Globalization forces: income convergence and divergence in North-North and North-South relationships

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Globalization

The process of globalization has significantly affected most countries' economic environment. This further affected the activity of companies in these countries and the economic policies that address them, which determined a series of changes regarding the incomes of the population. The per capita income in most countries is basically affected by several forces of convergence and divergence.

The process of convergence in the Atlantic region can be explained by the fact that poor countries in this region developed faster than industrialized countries. This allowed them to significantly reduce the economic differences between such countries. In certain cases, the economic differences were exceeded completely. Jeffrey G. Williamson discusses a series of theoretical model that were applied in certain periods in order to influence the process of convergence (Williamson).

These models were improved by the experience and practice of the countries affected by the process of convergence. The initial growth models only encouraged and supported unconditional convergence. This means that they were not quite applicable to real situations in the world's economies. But these growth models were improved, and focused on conditional convergence, given the fact that this factor better characterized these countries' situation.

The research conducted in this sense revealed that countries in the Third World were not able to implement the growth models that proved successful for other countries. This is because underdeveloped countries in Africa and Asia were prevented from growth by high population growth, low public savings rates, and human capital shortfalls.

There are several forces that influence the per capita GDP. These forces are technological catch-up, globalization through trade, and globalization through mass migration. These forces have different impacts on the evolution of GDP per capita and other indicators related to it. For example, in case the technological catch-up is the dominant force, then the increase of the GDP per capita is likely to determine the increase of wage rates, lands rates, and profit rates.

In case the globalization through trade is the dominant force, then wage-rental ratios will evolve in opposite directions in the two trade partners, while the GDP per capita will converge slower than the factor prices. In case the globalization through mass migration is the dominant force, then in immigrant countries the GDP per capita is likely to increase faster than the GDP per worker, while wage rates would decrease in accordance with land rates and profit rates. The emigrant countries would be characterized by the opposite situation.

But the process of convergence did not develop in the same manner in Europe. In this region, convergence developed on a smaller scale. This is because technological developments were counteracted by failures in this field, while large resources were involved in technological innovations.

One of the most important factors of convergence, whether one refers to the U.S. Or Europe, is represented by the factor price. The factor price convergence means that as a result of convergence in this sector the low wages in poor countries will reach the level of high wages in rich countries. As a consequence, low land rates in rich countries are likely to reach the level of high land rates in poor countries.

However, the evolution of global economic conditions do not allow for convergence to characterize the world's economies. It seems that there are several factors that determine economic indicators to evolve differently from one country to another. In other words, the inequality between different countries in the world becomes more and more obvious.

There are several hypotheses that are addressed by theories that aim at explaining the inequality between countries. One of these hypotheses states that inequality emerged in countries characterized by rich resources and low level of labor, like Argentina, Australia, Canada, and the U.S. In opposition, in countries characterized by a lower level of resources, but a higher level of labor, with a developed agricultural sector, like Italy, the Iberian Peninsula, Ireland, and Scandinavia. In European countries characterized by high industrialization, inequality was kept under control.

Another hypothesis is derived from that described above. It states that the inequality patterns observed in these countries can be attributed to the process of globalization. This hypothesis leads to another one that states that the inequality caused by globalization is the reason for the retreat from globalization during certain periods.

There are several theories that try to explain the causes of wage inequality. One of these theories states that wage inequality can be attributed to the fact that different levels of skills determine different level of wages, while also being affected by increasing trade and immigration. This is because the increased level of trade required workers that could work better for lower wages. This influenced the development of immigration. Other theories stated that the increased inequality regarding wages is actually caused by technological development.

There are differences regarding the work requirements between developed countries and those in Third World. For example, developed regions like the U.S. And Europe required less unskilled work, while in countries in the Third World, the demand for unskilled work increased.

However, it has been concluded that the wage decrease of workers with a lower level of skills can be attributed to the reduction of trade barriers and the increase of immigration, especially of workers with a higher level of education. This means that technological development is not the cause of this phenomenon. Same as in the case of other theories, this theory was also criticized by several specialists in the field.

Critics of this theory state that industrialization has been observed as a factor of influence of inequality. In addition to this, trade liberalization can be observed in other countries, like those in Latin America and East Asia where wage inequality did not decrease as a result of this action.