to avoidthe need for imposing some arbitrary orderingof the VAR system variables.

IV Empirical resultsAs a rst step, we tested each of our series oninequality and globalization for possible non-stationary behaviour. Using the augmentedDickey-Fuller (ADF) tests, we have foundthat inequality (by both measures), tradeand current account balance series have

unit roots in their levels only and therefore,exhibit properties of I(1) series. The unit rootproperties of the series are needed to deter-mine the maximum order of integration, dmax used in the TY method.

Our results for the modified Grangercausality tests are shown in Table 1. 7

Table 1 Modied Granger causality (Wald) test statistics for different VAR systems.The p-values are in the parenthesis. The null hypotheses in this case is: each variablein the rows does not Granger cause each variable in the columns (wheneverappropriate). Order (Lag) column indicates the maximum order of integrationaccording to TY (1995) and the lag order for the VAR

VAR specication Order (lag)

Does not GC

Inequality Trade Current a/c

Real GDP 1 (1) Real value GDP for Inequality measureInequality 0.5556

(0.4560)3.0813

(0.0792)Trade 12.6158

(0.0004)0.0892

(0.7651)Current a/c 7.0603

(0.0079)10.5323(0.0012)

PPP-adjusted GDP 1 (1) PPP value of GDP for Inequality measureInequality 1.7437

(0.1867)0.1823

(0.6694)Trade 5.6048

(0.0179)0.0623

(0.8029)Current a/c 0.4752

(0.4906)13.1212(0.0003)

Source: Authors calculations.


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Using real GDP gures, we nd both tradeand capital ows Granger-cause inequality atthe 95 per cent level of signicance, capitalows Granger-cause trade at the 95 per centlevel, and inequality causes capital ows atthe 90 per cent level. We nd no evidence of causality from trade to capital ows, or frominequality to trade.

Turning to the results with PurchasingPower Parity (PPP) dollar values, we nd thattrade Granger-causes inequality and currentaccount Granger-causes trade, both at the95 per cent level. The other variables do notGranger-cause each other.

The results for our impulse responseanalysis using the vector error correction

(VEC) model with the correct rank of co-integration are shown in Figure 2. Therank of the co-integration is chosen by theminimum Schwarz criteria from amongvarious combinations of VAR lag lengths(with maximum lag order being 3) andthe co-integration specifications (with fivedifferent specications based on the presenceof intercept and trend in the data series andco-integrating equation). Further, the IRsare calculated using generalized responses

as suggested by Pesaran and Shin (1998). Allthe responses shown are cumulative, so thatthe effects of a permanent change in one vari-able on the others are depicted in the diagrams.A simple generalized IR calculated from VARin levels, ignoring the non-stationarity of theseries, showed similar responses (but is notreported here).

For real GDP data, we nd that a one stand-ard deviation positive shock to trade results inan increase in cross-country inequality, and a

shock to inequality also leads to an increase intrade. An increase in capital ows leads rst toan increase in inequality that is then somewhatreversed, and then leads again to an increase ininequality. A positive shock to inequality alsoleads to an increase in capital ows.

For PPP-adjusted data, we nd that a shockto the current account has a slightly positiveeffect on inequality, while trade increases

inequality. A shock to inequality has no effecton current account, and a positive effect ontrade. Shocks to trade and current accountproduce negative responses on each other.

V ConclusionsThis paper has applied VAR models on somestandard data series on global inequality andglobalization measures to examine the relationbetween the inequality among nations and therole of international institutions.

Our main conclusion is that the data sup-port the conclusion that some of the majoraspects of globalization following from theactivities of international institutions leadto an increase in the inequality across nations.

An increase in global trade is found to Granger-cause inequality and shocks to trade are foundto increase inequality. A positive shock to cap-ital ows measured by the current accountdecit also leads to an increase in inequality,although the Granger-causality results are notconclusive.

This conclusion goes beyond the simpleassociation of trends in increasing globalizationand inequality. We have taken into account thepossibility of causality running from inequality

to globalization and indeed found that increasesin inequality (perhaps measuring differencesbetween countries) also cause increases intrade and also perhaps capital ows. We havealso taken into account the possibility thatincreases in inequality can be caused by factorsinternal to the countries by distinguishingbetween globalization shocks (in trade andcapital ows) and others which may be internal(shocks to inequality). The conclusion alsotakes into account the possibility that different

aspects of globalization may interact witheach other. Although our causality resultsregarding this are weak, we nd that tradeand capital ows to some extent substitutefor each other.

Our empirical results imply that if inter-national institutions are to reduce the inequal-ity among nations, they should be followingpolicies other than the type of globalization


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that they have advocating and promotingaround the globe. In particular, the expansionof trade through the promotion of liberalpolicies, and the growth of international capitalows based on private incentives, even whenthey have results in resource transfers asreected by current account decits, appear tohave led to an increase in the inequality amongnations. Our results can be taken to imply thatif they are interested in promoting equalityamong nations, international institutionsshould allow poor countries to pursue moreinterventionist trade and capital ow policieswhich are more likely to bring them the bene-fits of globalization, and should facilitatemore aggressively the transfer of appropriate

technology from rich to poor countries.We should conclude by noting that ourresults should be treated merely as suggestiveones, since our analysis is subject to a numberof obvious shortcomings and caveats. Four inparticular may be noted. First, despite theirwidespread currency, the weaknesses of themethods in addressing the issue of theoreticalcausality and in not being based on a theor-etical structure are well known. However, thecausality issue is less problematic in the series

(where expectations play a weak role) wehave used, and the absence of a clear theorymay be a virtue in addressing a wide range of forces. Second, in our inequality measure, wehave treated each country as one observation,thereby not taking into account populationweights which are arguably relevant for lookingat inequality among people in the world, andalso not directly addressing the question of theinequality between rich and poor countriesas groups. Third, our globalization measures

are highly aggregative and ignore the factthat trends may reect changes taking placewithin groups of countries (though this maynot necessarily be a problem since we areinterested in the effects of globalizationbrought about by international institutions,as it is actually occurring) rather than greaterintegration between rich and poor countries.Fourth, we have focused on only some of the

activities of international institutions, and notothers, such as the conduct of stabilizationpolicy. Future work can address some of theseissues.

AcknowledgementsThe authors are grateful to Firat Demir andSeok-Hyeon Kim for helpful research assist-ance. The views expressed in this paper do notnecessarily reect those of their institutions.

Notes1. It should be noted that not all observers agree that

inequality between countries is increasing. Some arguethat the appropriate method to examine inequalityacross countries is by weighting countries accordingto population rather than treating each country as

one unweighted observation, and that if one doesso, world inequality seems to be falling, because of the fast growth of China and India, which are low-income and populous countries. It is not clear, however,that population-weighted measures are superior tounweighted measures, since we may be interestedin knowing how different countries, with their owndevelopment strategies, are doing in terms of growthperformance. One may be interested in changes ininequality across people in the world, but that shouldbe measured by combining data on within countryinequality with between-country population-weightedinequality, instead of assuming that all individuals in a

country have the same income, as population weightedinequality across countries does. See Milanovic (2005)for a discussion of these debates.

2. A more extended discussion of the role of theseinstitutions is available in Dutt (2003).

3. See, for instance, Pieper and Taylor (1998) and Stiglitz(2002).

4. For instance, International Bank of Reconstructionand Development (IBRD) type net lending by theWorld Bank fell from about 10 per cent to less than1 per cent of net capital ows to developing countriesfrom 1970 to 1996 (Toye, 2003).

5. Only a few contributions examine the effects of

globalization on the inequality across countries. Severalof these studies (Ben-David, 1993, 1996, and Dollarand Kraay, 2002) suggest that greater interactionleads to convergence, some (see Slaughter, 2001)nd that the evidence is consistent with divergence.ORourke (2002) nds that in the pre-First World Warepisode of globalization convergence was primarilydue to international labour movements, which is anabsentee in the current episode, and that the effectof trade on convergence is unclear. However, thesestudies usually examine a subset of countries of the


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world, mostly rich countries. They also mostly focuson trade liberalization and do not incorporate capitalows, except in an informal manner (in the case of ORourke, 2002).

6. Our measure also does not take into account foreignaid transfers, which are incorporated into the currentaccount and not the capital account. Since such ows,as discussed earlier, have shrunk over time, relative toprivate ows and lending, this is arguably not a seriousproblem.

7. Some of these results were presented earlier in Duttand Mukhopadhyay (2005).

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