Discussion Paper Series 2004-E-20

Globalization, Inequality and Development: The Big Picture

William R. Easterly

Models of trade and factor flows based on differences in factor endowments give clear predictions as to how globalization affects inequality and development. Models in which productivity differences between countries drive trade and factor flows gave more ambiguous predictions. Unfortunately, productivity differences seem necessary to understand many, though not all, Big Picture globalization, inequality, and development outcomes. The factor endowment predictions help give us insight into how the North Atlantic economy achieved decreasing inequality between countries in the last five decades. They also give us insight into the Great Migration of Europeans from the land-scarce Old World to the land-abundant New World in the late 19th and early 20th century, accompanied by the predicted movements in land rentalwage ratios. However, productivity differences appear to be an important facet of many globalization, inequality, and development episodes. In the Old Globalization era, they seem to be crucial to understand the lack of convergence between North Atlantic economies, the Great Divergence between rich and poor countries in that same era, and the bias of capital flows towards rich countries. In the New Globalization era, productivity differences are important to capture the very different performance of poor country regions in recent decades, the flow of all factors of production towards the rich countries, the low returns to physical and human capital in many poor countries, and the "perverse" behavior of within-country inequality in reaction to trade and capital flows.

Keywords: Globalization, Trade, Capital flows, Migration, Education, Development.

Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.

Copyright © 2004 Bank of Japan All Rights Reserved.

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