The paper examines the relationship between the rapid pace of trade and financial globalization and the rise in income inequality observed in most countries over the past two decades. Using a newly compiled panel of 51 countries over a 23-year period from 1981 to 2003, the paper reports estimates that support a greater impact of technological progress than globalization on inequality. The limited overall impact of globalization reflects two offsetting tendencies: whereas trade globalization is associated with a reduction in inequality, financial globalization-and foreign direct investment in particular-is associated with an increase in inequality. [JEL F13, G32 T echnological progress and globalization are widely regarded as two of the main drivers of recent economic growth. One can broadly think of technological progress as the development and spread of new ideas and methods that enhance productivity and efficiency, and globalization as a catalyst of technology that facilitates the diffusion of ideas and methods around the world through, for example, openness to trade and FDI.Although the majority of technological innovation occurs in a handful of advanced economies (Helpman and Hoffmaister, 1997; World Bank, 2008), developing countries can potentially and disproportionately benefit from imitation of existing technologies. According to a World Bank report, Global Economic Prospects 2008: Technology Diffusion in the Developing World, yrapid technological progress in developing countries has helped to raise incomes and reduce the share of people living in absolute poverty from 29 percent in 1990 to 18 percent in 2004. The dismantling of trade barriers in many developing countries over the past 20 years has dramatically increased their exposure to foreign technologies. The ratio of high-tech imports to GDP in developing countries has more than doubled since 1994. The easing of restrictions on FDI has also contributed to technology diffusion within developing countries. FDI is a major source of process technology and 'learning by doing' opportunities. FDI can also have significant spillover effects on domestically-owned enterprises. For example, leading call center companies from France and Spain have paved the way for domestically-owned and export-oriented call centers in Morocco and Tunisia.Although technology and globalization may be cornerstones of the unprecedented growth of the world economy over the last two decades, what is less clear and still fiercely debated is their distributional effects. Rising inequality across most countries over the past two decades poses one of the greatest challenges to economic policymakers in both developed and developing countries. While improvements in technology, liberal marketoriented reforms, and the entry of China and countries from the former Soviet bloc into the global economy have led to an unprecedented level of integration of the world economy-surpassing the pre-World War I peakthe benefits of rising incomes and aggregate GDP growth rates associated with globalizatio...

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We examine the relationship between the rapid pace of trade and financial globalization and the rise in income inequality observed in most countries over the past two decades. Using a panel of 51 countries over a 23 year period from 1981-2003, we find that technological progress has had a greater impact than globalization on inequality. The limited overall impact of globalization reflects two offsetting tendencies: whereas trade globalization is associated with a reduction in inequality, financial globalization-and foreign direct investment in particular-is associated with an increase in inequality. We find that policies aimed at reducing barriers to trade and broadening access to education and credit can allow the benefits of globalization to be shared more equally. A key finding is that both globalization and technological changes increase the returns on human capital, underscoring the importance of education and training in both developed and developing countries in addressing rising inequality.

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