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Impact of Globalization and Economic Growth on

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IUB Journal of Social Sciences and Humanities Vol.6 No.2, 2008

Impact of Globalization and Economic Growth on

Income Distribution: A Case Study of Pakistan
Rana Ejaz Ali Khan and Muhammad Zahir Faridi ∗

Abstract: In economic theory globalization would result into enhanced

economic growth. Economic growth has often been given priority to an anti-
poverty measure. There are diverging evidences on the impact of globalization
on income inequality within nations. Somehow policy makers ignore the
negative link between growth and inequality. The study analyzed the impact of
globalization (trade openness, foreign direct investment and foreign
remittances) and economic growth (real GDP growth) on income inequality
(Gini-coefficient) in Pakistan. Using time series econometric technique on the
data (annual time series 1970-2005) from State Bank of Pakistan and
International Financial Statistics, it is concluded that globalization (trade
openness, foreign direct investment and foreign remittances) has significant
positive effect on income equality (Gini-coefficient). The economic growth rate
is also positively affecting the income equality. In the policy perspective trade
openness, foreign direct investment and foreign remittances may contribute in
reducing inequality.
Keywords: Globalization, Income inequality, Economic growth rate, Openness,
Foreign remittances, Foreign direct investment.
JEL Classification: E43, F21, O19, O30.

1. Introduction
Globalization has become the way to describe changes in
international economy and in world politics. Economists define it
as the free movement of goods, services, labour and capital across

∗
Assistant Professor, Department of Economics, The Islamia University of
Bahawalpur. Pakistan. E-mail: ranaejazalikhan@iub.edu.pk and Lecturer,
Department of Economics, Bahauddin Zakarya University, Multan. Pakistan,
respectively.
7

Electronic copy available at: http://ssrn.com/abstract=1559632

Impact of Globalization and Economic Growth on Income Distribution…
borders (Heshmati 2003). Globalization is the result of reduced
transportation and communication costs, lower trade barriers,
faster communication, rising capital flows, increased competition,
standardization, and migration. The process has brought the
developed economies closer together and made them more strongly
interrelated. In the new era of growing integration of economies
and societies, individuals and corporations reach around the world
further, faster, and more economically than before. It takes states
and individuals to more intense developed market forces by
causing rapid changes in trade relations, financial flows, and the
mobility of labour across the world. However, there is a large
heterogeneity in the degree of the process of globalization over
time and across countries, regions as well as within countries
across cohorts and skill groups. This heterogeneity causes disparity
in development, especially with regard to negative effects such as
rising inequality within and between countries, and points to the
need to find the sources of disparity and to quantify its magnitude
and impacts on the living conditions of the world population.
Economic liberalization has, therefore, been a much-favored
strategy with which international leaders hope to accomplish more
efficient economic management especially for developing
countries (Wagle 2005).

Policymakers in developing countries also find enough reasons to

be hesitant of embracing such path suspecting unintended negative
consequences. Economic inequality is one area in which the effect
of globalization has been highly controversial. Between nations
income inequality matters because it constitutes the major portion
of global income inequality. The study of inequality within and
between countries is critical to major theoretical traditions in
sociology and economics (to cite a familiar example, the
assumption of income bifurcation is a key component of Marx’s
theory of history). Income inequality matters because poverty is
largely a problem of distribution, not production. As the growth
has outpaced the growth in population over the past two centuries
globally. So the average person today is much richer than the

Electronic copy available at: http://ssrn.com/abstract=1559632

IUB Journal of Social Sciences and Humanities Vol.6 No.2, 2008
average person in the past. But the inequality has remained high in
a large number of developing economies.

Pakistan had long been reforming its economic policies and

institutions to promote greater openness. In 1987 it committed
itself to a comprehensive programme of structural reform to
liberalize its economic policies and to accelerate the pace of
integration with the global economy. Whether these reforms have
produced the expected growth and distributional outcome is a
question that has preoccupied the social scientists in the country
ever since. While globalization is viewed as key for higher growth
with equity, it is also argued that it reduces growth rate, increases
income inequality in developing countries. In this context, it would
be interesting to examine how the globalization process affects
growth, income inequality in Pakistan.

The major objective of our study is to examine the impact of

globalization and economic growth on income inequality in
Pakistan. It may be classified into four components as follows:
• To evaluate the growth performance of the economy;
• To analyze the impact of growth on income inequality;
• To assess the impact of trade liberalization on income
inequality; and
• To state the policy implications, keeping in view the impact of
globalization and economic growth on income inequality.

2. Conceptual Framework and Review of Literature

The period of 1870-2000 is classified into: the first wave of
globalization 1870-1913, the de-globalization period of 1913-1950,
the golden age of 1950-1973, and the second wave of globalization
of 1973 onward 1 . In recent years, research on the link between
globalization and world inequality has been intense. Three main
approaches are distinguished by Wade (2001). First, the
neoclassical growth theory predicts that national economies will

1
See for details, O’Rourke (2001), O’Rourke and Williamson (2000), Maddison
(2001) and Williamson (2002)
9
Impact of Globalization and Economic Growth on Income Distribution…
converge in their average productivity levels and average incomes
because of increased mobility of capital. Second, the endogenous
growth theory predicts that increasing returns to technological
innovation in the developed countries offsets diminishing returns
to capital. In short the neoclassical theory predicts convergence
(equality) while the endogenous theory predicts less convergence
or divergence (inequality). Third, the dependency approach
predicts that convergence is less likely and divergence more likely,
because of differential benefits from economic integration and
trade, restricted free market relations, and locked developing
countries to produce certain commodities.

The empirical evidence shows that during the first wave of

globalization convergence in per capita income real wages took
place within the Atlantic Economy due to an increase in
international trade and massive international migration. The de-
globalization period is characterized as widening disparity between
the richest and the poorest regions and among the Atlantic
Economy reverting the convergence trend of the previous period.
There was considerable convergence among western European
economies and the OECD and a decline in the GDP gap in per
capita income between the poorest and the richest regions
(Solimano 2001). It is argued that neoclassical effects of trade and
factor supplies changes provide more insight. Increased trade,
stimulated by falling transportation costs, and factor movements
caused prices of locally scarce factors to fall and promoted factor
price convergence. Firebaugh (2003), O’Rourke (2001), and Sala-
i-Martin (2002) find global economic inequality to have fallen.
Wagle (2005) observed progress of different magnitudes made by
different countries in integrating their economies, Bangladesh,
Pakistan, and especially Nepal made considerably slower progress
than did Sri Lanka and India. Gini index shows that countries
diverged in trend over time. For example, it did not change much
in India, Pakistan, and Sri Lanka. There was wide variation in
economic inequality in the South Asia region. While Bangladesh
and Pakistan were moderately unequal during 2000-2003 with Sri-

10
IUB Journal of Social Sciences and Humanities Vol.6 No.2, 2008
Lanka being much less unequal and India and especially Nepal
being much more unequal.

Economic growth has often been given priority as an anti-poverty

measure. But, policymakers have ignored the negative link
between growth and inequality. Rising inequality threatens growth
and poverty reduction targets calling for more distributionally
favorable pro-growth policies. Cornia and Court (2001) in a policy
brief covering the second wave of globalization, report changes in
within-country income inequality and on the link between poverty,
inequality and growth. The analysis highlights five main issues.
First, inequality has risen since the early-mid 1980s. Second, the
traditional common factors causing the inequality such as land
concentration, urban bias and inequality in education are not
responsible for worsening the situation. Third, the persistence of
inequality at high levels makes poverty reduction difficult. There is
a negative relationship between inequality and the poverty
alleviation elasticity of growth (see, Cornia and Kiiski 2001).
Fourth, a high level of inequality can depress the rate of growth
and have undesirable political and social impacts (Birdsall 2000).
Fifth, the developments in Canada and Taiwan show that low
inequality can be maintained at fast growth. The non-traditional
new causes of inequality identified are liberal economic policy
regimes and the way in which economic reform policies have been
carried out. Land reforms, expanding education and active regional
policy are recommended as measures to reduce inequality among
areas, gender and regions. Policies offsetting the inequality impact
of new causes designed and incorporated in a revised development
approach, called by Stiglitz (1998) ‘the Post-Washington
Consensus’. These policies include measures to offset the impacts
of new technologies and trade, macroeconomic stability, careful
financial liberalization and regulation, equitable labour market
policies, and innovative tax and transfer policies. International
community should include distribution issues in their policy
advice, avoid distributive distortions, support to reduce output
volatility and increase external budgetary support.

11
Impact of Globalization and Economic Growth on Income Distribution…
Ideally, increased economic activities prompted by globalization
will have positive impact on expanding employment opportunities
and increasing earnings, which then would reduce economic
inequality. The classic Stopler-Samuelson (1941) hypothesis also
suggests that the poor with abundant labor power in developing
countries are likely to gain from international trade. While
globalization may accentuate the Mathew effect and create both
winners and losers with the latter knocking the door of the state for
public support, one can also hope that economies will have larger
capacity to cope with different kinds of economic shocks and to
develop a welfare state that reduces economic inequality (Amit
1980; Esping-Anderson 1990; Mahler 2004).

The notion of fiscal discipline, however, disallows governments to

enlarge state spending and introduce progressive tax structure.
Moreover, as Goldberg and Pavcnik (2004) succinctly summarize,
globalization may escalate earnings inequality by increasing ‘skills
premium’ due to an increased demand for and wages of skilled and
technical manpower, by increasing wages for the given sets of
skills and education, and by expanding the informal sector.
Similarly, because of the composition of societies is diverse as
investors, entrepreneurs, self-employed workers, public officials,
wage workers, recipients of public services, and users of common
property resources, with different sets of profits or losses to accrue,
how globalization affects given economic order is largely unclear
(Bardhan 2004). Many studies have suggested that globalization
does not confer any discernible effect on economic inequality
within nations or, if any, confers some negative effect. Findings
here, however, mostly support that globalization does hold
significant power to explain economic inequality within nations in
South Asia and that while there are variations in country
experiences the effect of globalization on. Economic inequality
within South Asian countries is in fact positive. It appears to be
consistent with the findings of Alderson and Nielsen (2002) and
Milanovic (2005) suggesting that globalization is helpful to explain
increasing economic inequality within countries. Kentor (2003)
explained the challenges faced by the international community
12
IUB Journal of Social Sciences and Humanities Vol.6 No.2, 2008
because of emphasized economic issues related to the distribution
of benefits accruing from increased trade and the reduction of the
effects of instability in international capital flows.

Globalization has different dimensions with different impacts and

can be looked at with different perspectives 2 . James (2002)
analyzed the causes of globalization in terms of transaction costs
and focused on information and communication technologies,
technical change, foreign investment deriving globalization and
their application in Africa. Bhagwati (2000) focused on the trade
and foreign direct investment. Globalization is both economically
and socially benign, i.e. they can produce beneficial consequences
for a variety of social objectives as a general tendency.
Appropriate governance is needed to manage globalization and the
speed at which it must be pursued. There is disagreement about the
effects of globalization on income distribution of countries.

International trade theory implies that increased trade and foreign

investment should make income distribution more equal in poor
countries and less equal in rich countries. Milanovic (2003)
attempted to discern the effects of trade and foreign investment on
relative income shares of low and high deciles used household
budget surveys. The results show that the effects of openness on
income distribution depend on the country’s initial income level.
At the very low levels the rich benefit, but the situation changes as
income levels rise. Seshanna and Decornez (2003) find that during
the last 40 years the world economy has become wealthier; more
globally integrated but unequal and polarized sharpening the
division between the rich and the poor countries. The issue of
economic globalization, domestic politics and income inequality in

2
From the earlier studies, see Khan and Saqib (1993); Khan, et.al (1995) for bi-
direction causality between exports growth and economic growth for Pakistan;
Naseem (1998) for technology and Asian economic growth in the perspective of
globalisation; Paul (1998) for globalization and macroeconomic variables;
Siddiqui, et. al. (1999) for impact of tariff reduction on distribution of income;
La Porta et al. (1999) in the perspective of law in countries, like Common law,
French Civil law, Socialist law and Protestants.
13
Impact of Globalization and Economic Growth on Income Distribution…
the developed countries has been studied by Mahler (2001). The
results have shown little evidence of a systematic relationship
between any of the three main modes of economic globalization
(trade, foreign direct investment and financial openness) and either
of the distribution of disposable income or earnings of households.
The overall conclusion is that integration into the world economy
does not systematically lead to an inegalitarian distribution of
income or earnings across entire economies. The modes of
globalizations are weakly and positively related to the fiscal
redistribution in the countries studied. The evidence has shown that
politics continues to play a critical role in determining distributive
outcomes in the developed world. Economic globalization is
compatible with a wide variety of political interactions leading to a
wide range of distributive outcomes.

Chishti, et. al. (2001) have attempted to find out the impact of
trade liberalisation on agricultural growth, and poverty alleviation
in Pakistan. The study concluded that the WTO's liberalisation
policies, opening of closed economy for exportable, and
withdrawal of export subsidies by foreign exporters would be pro-
producers. These policies would help absorb new resources and
enhance producer surpluses, and would therefore directly
contribute to poverty alleviation This is how the country can
achieve a sustainable and stable growth in agriculture and other
sectors of our economy. But the country in isolation, would not be
able to achieve a durable sustained growth. A more durable
sustainability would be achieved when the liberalisation is pursued
and enforced world over. Shirazi and Manap (2004) examined the
bi-direction causality between exports and economic growth. There
has been used multivariate Granger Causality test (Toda and
Yamamoto 1995). The results indicated that there is a
unidirectional causality running from exports to output. This
confirms the ELG hypothesis for Pakistan. Exports boost the
growth of economy through access to the wide world market and
hence the economies of scale. It earns foreign exchange and also
supports the employment in the export sectors of the economy.
Study does not show any significant causality between import and
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IUB Journal of Social Sciences and Humanities Vol.6 No.2, 2008
exports. The results contradict the previous results which do not
support the ELG hypothesis for Pakistan. The contradiction may be
due to the standard granger causality test, which is an
oversimplified approach. But it confirms the results of Kemal, et.
al. (2002) for the long-run and contradicts in the short-run. It can
be concluded that the results strongly support a long-run
relationship among the variables. The study found a feedback
effect between imports and output. Though an export causes output
growth, but converse is not true. More interestingly, no significant
causality between imports and exports was found. Therefore, it
was suggested that Pakistan may continue with the imports of
necessary raw material for value addition and needed technology
to expand capacity and improve productivity. It may pay full
attention to boost up the exports.

3. Data and Methodology

A number of studies regarding economic growth and income
inequality have been undertaken during the last five decades to
assess the income distribution trend in Pakistan. Mostly studies
used Gini co-efficient to assess the income inequality. On the other
hand, for measuring the bi-directional causality between trade and
economic growth, real GDP, real imports and real exports, macro-
economic variables were used by different studies but emerging
results were mixed (see also Bardhan 2004). Various techniques
have been used by economists 3 for seeking the impact of economic
globalization or trade liberalization on income inequality, but
results remained diverging. Lindert and Williamson (2001), Wei
and Wu (2001) found, that globalization did not contribute to
economic inequality within nations but lack of globalization
increased inequality within many nations. Where as (Kemal 1994;
and Siddiqui, et.al. 1999) arrived at the results, that economic
globalization accentuated the income inequality and raised the
economic growth in Pakistan. Our study is concerned with the

3
For instance, Naqvi and Ahmed (1984) used two stage least square estimation;
Khan, et. al. (1995) and Shirazi and Manap (2004) used bi-directional causality.
15
Impact of Globalization and Economic Growth on Income Distribution…
impact of globalization and income growth on income inequality
with a fresh data.

We have taken trade openness, foreign direct investment and

foreign remittances as a proxy variable for economic globalization.
As far as the real GDP growth is concerned it has been used as a
proxy variable for the economic growth of Pakistan. Data about
real GDP, foreign direct investment (FDI) (as a percentage of
GDP), foreign remittances, real imports and real exports for the
period of 1972 to 2005 have been taken from, GOP (various
issues), State Bank of Pakistan (SBP various issues) and from
International Financial Statistics (IFS). For income inequality
popular measure Gini-coefficient is used, that is given by the ratio
of the area between the diagonal and the Lorenz curve divided by
the total area of the half square in which the curve lies. For the
calculation of trade openness we have used total trade volume as a
proxy of trade openness (value of export and imports).

We have employed ADF tests to check the stationerity in time

series data. The ADF test for unit roots (Dickey and Fuller 1979,
1981) indicates whether an individual series is stationary by
running an OLS regression. If the variables are stationary in level
then the Ordinary Least Square (OLS) regression analysis is used
for empirical analysis. Regression errors in all the estimated
equations are tested for autocorrelation with the help of Durbin
Watson test. If correlation is found in an equation, it is re-
estimated by iterative two steps least square method for Auto
Regression AR (1) autoregressive of order (1) and moving average
of order one or three MA (1) or MA (3) specification.

The econometric functional forms of the impact of globalization

and growth on income inequality are as:

GINI= αο + α1 (FDI) + α2 L (OPEN) + α3 L (REMIT) ……(1)

GINI= βο + β1 (GDPG) ……..…… (2)
∆GINI = αο + α1 ∆ (FDI) + α2 L (OPEN) + α3 ∆ L (REMIT) ……..(3)
∆GINI= βο + β1∆ (GDPG) …….(4)

16
IUB Journal of Social Sciences and Humanities Vol.6 No.2, 2008
Where,
GINI= Gini co-efficient as a measure of income inequality
FDI= Foreign Direct Investment (Percentage of GDP)
LREMIT = Log of Foreign Remittances (Million Dollars)
LOPEN= Log of Trade Openness (Exports + Imports in million dollars).
GDPG= Growth rate of Real Gross Domestic Production
∆GINI= Change in Gini co-efficient as a measure of income inequality
∆ LOPEN= Change in Log of Trade Openness (Exports + Imports in million
dollars).
Imp = Imports (Million Dollars)
Exp = Exports (Million Dollars)
∆ FDI = Change in Foreign Direct Investment (Percentage of GDP)
∆ LREMIT= Change in Log of Foreign Remittances (Million Dollars)
∆GDPG= Change in growth rate of Real Gross Domestic Production

4. Results and Discussion

We have divided this section into three sub-sections. In the first we
have discussed the macroeconomic variables which substantially
contribute towards the country’s growth. In the second unit root
test has been discussed. In the last regression estimates have been
discussed.

4.1 Performance of Macroeconomic Variables

In this sub-section we have described succinctly the particular
trend and performance of various macroeconomic variables for the
time period 1972 to 2005, which have substantial share in the
economic development of Pakistan.

4.1.1 Real Gross Domestic Production

Despite fragile infrastructure of Pakistan’s economy the real gross
domestic production showed its healthy average increase of 5 to 6
percent growth trend. This substantial GDP growth provides strong
evidence that Pakistan’s economy has great potential of economic
growth.

17
Impact of Globalization and Economic Growth on Income Distribution…
Figure 1: Trend of GDP Growth Rate in Pakistan (1970-2005)
10

6
GDP
Growth Rate
4

0
75 80 85 90 95 00 05
Years (1970-2005)
Figure 1 exhibits that during 1970s and 1990s GDP growth rate
was touching to its lowest web, the main cause of low growth of
GDP in 70s was the disintegration of Pakistan and war with India.
The structural adjustment programme is known as a main cause of
this low growth rate in 90s. Gross domestic production is
indicating rising trend after 2000.

4.1.2 Income Distribution

The Gini-coefficient is a broad single aggregative measure for
income distribution. The Gini-coefficient takes on a value between
0 and 1. The higher the value of Gini-coefficient, the greater will
be the inequality. Figure 2 is indicating the widening trend in the
income distribution during 70s. The era of 80s is showing the
improving situation in income distribution in Pakistan. Since 1990
to 2005 the situation of income distribution is not promising well.
The value of Gini-coefficient has remained in between 0.36 and
0.39 but after mid-1990s it reached up to 0.41.

18
IUB Journal of Social Sciences and Humanities Vol.6 No.2, 2008
Figure 2: Trends of Income Inequality in Pakistan (1970-2007)
0.42

0.40

0.38
Gini-coefficient

0.36

0.34
75 80 85 90 95 00 05
Years (1970-2005)

4.1.3 Volume of Trade

In 1970s for the enhancement of the export Government of
Pakistan took various measures like Export Bonus Scheme,
devaluation of rupee to the extent of 131 percent, abolition of
multiple exchange rate system, and trade agreement with Islamic
countries. These measures brought about to increase in trade
volume in 70s. In 1982, Pakistan delinked rupee from dollar.
Notwithstanding global economic expansion, the sound
macroeconomic policies that Pakistan pursued coupled with wide-
ranging structural reforms, particularly in the areas of trade and
tariff implemented over the last six or seven years supported the
country to double its exports in seven years and increase its trade
volume. Figure 3 is exhibiting continuous rising trend in the trade
volume after 2000.

19
Impact of Globalization and Economic Growth on Income Distribution…
Figure 3: Trends in Volume of Trade in Pakistan (1970-2005)
40000

30000

Volume of Trade
(Million Dollars) 20000

10000

0
75 80 85 90 95 00 05
Years (1970-2005)

4.1.4 Foreign Direct Investment

Concrete policies, strong infrastructure, and investment friendly
polices of countries always give confidence to foreign investors.
The policies representing the true interests of the host countries
also guide foreign investments into the right areas where they are
needed most. The size of FDI inflows in Pakistan was not
significant until 1991 due to the regularity policy framework.
Pakistan has received comparatively higher amount of FDI over
the last two decades. Especially during the decade of 1990s,
Pakistan received high amount of FDI due to its market-oriented
policies, conductive environment for investment and reemphasis
on private sector for economic growth. Figure 4 indicates that until
90s the flow of FDI as a percentage of GDP has not been
promising well. After mid 90s there has been sharp increase in the
flow of FDI in Pakistan.

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IUB Journal of Social Sciences and Humanities Vol.6 No.2, 2008

Figure 4: Trend of Foreign Direct Investment in Pakistan (1970-2005)

2.0

1.5

FDI (Percentage
of GDP) 1.0

0.5

0.0
75 80 85 90 95 00 05
Years (1970-2005)

4.1.5 Workers Remittances

Foreign remittances have remained vital source of foreign
exchange in Pakistan. Foreign remittances bring about to mitigate
the economic or income inequality among the masses in an
economy. Worker’s remittances are the second largest source of
foreign exchanges inflows after exports in Pakistan. Foreign
remittances had rising trend from 1970 to 1994. After 1995 foreign
remittances had falling trend till 2001, but after 2002 foreign
remittances started increase considerably. Figure 5 reveals that
during 1985-1995 worker remittances has sharp rising trend.
Foreign remittances has not only been the vital source of increase
in foreign exchange but also helpful in making the distribution of
income in Pakistan. Figure 5 is indicating falling trend
subsequently in remittances from 1995 till 2000, after that there
has been sharp rising trend in worker remittances in Pakistan.

21
Impact of Globalization and Economic Growth on Income Distribution…

Figure 5: Trend of Workers Remittances in Pakistan (1970-2005)

5000

4000

Remittances 3000
(Million Dollars)

2000

1000

0
75 80 85 90 95 00 05
Years (1970-2005)

4.2 Results of Unit Root Test

The results of the Augmented Dickey-Fuller test with intercept and
with trend and intercept has been reported in table 1 and 2. The
results of the ADF test with intercept imply that time series of
variable of income inequality, i.e. Gini-coefficient (GINI) is
stationary at 1st difference at 1 percent level of significance.

Table 1: Result of Augmented Dickey-Fuller Test with Intercept

Variables Level 1st Difference 2nd Difference Conclusion
GINI -2.57 -7.83 -- I (1)
GDPG -4.56 -- -- I (0)
LOPEN -3.01 -- -- I (0)
FDI -1.46 -7.35 -- I (1)
LREMIT -2.83 -3.27 -- I (1)

It is an empirical fact that many macroeconomic variables appear

to be integrated of order 1 [I (1)] so that their changes are
stationary. To check stationerity in our time series data we have
applied unit root test. That is conceptually based on the process as:
У t = ρ y t-ı+ ε t …………….. (5)

22
IUB Journal of Social Sciences and Humanities Vol.6 No.2, 2008
Where ε t is the stochastic error term having zero mean and
constant variance. ε t is known as a white noise error term. If the
above regression is run and we find that ρ = 1
then
У t = y t+ ε t …………….. (6)
This is the equation of a Pure Random Walk, У t is said to have a
unit root. A time series having unit root is called a non-stationary
time series. A time series is stationary if its mean, variance and
covariance are time invariant. A time series, which is stationary
after differentiated times, is said to be integrated of order d, and
denoted as I (d). A series that is stationary without differentiated is
said to be I (0). In order to establish the order of integration of the
variables in our data set, we employ Augmented Dickey Fuller test
(ADF). The ADF test for unit roots (Dickey and Fuller 1979, 1981)
indicates whether an individual series, say У t is stationary by
running an OLS regression. They are based on general form of
ADF test of regression equations (7) and (8).
The can be written as follows

ΔУ t = y t-1 + ∑n i=1 bi Δ y t-i + d + gt + et (for levels) …..(7)

ΔΔУ t = a Δy t-1 + ∑n i=1 bi Δ Δ y t-i + d + gt + et (for first differences)…..(8)

Where ΔУ are the first differences of the series, n is the number of

lags and t is time. The practical rule for establishing the value of
(n) is that it should be relatively small in order to save degree of
freedom but large enough not to allow for the existence of
autocorrelation in et. For example if for (n) =2 th Durbin-Watson
autocorrelation statistic is low indicating first order autocorrelation
it would be sensible to increase n with the hope that such
autocorrelation will disappear (Charemza and Deadman 1991). In
short, the ADF test proceeds as follows, equations such as A and
B are estimated adding as many terms of differenced variables as
are necessary to achieve residuals that are non-auto-correlated.

Table 2: Results of Augmented Dickey-Fuller Test (Trend and Intercept)

Variables Level 1st Difference 2nd Difference Conclusion
GINI -3.34 -7.70 -- I(1)

23
Impact of Globalization and Economic Growth on Income Distribution…
GDPG -4.79 -- -- I(0)
LOPEN -3.33 -3.26 -6.23 I(2)
FDI -3.90 -- -- I(0)
LREMIT -2.31 -3.43 -7.07 I(2)

The time series is not stationary even at 10 percent level of

significance. The time series of growth rate of real GDP (GDPG) is
found stationary at 1 percent level of significance. The variable of
log of trade openness (LOPEN) is also stationary time series at 5
percent level of significance. The variable of foreign direct
investment (FDI) and log of remittances (LREMIT) are not
stationary time series at any significant level. These are integrated
of order one i.e. I (1). ADF test is also applied with trend and
intercept. The time series of Gini-coefficient (GINI) is found
stationary at 1st difference while growth rate of GDP (GDPG) is
integrated of order zero i.e. I (0). Log of remittances (LREMIT)
and log of openness of trade (LOPEN) are stationary time series at
2nd difference. The test has been performed on the basis of 5
percent level of significance.

4.3 Estimates of OLS Model

The regression results of our model are reported in table 3. These
results are not different from other studies conducted to explore the
relationship among income inequality and globalization variables.
Gini-coefficient (GINI) with first difference has been taken as
dependent variable. Conventional OLS technique has been used for
analysis. The results imply that foreign direct investment has
negative impact on income inequality (at 10 percent significant
level). It also implies that increase in flow of foreign direct
investment equalize the distribution of income.

Trade openness has been measured with volume of trade i.e.

exports plus Imports. It has also negative impact on income
inequality (GINI). It implies that increase in trade volume will lead

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IUB Journal of Social Sciences and Humanities Vol.6 No.2, 2008
to decrease the income inequality in the country 4 . Income
inequality (GINI) is negatively related with trade openness
(OPEN) at 5 percent level of significant.

Income inequality (GINI) is negatively related with foreign

remittances log (REMIT). Its significant effect implies that inflow
of remittances can make the distribution of income fairer.
Moreover, the problem of autocorrelation has been removed with
help of Moving Average process one.

The theoretical interpretation of AM is as follows:

Autoregressive (AR) is the process of such a dependence in which
we use past knowledge to predict future values of variable. Moving
Average is the process of weighted sum of the numbers of white
noise series. In MA process to determine cut off point the sample
autocorrelation is used. The simulation equations of AR and MA
are given as:
AR (1): depending upon one lag value
Yt = αο + αı Yt-1 +et .....................(9)

AR (p) a
Yt = αο + αıYt-1 + α2Yt-2 + ………+ α PYt-p + ε t ……………(10)

Similarly MA (1)
Yt = αο + μ t ………………(11)

Where
μ t = βο ε t + βı ε t-1… + β q ε t-q …………….(12)

AR model depends upon previous lag values, while MA model

depends upon previous shocks. In forecasting only one process is
enough for the future forecasting.

4
Stopler-Samuelson (1991) hypothesis and Methew effect (Amin 1994; Esping-
Anderson 1990 and Malher 2004) are supported by the results. It contradicts the
notion of Goldberg and Pavnick (2004), the results of Anderson and Nielsen
(2002) and Malanovic (2005).
25
Impact of Globalization and Economic Growth on Income Distribution…
Overall model is good fit as indicated by F-statistic. Our R-square
implies that 57 percent of the total variation in dependent variable
is explained by explanatory variables.

Table 3: Regression Results of Equation 3 in the Model

Dependent Variable: Δ GINI
Method: OLS
Sample: 1972-2005
Variables Coefficient t-statistics
Constant -0.0357 -2.0057
Δ FDI -0.0064*** -1.6879
Log (OPEN) -0.0039** -2.0739
Δ Log (REMIT) -0.0107*** -1.6753
MA (1) -1.4342 -6.0413
R-squared = 0.5736
Adjusted R-squared = 0.5104
F-statistics = 9.0787*
Durbin-Watson stat = 1.7229
Note: *, ** and *** indicate the level of significance at 1percent,
5percent and 10 percent, respectively.

We have also checked the impact of economic growth (growth rate

of real GDP) on income inequality (Gini-coefficient). The results
are reported in table 4. The results imply that growth rate of real
GDP (GDPG) has significant negative impact on Gini-coefficient
of Pakistan as a measure of income distribution (GINI). The
problem of autocorrelation has been removed with the help of
moving average process, which is an efficient technique to tackle
this problem. This model is good fit as indicated by the F value.

Table 4: Regression Results of Equation 4 in the Model

Dependent Variable: Δ GINI
Method: OLS
Sample: 1972-2005
Variables Coefficient t-statistics
Constant 0.0097 3.1218

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IUB Journal of Social Sciences and Humanities Vol.6 No.2, 2008
GDPG -0.0016* -2.7093

MA (1) 0.9897 1317.426

R-squared = 0.2546
Adjusted R-squared = 0.2049
F-statistics = 5.1243*

Durbin-Watson stat = 1.7011

Note: *, ** and *** indicate the level of significance at 1percent, 5percent and
10 percent, respectively.

5. Conclusion and Policy Implications

In the national and international literature pertaining to the impact
of globalization and growth on income inequality, the results were
found mixed. The reasons of mixed results may be the use of
different methods and variables to estimate and measure the
globalization. Similarly, in the literature there had been used
different methods to measure the income inequality i.e. Theil
Index, Atkinson and coefficients of Variation, etc. For the
measurement of globalization we have used the indices of total
trade volume as a proxy of trade openness, FDI as a proxy of
financial openness, and foreign remittances. For the measurement
of income inequality we have used the Gini-coefficient. Both
descriptive statistics and econometric analysis have been used to
sketch a few stylized facts in a very complex framework of
relationships. The empirical results lead us to a number of
interesting conclusions. The over all impact of globalization on
income inequality is that globalization variables (trade openness,
foreign direct investment and foreign remittances) have significant
negative effect on income inequality. The impact of economic
growth on income inequality also shows that economic growth has
also negative and significant impact on income inequality.

The empirical results have shown that income inequality is

negatively associated with economic globalization. Political
instability and inconsistent government economic polices did not
allow FDI to increase considerably in Pakistan, but whatever
27
Impact of Globalization and Economic Growth on Income Distribution…
extent it has been an increase in FDI in Pakistan, has left good
effect on income distribution. The cause of this good effect of FDI
on income inequality may be on account of long run effect of FDI
on demand of labour, which in turn enhances the wage level of
non-skilled and skilled labour as well. Worthwhile FDI has been
made in natural resource, energy, and especially in infrastructure
sector, which might have put better effect on demand for labour
and on their earnings .So our empirical findings ratifies that FDI
has succeeded to reduce income inequality, but not considerably.

Our empirical findings support the notion that trade liberalization

is a significant source of lessening income inequality. Mostly
exports of Pakistan are consisted of traditionally agriculture goods.
The decomposition analysis of exports reveals that the share of
manufacturing goods is extending in exports but agriculture goods
still have comparatively more share in exports. Mostly exports are
produced with the help of labour intensive technique, which brings
about to increase their wages and lessens income inequality.

So far as the foreign remittances are concerned, our empirical

findings argue about negative relationship between income
inequality and foreign remittances. Foreign remittances seems to
be helpful in reducing the income inequality. Since last decade the
foreign remittances of Pakistan have been increasing considerably
(see figure 5). Foreign remittances have been the direct source of
exacerbating the standard of living of labour class. Foreign
remittances also mitigated the distressing situation of income
distribution in Pakistan. Hence our study has proved to be helpful
to reach at conspicuous result, that is globalization may be helpful
to mitigate the worse distribution of income in Pakistan.

Our empirical results bear out conventional wisdom of trickle

down effect of economic growth. Economic growth has negative
effect on income inequality. It means economic growth has trickle
down its effects to the lower strata of the population. But we are
still indecisive that from what way growth has reinforced its
distributional effects among the masses. Either economic growth
28
IUB Journal of Social Sciences and Humanities Vol.6 No.2, 2008
has done it through progressive tax process, or through wages,
public support program, literacy and socioeconomic structure of
the economy.

On the other hand, the concept of income inequality has also

ambiguities. Are we primarily concerned with the range (for
instance incomes of the top deciles as a multiple of the lowest
deciles)? Does the shape of the distribution also matter? One
aspect of changing distribution that may be particularly important
for policy makers is gains and losses to middle strata.
Conventional measures of inequality like the Gini index fail to
capture that dimension. Quite recently data of Gini index has been
scarce and unreliable. There have been rapid improvements in the
past few years, but time trends remain difficult to trace because of
missing or inadequate data for earlier and recent periods. However,
the conclusions emerging from our empirical study can be
summarized as follows:
• Trade openness is essential for amelioration of income
distribution
• Foreign direct investment emerged as a factor to reduce
inequality
• Foreign remittances have come off another factor which may
contribute in reducing income inequality
• An economic growth will carry better income distribution
effects.

The evidences presented in our study suggest that further

initiatives pertaining to economic incentives should be taken to
attract the foreign investment. It is suggested that the demand of
our labour force should be sought out not only in few selected
countries but also in the rest of the world. Trade volume is
increasing in the country with a rapid pace (see figure 3) but policy
makers should consider the pattern concerned with welfare in the
aspect of distribution of income. Along with it trade balance
should not be underestimated because as it has remained negative
during most of the times in Pakistan. The economic growth rate
must be accompanied by measures which further alleviate the
29
Impact of Globalization and Economic Growth on Income Distribution…
income inequalities. Globalization process is beneficial for the
economy but the nature of this process should not be
underestimated.

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