How Globalization Affects Economic Inequality and Redistribution

Globalization has significantly transformed the global landscape, making the world more interconnected than ever before. Its impact on economic inequality and redistribution is a topic of intense debate. In this article, we explore how globalization influences the disparity between the rich and the rest, and the role of government policies in redistributing these benefits.

Globalization and the Evolution of Economic Opportunities

Imagine the world in 1800. A talented singer could only reach a limited local audience, limiting their earning potential to a small amount. In the early 1900s, with the advent of recording and radio, this same singer could now reach audiences across multiple states, earning significantly more than an average singer whose talents were confined to a smaller, localized live audience. Fast forward to 2010, and globalization has further expanded this singer's reach, making them a global star with earnings far beyond the average.

Impact of Globalization on Economic Inequality

The following example illustrates how globalization can affect the distribution of wealth within a company. Consider a small marketing firm with one owner and ten employees, each earning $50,000 annually. If this company operates on a local market, it earns $1 million annually, with the owner taking $500,000 and distributing the remaining $500,000 among the employees.

However, globalization changes this equation. The company now targets a global market and doubles its revenue to $2 million. The owner, to cut costs, fires the ten employees and hires new ones from a developing nation, paying them $10,000 each. As a result, the owner now earns $1.9 million, and the employee compensation is only $100,000 in total.

From a purely economic standpoint, this seems like a clear example of how globalization benefits the wealthy, with a significant increase in the owner's income from $500,000 to $1.9 million. However, this overlooks the role of governmental policies in redistributing the benefits of globalization.

The Role of Government in Redistribution

In the second scenario, the government implements a tax policy that allows the owner to keep the first $1 million tax-free. For the additional $900,000, 60% are taxed, and the collected funds are used to retrain the former employees, ensuring that they earn $60,000 annually. In this case, the owner's income increases to $1.3 million, and the former employees' earnings increase to $60,000 each.

This example demonstrates that globalization alone does not inherently benefit the 1% at the expense of everyone else. It is the policies implemented by national governments that determine whether the benefits of globalization are distributed fairly.

Conclusion

Globalization can significantly change economic landscapes, but it is not the sole factor determining economic inequality. It is the policies and actions of governments that shape how the benefits of these changes are distributed among citizens. While globalization may initially seem to favor the wealthy, effective redistribution policies can ensure that the benefits are shared more widely.

Ultimately, the goal should be not just to increase the overall economic output, but also to ensure that this growth is inclusive, benefiting a broader segment of society.