The Effect of Globalization on Income Inequality in Developing Countries: A Bayesian Approach

Abstract

The rapid advancement of economic globalization over the last several decades has sparked fierce disagreements about its impact on income inequality on a global and domestic scale. Whether globalization improves (neoclassical theory) or worsens (dependence theory) income inequality is a matter of debate at the theoretical level. The results of empirical studies have been contradictory as well. This study examines the effects of three lenses of globalization (financial openness, trade openness, and social globalization) on income inequality in developing countries. Using Bayesian estimation with Markov Chain Monte Carlo, we analyze a balanced panel of 36 developing countries from 2010 to 2022. The Bayesian method is particularly well-suited for social science research because of its capacity to effectively manage complex relationships and integrate prior information, resulting in more contextually relevant and robust results. The findings reveal significant nonlinear relationships between different dimensions of globalization and income inequality. Specifically, the impact of trade openness on income inequality is U-shaped, with a threshold of 83.35% of GDP, whereas the impact of direct foreign investment and migration is in an inverted-U shape, with respective thresholds of 13.4% of GDP and 1.276% of the total population. Importantly, all sampled countries remain below the identified thresholds for direct foreign investment and migration, indicating that these channels currently exacerbate inequality. Consequently, policy measures designed for “post-threshold” conditions should be viewed as forward-looking. This study contributes by clarifying how globalization can alternately worsen or reduce inequality depending on a country’s stage of integration. From a policy perspective, developing countries should strengthen absorptive capacity and institutional readiness so that higher direct foreign investment inflows and migration eventually yield more equitable outcomes once thresholds are surpassed. Meanwhile, countries already beyond the trade openness threshold should proceed cautiously, prioritizing export diversification, vocational training, and inclusive trade policies to mitigate inequality risks.