SP 2001 48 4 435

The Long Term Effects of Globalization on Income Inequality, Population Growth, and
Economic Development
Author(s): Jeffrey Kentor
Source: Social Problems, Vol. 48, No. 4 (November 2001), pp. 435-455
Published by: University of California Press on behalf of the Society for the Study of Social
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S O C I A L P R O B L E M S , V o l . 4 8 , N o . 4 , p a g e s 4 3 5 4 5 5 . I S S N : 0 0 3 7 - 7 7 9 1 ; o n l i n e I S S N : 1 5 3 3 - 8 5 3 3
2 0 0 1 b y S o c i e t y f o r t h e S t u d y o f S o c i a l P r o b l e m s , I n c . A l l r i g h t s r e s e r v e d .
S e n d r e q u e s t s f o r p e r m i s s i o n t o r e p r i n t t o : R i g h t s a n d P e r m i s s i o n s , U n i v e r s i t y o f C a l i f o r n i a P r e s s ,
J o u r n a l s D i v i s i o n , 2 0 0 0 C e n t e r S t . , S t e . 3 0 3 , B e r k e l e y , C A 9 4 7 0 4 - 1 2 2 3 .
The Long Term Effects of Globalization
on Income Inequality, Population
Growth, and Economic Development
JEFFREY KENTOR, University of Utah
Population growth, inequality and economic development are among the most pressing social issues con-
fronting us today. This research argues that these national problems are embedded within the context of increas-
ingly complex multi-dimensional international networks, commonly referred to as globalization. Using cross-
national comparisons among 88 less developed countries, I construct a series of structural equation models to esti-
mate the effects of two aspects of globalization, foreign capital dependence and trade openness, on these three
domestic concerns between 1980 and 1997. I nd that foreign capital dependence has a positive effect on income
inequality, raises fertility rates, accelerates population growth and retards economic development. Trade open-
ness, in contrast, has long-term positive effects on economic development.
Population growth, inequality and economic development are among the most pressing
social issues confronting us today. The goal of this work is to explore the extent to which these
intra-national processes are affected by the global dynamics of the world-economy, or what is
now commonly referred to as globalization.
The possibility of a linkage between globalization and national demographic and eco-
nomic processes was probably rst suggested by Roderick McKenzie in his original formula-
tion of human ecology theory. Smith (1995) highlights McKenzies argument that population
growth, along with the other dynamics studied by human ecologists, is embedded within a
larger, global context.
Charles Tilly (1978:3132) echoed this sentiment:
Faint in the background ickers a fascinating possibility: that the high rates of population growth in
todays Third World Countries will turn out to be less consequences of their own peculiar internal
organizations than effects of their economic relationships with the rich countries of the West.
And Amos Hawley (1998:20) has recently restated this perspective more concisely:
What does this network of intimate transnational interdependencies mean for the population dynam-
ics of each nation-state? The answer lies somewhere in the complexities of political-economy.
And further,
I can only surmise that events in the global network exert pressures on domestic demographic
processes.
The examination of possible linkages between these global and domestic processes is a
complex undertaking. Most researchers, therefore, choose to study only one aspect of these
I would like to thank Lee Bean, Mel Kohn, Chris Chase-Dunn, Ed Kick and Tom Burns for their assistance at various
stages of this research. Thanks also to the anonymous reviewers, whose detailed comments and suggestions signicantly
improved this work. An earlier draft of this work was presented at the 2000 Annual Meeting of the Americna Sociological
Association. Direct correspondence to: Jeffrey Kentor, Department of Sociology, University of Utah, Salt Lake City, UT
84112-0250. E-mail: kentor@soc.utah.edu.
436 KENTOR
inter-related processes (Alderson and Nielsen 1999; Firebaugh 1992, 1996, 1999; Khoo and
Dennis 1999; Korzeniewicz and Moran 1997; Lam 1986; London and Robinson 1989; Soysa
and Oneal 1999). This reductionist approach implies that the social structure can be under -
stood atomisticallyas the sum of its component parts. This assumption may be unwarranted.
One cannot assume that complex demographic, economic, and social outcomes can be under -
stood as the simple linear sum of individual processes. Rather, these are dynamic systems that
need to be examined in their entirety. While our theories may not be sufciently developed to
fully construct such complex models, we need to be aware of the shortcomings of our current
method of isolating individual processes from these global inter-relationships. Because, as
George Miller put it, scientic journals are catalogs of parts for a machine they never build
(cited in Cowan 1999).
Therefore, this research design will incorporate multiple relationships into a single model.
Within the structure of this single model, evidence is presented allowing the interpretation of
various bivariate relationships previously analyzed independently, including: 1) foreign
investment-income inequality; 2) income inequality-population growth; 3) income inequality-
economic development; 4) foreign investment-population growth; 5) foreign investment-
economic development; and 6) population growth-economic development.
Theoretical Debate
Much of the debate underlying the study of the impact of the world-economy on national
processes is based upon the two opposing theoretical perspectives of modernization vs. depen-
dency/world-systems.
1
Modernization theory (Hoselitz 1960) argues that development is a
process all countries go through, and that assistance from developed countries will speed this
process. Even if this process of modernization has some negative consequences for developing
countries, these are only temporary growing pains that all countries have experienced.
Dependency theorists (Amin 1976; Frank 1979) assert that development is not an invariant
process. They argue that the current economic, political, military, and social environment is
very different than that experienced by developed countries, and inhibits the ability of less
developed countries to grow. Moreover, the assistance of developed countries actually retards
economic growth in less developed countries. These LDCs become dependent upon devel-
oped countries for manufactured goods and capital, enabling core countries to obtain favor-
able (unequal) trade relationships, resulting in a net outow of capital from the periphery to
the core of the world-economy and the underdevelopment of LDCs. Immanuel Wallerstein
(1974, 1979, 1984) argued that the current capitalist world-economy, which began in the six-
teenth century, represents a tripartite global division of labor with capital intensive manufac-
tures produced in the core being exchanged for labor intensive goods from the periphery. This
world-systems perspective suggests that the capitalist world-economy has inherent struc-
tural characteristics that generate and maintain this relative global hierarchy.
2
Empirical Studies of the Impact of Globalization on National
Processes Foreign Investment and Economic Development
Perhaps the most widely explored, and contested, of the relationships under study is the
impact of foreign investment dependence on economic development (Bornschier 1980; Born-
schier and Chase-Dunn 1985; Chase-Dunn 1975; Dixon and Boswell 1996; Firebaugh 1992,
1996; Kentor 1998; Soysa and Oneal 1999). Researchers on both sides of this debate cite
1. For a good summary of this debate, see Shannon (1992).
2. See Skocpol (1977) for a trenchant analysis of Wallersteins original formulation of world-systems theory.
The Long Term Effects of Globalization 437
apparently denitive results supporting opposite conclusions. In this literature a key distinc-
tion is made between simple foreign investment (inows of foreign capital) and what is
referred to as foreign capital dependence. It is not foreign investment, per se, that has a nega-
tive impact on the host economy. Negative consequences arise when the host economy
becomes dependent upon foreign capital for its development.
The question of whether foreign investment is a panacea or an albatross on a host econ-
omy was rst addressed empirically by Christopher Chase-Dunn (1975), who found that his
measure of foreign capital penetration (debits on investment income) had a negative effect on
economic development. Bornschier, Chase-Dunn and Rubinson (1978) furthered Chase-
Dunns work by constructing a new measure of foreign capital penetration (PEN), a ratio of
foreign capital stocks to investment ows, which also exhibited a negative effect on economic
development. These ndings were replicated by Bornschier (1980) and Bornschier and Chase-
Dunn (1985). It was variously argued in these works that foreign capital had a wide range of
negative consequences. Foreign investment tended to be concentrated in a single product that
dominated the host economy, resulting in commodity, trade and partner concentration. This
concentration allowed the investing country to obtain and maintain a signicant advantage
over its dependent partner (Galtung 1971). Further, prots from foreign investments tended
to be repatriated, rather than reinvested in the host country (Bornschier 1980), resulting in
decapitalization and a lack of forward and backward economic linkages (Dixon and Boswell
1996). Finally, it was argued that there were a host of long-term ancillary negative effects, the
negative externalities that arose in the host countrys social structure (Dixon and Boswell
1996).
Firebaugh (1992, 1996) rejected Bornschier and Chase-Dunns (1985) ndings, and the
subsequent ndings of those who used their PEN measure of foreign capital penetration, as
a statistical artifact, the well-known denominator effect. Firebaugh argued that a correct
analysis of these data indicated that foreign investment actually had a positive effect on eco-
nomic development, albeit weaker than the effects of domestic investment. Dixon and
Boswell (1996) reanalyzed Chase-Dunns model with a new measure of foreign capital pene-
tration (foreign investment stocks/GDP) that addressed Firebaughs concerns, and were able
to replicate the earlier negative ndings.
Kentor (1998) examined the long-term lagged effects of foreign capital penetration on
economic development. In a cross-national study of less developed countries between 1940
and 1990, Kentor found that two separate indicators of foreign capital penetration (debits on
investment income and foreign investment stocks/GDP) had initial short-term positive effects
on per capita GDP growth followed by a long-term (201 year) negative effect. He argued that
the short-term positive effects reected the initial benecial effects of capital ows into the
host country, while the long- term negative effects were the consequences of trade distortions,
decapitalization, lack of forward and backward linkages and the negative externalities dis-
cussed by Dixon and Boswell (1996).
Most recently, Soysa and Oneal (1999) reported that, in their reassessment of earlier
models, foreign investment had a positive effect on economic growth between 1980 and 1990.
In fact, according to Soysa and Oneal, foreign investment is actually two and one-half times as
productive as domestic investment. However, Soysa and Oneal fail to address the question of
the impact of long-term lagged effects described by Kentor (1998). In fact, their results would
be consistent with Kentors ndings that foreign investment had a short-term positive effect
followed by a long-negative one.
While a detailed discussion of Soysa and Oneals work is beyond the scope of this paper,
there is one aspect of this research that warrants mention. Their failure to examine these
long-term effects reects more than an empirical omission. It suggests a lack of understanding
of the concept and mechanisms of structural dependence (Cardoso and Faletto 1979). This
term refers to the development and/or restructuring of the host economy to make it attractive
to foreign investment, which affects a wide range of social, political and economic structures.
438 KENTOR
These include laws permitting foreign ownership, convertibility and repatriation of currencies,
favorable labor laws, lax environmental standards, and favorable tax treatments, among others.
There is also an ideology that is legitimated concerning the value of foreign investment and
incorporation into the global economy. These effects reproduce and exacerbate the negative
effects of foreign investment far beyond, the commercial life of a given foreign investment.
How are we to interpret these conicting analyses? In spite of those who dismiss the
validity of negative ndings of foreign capital penetration by simply referring to Firebaughs
(1992) critique of this body of work, an impartial review of the literature suggests otherwise.
First, Firebaughs critique refers only to Bornschier, Chase-Dunn and Rubinsons PEN mea-
sure of foreign capital penetration. Firebaugh does not address Chase-Dunns (1975) earlier
results using debits on investment income (subsequently supported by Kentor 1998). Nor is
Soysa and Oneals myopic analysis of the short-term impact of foreign investment a valid
rejection of the overall long-term negative effects found by Kentor (1998). In short, none of
the critiques of these negative ndings provide a basis for rejecting the basic tenet that depen-
dence on foreign capital has negative consequences for the host economy.
Foreign Investment and Inequality
Other effects of foreign investment also receive considerable attention. Inequality, income
inequality in particular, has a long history of empirical consideration, originating with Simon
Kuznets (1955) effort to quantify this theoretical concept.
Beginning with Chase-Dunns (1975) effort, several researchers found that foreign capital
penetration exacerbates income inequality (Alderson and Nielsen 1999; Beer 1999; Born-
schier and Ballmer-Cao 1979; Bornschier and Chase-Dunn 1985; Bornschier, Chase-Dunn,
and Rubinson 1978; Evans and Timberlake 1980).
The argument here is four-fold. First, foreign investment dependence distorts the class
structure of the host country by generating a small, highly paid class of elites to manage these
investments and expanding the tertiary and informal sectors of the economy (Evans and Tim-
berlake 1980; Kentor 1981; Timberlake and Kentor 1983). Further, some of the employment
generated by these investments may be in low-wage jobs. Second, prots from these invest-
ments are repatriated, rather than reinvested in the host country, inhibiting domestic capital
formation (Bornschier 1980). Third, foreign capital penetration tends to concentrate land
ownership (Furtado 1970). Finally, host countries are likely to create political and economic
climates favorable to foreign capital that limit domestic labors ability to obtain more favorable
wages (London and Robinson 1989).
Crenshaw and Ameen (1994) present contrasting ndings to these earlier works. They
examine the effect of foreign capital penetration on various measures of inequality in 3461
less developed countries between 19651985. They nd no signicant effect of their measure
of foreign capital penetration on inequality, and conclude that modernization and human-
ecological theories offer more coherent explanations of this relationship than world-systems
or dependency approaches. It is difcult to compare these results with recent works, though,
for two reasons. First, their measure of foreign capital penetration, foreign capital stocks
divided by the product of the square root of domestic investment and total population, has
been replaced by other indicators of penetration (Alderson and Nielsen 1999; Beer 1999;
Dixon and Boswell 1996; Kentor 1998). Second, Crenshaw and Ameen fail to distinguish
between, and control for, the differential effects of foreign stocks and ows.
Alderson and Nielsen (1999) provide the most recent analysis of the link between foreign
capital penetration and income inequality between 1967 and 1994. In a pooled cross sectional
analysis of 88 countries, Alderson and Nielsen found that foreign direct investment stocks had
a signicant positive effect on income inequality, net of the regional effects posited by Tsai
(1995).
International Dependence and Fertility
Hout (1980) examined the long-term effects of dependence on fertility rates in Latin
America between 1900 and 1975. He points out that fertility rates failed to decline with eco-
nomic development over this period, as would be expected by prevailing demographic theo-
ries (Meyer, et al. 1979). Hout argues that the absence of such a reduction in fertility rates is due
to the impact of global dependency relationships. According to Hout, international dependence
tends to suppress adult wages. This perpetuates the role of children as economic necessities as
they are needed to supplement family income, generally in the area of home production.
Dependence also indirectly maintains high fertility rates due to its positive effect on inequality,
which isolates a large segment of the population from the benets of development.
Inequality and Fertility Rates
The impact of income inequality on demographics has also been examined, primarily in
terms of fertility (Bhattacharyya 1975; Flegg 1979; Heerink 1994; Khoo and Dennis 1999;
Mooreland 1984; Repetto 1979, 1981; Ward 1984; Winegarden 1985). All of these studies,
with the exception of Winegarden, found a positive effect of inequality on fertility. Repetto
(1979) argued that higher levels of income inequality result in high fertility rates due to the
non-linear relationship between income and fertility rates. Increased income for high-income
families has little effect on fertility rates because fertility rates are already so low for these fam-
ilies, while increased income for low-income families has a substantial effect on the high fer-
tility rates of low-income families. Therefore, changes in per capita GNP (average income)
may not reduce fertility. Repetto reports that, in a cross sectional OLS regression analysis of 64
countries between 1960 and 1970, a 10% reduction in income inequality (measured by a Gini
Coefcient) is associated with a 22% drop in the gross reproduction rate. Repetto then esti-
mates a 2SLS model to control for the reciprocal effects of fertility on inequality. Repetto nds
that changes in inequality have nearly twice the effect on fertility as the opposite.
Flegg (1979) reanalyzed Repettos ndings for a sample of 47 underdeveloped countries
and found an increased direct effect of inequality on fertility to .31 (as contrasted with
Repettos .21 result). Further, Flegg asserted that the overall effect of inequality on fertility
was lower than the direct effect reported by Repetto, as increased family incomes would also
allow women to stay at home and have more children. These indirect positive effects notwith-
standing, Flegg nds that reduction in income inequality would have a net negative effect on
fertility rates. Further, the magnitude of this negative effect would be at least equivalent to the
impact of increases in overall development on fertility.
In a cross national OLS regression study of 126 countries, Ward (1984) reported that
income inequality in 1965 had a small positive effect on fertility in 1975, with betas between
.15 and .28, depending on what control variables were included. But contrary to the ndings
of Repetto and Flegg, Ward found that overall development had a signicantly stronger effect
on fertility than income inequality. However, it is difcult to compare Wards results with
those of Repetto and Flegg because Ward includes both developed and less developed coun-
tries in her analyses.
Inequality and Economic Development
This relationship received renewed attention in the last decade. The most recent studies
nd a negative relationship between inequality and economic development (Alesina and Per-
otti 1996; Alesina and Rodrik 1994; Perotti 1994; Persson and Tabellini 1996). The explana-
tions for this effect generally focus on the negative impact of income inequality on investment.
440 KENTOR
Higher levels of inequality are likely to generate political instability, resulting in policies that
favor redistribution of income. This threat of political instability discourages investment,
which slows economic growth.
Khoo and Dennis (1999) take a different tack. They nd that, in a cross-national study of
7991 countries between 1960 and 1985, income inequality has a negative effect on economic
growth. Khoo and Dennis argue that this negative effect is due to inequalitys positive effect
on fertility. Poor parents are likely to have more children to increase the probability that they
will receive a nancial payoff from at least some of their offspring. This payoff is less impor -
tant for wealthy parents who will, therefore, have fewer children.
Population Growth and Economic Development
Studies of the impact of population growth on economic development began with
Malthus famous essay ([1803] 1992). Malthus predicted that population growth would even-
tually outpace economic growth, resulting in economic decline. Firebaugh (1999) tempered
Malthus prediction, arguing that rapid population growth in less developed countries would
slow economic growth, as the number of dependents in the population expands relative to the
level of economic output. Others argue, however, that population growth can exert a positive
effect on economic development. Simon (1981), for example, asserts that population growth
stimulates human interactions, resulting in technological innovations that overcome the neg-
ative consequences of higher population densities.
Crenshaw, Ameen, and Christenson (1997) argue that the effect of population growth on
economic development is more complex than an either/or scenario. In their study of 75 less
developed countries between 1965 and 1990, they nd differential effects of population
growth on GNP per capita growth, depending upon the age cohort examined. Increases in
infant populations tend to inhibit GNP per capita growth, while expansion of adult popula-
tions accelerates economic growth.
Crenshaw, Ameen, and Christenson were not the rst to nd this effect. Heerink (1994)
nds, in a cross-national study of 54 countries between 1967 and 1982, that population
growth in certain gender/age cohorts (2554 year old males) also has benecial effects on the
economy.
Age cohorts cannot be studied independently of one another. High youth dependency
ratios arising from rapid population growth, largely due to high fertility, generate a demo-
graphic overhead reected in increasing investment demands for education and health care. A
low dependency ratio, reecting a proportionately large adult population, arises from long-
term declines in the fertility rates. The expansion of the adult population increases the relative
size of the labor force and, other things being equal, accelerates economic growth (Coale and
Hoover 1958).
The Role of Human Capital
Various researchers argue that human capital attributes, such as education, need to be
taken into account in studies of income inequality, economic development and population
growth (Alderson and Nielsen 1999; Soysa and Oneal 1999). Inclusion of human capital mea-
sures attempts to control for the internal processes that affect these various outcomes. Simp-
son (1990), Nielsen (1994), and Alderson and Nielson (1999) report that secondary educational
enrollment has a signicant negative effect on income inequality. Soysa and Oneal (1999)
nd that their composite human capital measure has a signicant positive effect on average
annual growth of per capita GDP.
Studies also nd that education has a signicant impact on population growth. Heerink
(1994) argues that education inhibits population growth by reducing fertility rates. According
to Heerink, education provides basic birth control information and tends to increase the age
at marriage.
The Analyses
I develop a series of causal models to examine the complex interrelationships among for -
eign direct investment, income inequality, population growth and economic growth. These
time-sequenced path analyses are estimated with a structural equation (SEM) model. This
type of causal modeling has several advantages over standard regression models, including
panel and pooled cross-sectional regression analyses. First, it clearly species the hypothesized
direct and indirect relationships among the variables in question, and permits the estimation
of these effects. Second, the maximum likelihood estimation (MLE) employed in these struc-
tural equation models is a full information estimation method. That is, no information is
excluded from the analyses because of missing data. The result is a more consistent, less biased
estimation than either listwise or pairwise deletion methods of standard multiple regression
models (Arbuckle 1996; Kim and Curry 1997; Rubin 1976).
Variables
Unless otherwise noted, these data are taken from the World Bank World Development
Indicators (1999) CD-ROM data set. A correlation matrix of the variables included in the
analyses, along with number of cases for each variable, is provided in Appendix A.
Foreign Direct Investment/GDP 1980 (natural log)
This is a measure of accumulated stocks of direct foreign investment as a percentage of
total economic activity (GDP), and has been logarithmically (Ln) transformed. It is an indica-
tor of the extent to which foreign capital dominates a host countrys economy. This indicator
of foreign capital penetration is used in most recent studies in this area (Dixon and Boswell
1996; Kentor 1998; Soysa and Oneal 1999). These data are taken from Soysa and Oneal
(1999), to permit a comparison with their results.
There is some debate concerning the interpretation of the signs of the coefcients of this
variable. Firebaugh (1996) agues that since both foreign and domestic investments are stan-
dardized by total stocks (GDP), it is unclear whether a negative coefcient should be inter-
preted as an absolute (negative) effect on GDP per capita, or as a relative (less positive than
domestic investment) effect on growth. For this reason, a second measure of foreign capital
dependence was constructed in which stock of foreign capital was standardized by total popu-
lation instead of GDP. There is a correlation of .72 between these two variables. In analyses
not shown, this new variable was substituted for Soysa and Oneals measure. No signicant
differences were found, although the standardized effects of the new measure were somewhat
stronger than those found with Soysa and Oneals indicator of penetration.
Foreign Direct Investment Flows/GDP 1980
This variable controls for the differential effects of inows of foreign capital, and has been
included in most prior research in this area (Dixon and Boswell 1996; Firebaugh 1996; Soysa
and Oneal 1999).
442 KENTOR
Gross Domestic Investment/GDP 1980
This represents the rate of domestic investment in xed assets plus net changes in inven-
tory levels.
Population Growth 19901997
Population ratio growth rate is calculated as follows: (population 1997 2 population
1990)/population 1990.
Gross National Product per capita 1980 (natural log)
and GNP per capita Change
Following Korzenieweicz and Moran (2000), I use the foreign exchange (FX) measure of
this variable for these analyses. Several researchers prefer the use purchasing power parity
(PPP) measures of national income. Firebaugh (1999) points out that foreign exchange calcu-
lations are based only on those items traded on international markets, and therefore do not
include the value of those items produced and consumed in the domestic market. As Fire-
baugh puts it, an ox does not become half an ox to a farmer when his country devalues its
currency by half relative to the U.S. The expenditures-based PPP measures attempt to correct
this problem by measuring the absolute purchasing power of a currency within a given coun-
try.
3
This debate is a moot point for these analyses, however, since PPP measures are not avail-
able for 1997. The change measure is calculated in the same manner as population growth:
(GNPpc 1997 2 GNPpc1990)/GNPpc1990.
Gross National Product 1980 (natural log)
This variable is included in nearly all prior research on the effects of foreign capital pene-
tration on economic growth. It represents a signicant dimension of power that a country is
able to exert in the global economy (Kentor 2000). And, as Firebaugh (1992) points out, this
measure is also an excellent surrogate for domestic capital stocks.
Education; Secondary School Enrollment 1980
This is an indicator of human capital. This variable is dened as the ratio of total second-
ary school enrollment, regardless of age, to the population of the age group corresponding to
this level of education. It was necessary to residualize this variable from GNP per capita and
fertility to deal with the high level of multicollinearity among these indicators. This was
accomplished by regressing educational enrollments on GNP per capita and fertility, and sav-
ing the residuals. This new variable represents the effect of secondary school enrollments, net
of the effects of GNP per capita and fertility rates.
Total Fertility Rate 1980 (births per woman)
and Fertility Rate Change 19801990
Fertility is commonly included in studies of population growth as it is, along with mortal-
ity and migration, the most proximate determinant of these changes. The change score is cal-
3. Korzeniewicz and Moran (2000) argue against the use of PPP measures. They point out that much of the PPP data
are obtained by statistical estimations rather than actual within-country measurements. PPP data for seventy countries are
based solely on estimations, with no actual data ever having been collected. They also question the ability of PPP measures
to take into account the quality of the items being compared across countries, which is particularly problematic for service
related products. On a substantive level, Korzeniewicz and Moran argue that these two (FX and PPP) measures are appro-
priate for different questions. PPP measures are appropriate for the study of within country consumption patterns, while FX
measures are appropriate in examinations of the impact of differential power relationships on the distribution of incomes.
culated as above for GNP per capita. This variable is residualized on GNP per capita, due to
their high correlation.
Income Inequality 1980 and Income Inequality (Gini coefcent)
Change 19801990
The Gini coefcient represents the departure of a countrys actual income distribution
from a theoretically equal distribution, referred to as the Lorenz Curve. In a Gini representa-
tion of inequality, 0 equals an absence of inequality while a score of 1 indicates total inequal-
ity. This change score was computed as: (Inequality 1990 2 Inequality 1980)/Inequality 1980.
These data are taken from Deininger and Squire (1996).
4
Trade/GDP 1980
This variable has been included in most prior analyses as a control for a countrys level of
integration in the world-economy (Bornschier and Chase-Dunn 1985; Chase-Dunn 1975;
Dixon and Boswell 1996; Firebaugh 1992, 1996; Kentor 1998, Soysa and Oneal 1999). How-
ever, this variable actually represents a second dimension of globalization. The volume of
world trade has grown along with that of foreign investment over the period in question, accom-
panied by an opening of national markets. In order to make the results of this study more
comparable to the analyses of Soysa and Oneal (1999) total trade is used as the indicator of
integration into the world-economy.
Countries Included in the Analyses
5
Prior researchers have taken various positions on what countries should be included in
their analyses. Many exclude core countries (Bornschier and Chase-Dunn 1985; Chase-Dunn
1975; Crenshaw and Ameen 1994; Dixon and Boswell 1996; Firebaugh 1992; Flegg 1979;
Kentor 1998), the argument being that they are interested in the effect of core countries on
underdeveloped countries. Kick, et al. (2000) preferred to include all available countries in
their analyses, and control for differential effects across zones of the world-economy by
including slope dummies for core, semi-core, semiperiphery and periphery.
6
They nd that
the effects of foreign investment vary dramatically by position in the world-economy. There-
fore, in order to disaggregate the processes under examination, I restrict the sample to less
developed countries. This was determined by selecting only those countries with a per capita
GNP in 1980 under $10,000, resulting in a sample of 88 countries.
The Models
The rst causal model to be estimated is presented in Figure 1. In this model, GNP per
capita growth and population growth 19901997 are examined as separate, but related,
4. Only Deininger and Squires high quality data are used in these analyses.
5. Algeria, Argentina, Bangladesh, Barbados, Belize, Benin, Bhutan, Brazil, Bulgaria, Burkina Faso, Burundi,
Central African Republic, Chad, Chile, Colombia, Comoros, Congo, Dem. Rep., Congo, Rep., Costa Rica, Cote dIvorie,
Dominica, Dominican Republic, Ecuador, Egypt, El Salvador, Fiji, Gabon, Gambia, Ghana, Greece, Grenada, Guatemala,
Guyana, Haiti, Honduras, India, Indonesia, Iran, Ireland, Jamaica, Jordan, Kenya, Korea, Rep., Lesotho, Madagascar,
Malaysia, Mali, Malta, Mauritania, Mauritius, Mexico, Moldova, Morocco, Mozambique, Namibia, Niger, Nigeria,
Oman, Pakistan, Panama, Papua New Guinea, Paraguay, Peru, Philippines, Portugal, Sao Tome, Senegal, Seychelles,
Sierra Leone, Solomon Islands, South Africa, Sri Lanka, St. Kitts, Sudan, Suriname, Swaziland, Thailand, Togo, Trinidad
and Tobago, Tunisia, Turkey, Uruguay, Venezuela, Zambia, Zimbabwe.
6. A slope dummy is a type of interaction term in which the relevant independent variable is multiplied by
dummy variables (0 or 1) for each zone of the world-economy.
444 KENTOR
endogenous outcomes of change in income inequality 19801990, (exogenous) levels of for -
eign capital penetration, foreign investment ows, gross domestic investment, secondary edu-
cational enrollments, fertility rates and trade/GDP in 1980, along with the control variables of
GNP and GNP per capita in 1980. This is a fully saturated model, meaning that there is no
attempt to limit the causal relationships among the variables. All exogenous variables are allowed
to covary, as are the error terms for the fully endogenous variables. Fertility rates and GNP in
1980 are used as instruments for population growth and GNP per capita growth, respectively,
to permit the estimation of the reciprocal effects between these endogenous variables.
Results
7
The results for this model are given in Table 1.
8
I will begin with a description of the effect
of the exogenous variables in 1980 on change in income inequality 19801990. Foreign capi-
tal stocks/GDP and fertility rates in 1980 have signicant positive effects on income inequality
7. In analyses not shown, non-residualized fertility rates and secondary education enrollments 1980 replaced
their residualized forms. The only signicant difference was an increase in the standardized coefcient of fertility rate on
population growth.
8. The critical ratios given in the tables are equivalent to t-values. Ratios greater than 1.5 are considered
signicant.
Figure 1 A Causal Model of the Effects of Foreign Direct Investment and Control Variables 1980,
on Growth of Income Inequality 19801990, and Population and GNP per capita
Growth 19901997
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446 KENTOR
change 19801990 (betas 5 .29 and .36, respectively), while secondary education has a negative
effect (beta 5 2.37). Other exogenous variables had no signicant effect on inequality change.
I turn now to the effects of the exogenous and partially endogenous variables on popula-
tion and GNP per capita growth 19901997. Foreign capital penetration has no signicant
direct effect on population growth or GNP per capita growth. Income inequality has a positive
direct effect on population growth (beta 5 .23), but no signicant effect on GNP per capita
growth. GNP and trade both exhibit positive effects on GNP per capita growth (betas5.49,
.47), but no effect on population growth. Fertility rates, as expected, have a substantial posi-
tive effect (beta 5 .73) on population growth. Secondary education, and foreign and domestic
investment ows have no signicant direct effect on either endogenous variable.
Finally, examining the reciprocal effects between the endogenous variables, I nd that pop-
ulation growth has a signicant negative effect on GNP per capita growth (beta52.57), but
there is no signicant effect reciprocal effect of GNP per capita growth on population growth.
Model 2
The ndings in the above analyses lead us to a further question. What are the mecha-
nisms by which income inequality exerts a negative effect on population and economic
growth? To address this question, a second model is estimated to test the argument of Repetto
(1979) and Khoo and Dennis (1999) that fertility mediates the effect of inequality on develop-
ment. This is accomplished by substituting changes in fertility rates for income inequality in
the previously estimated model.
The results of this model are presented in Table 2. These ndings support the prior work of
Repetto and Khoo and Dennis, with some additional signicant results. First, foreign capital
penetration and trade in 1980 have signicant positive direct effects on fertility rate change
19801990 (betas 5 .27, .22), while gross domestic investment and GNP per capita have
signicant negative effects (beta 5 2.45, 2.33). As would be expected, fertility rate change
19801990 has a positive effect on population growth 19901997 (beta 5 .34), but has no
direct effect on GNP per capita change over the same period. Secondary education exhibits a
negative effect on population growth, but also has no effect on GNP per capita growth. Two
additional ndings are worth noting. First, foreign capital penetration in 1980 has a signicant
negative effect on GNP per capita growth 19901997 (beta 5 2.22). Second, while population
growth still has a signicant negative effect on GNP per capita growth (beta 5 2.57), GNP per
capita growth now has a signicant reciprocal positive effect on population growth (beta 5 .68).
Model 3
Next, a third model was estimated in which all non-signicant paths were eliminated, to
permit the estimation of direct, indirect and total effects of the variables in our model. A path
model of these results is presented in Figure 2, and the (standardized) total effects of all vari-
ables given in Table 3.
9
This reduced model has a reasonable t to the data, with a chi-square
of 15.13 for 13 degrees of freedom (p5.30). Other t measures, such as RMSEA (.04), RHO1
(.96) and Delta 1 (.99) also indicate an excellent t (Bollen 1989). The stability index for the
reciprocal relationship between population and economic growth was .20, indicating stable
estimates. The coefcient estimates for this model are quite close to those of the saturated
model, with one exception. Secondary education in 1980 no longer has a signicant negative
effect on population growth, although the coefcient is negative and 1.2 times the standard error.
9. Trade/GDP and secondary education 1980 were included in the reduced model 3, but are not shown in Figure
3 for model clarity. The results for all variables in the model are given in Table 3.
T
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448 KENTOR
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6
It is instructive to trace the indirect effects of the causal variables on the endogenous out-
comes shown in Figure 2. Foreign capital penetration exerts indirect effects on population
growth in two ways. First, it has a positive indirect effect on population growth via its positive
effect on fertility change. It also exerts an indirect negative effect on population growth
through its negative effect on GNP per capita growth. Foreign capital dependence affects GNP
per capita growth in two ways. It has a direct, negative effect on economic development (beta 5
2.25) as well as a modest indirect, positive effect via its positive impact on fertility rates,
which exacerbates the positive effect of fertility rates on population growth.
10
This, in turn,
magnies the negative effect of population growth on economic growth. Conversely, gross
domestic investment and per capita GNP in 1980 exert indirect negative effects on population
growth via their negative effects on fertility growth. Further, these negative indirect effects on
population growth have positive effects on GNP per capita growth.
Table 3 provides an interesting comparison of the effects of foreign capital penetration with
another aspect of globalization, that of trade openness. While both aspects of globalization have
positive effects on fertility rates and population growth, trade/GDP also has a positive effect on
GNP per capita growth, in contrast to the negative effect of foreign capital penetration.
Model 4
It is unclear from the above models however, whether fertility change is the mechanism
by which income inequality exerts its effect on population growth, or vice-versa. So a nal
10. In analyses not shown, the negative effect of foreign investment stocks/population on GNPpc growth is some-
what stronger (beta 5 2.37) than that for Soysa and Oneals measure (foreign stocks/GDP).
Figure 2 Standardized Coefcients of the Effects of Foreign Capital Dependence 1980 on Fertility
Rate Change 19801990, and Population and GNP per capital Growth 19901997,
Controlling for Trade, GNP, Education and Foreign Investment Flows (R Squares in
bold italics)
450 KENTOR
model was estimated in which income inequality and fertility rates in 1980 each affect change
in inequality and fertility rates 19801990, controlling for 1980 levels of GNP, GNP per capita,
and secondary educational enrollments. The results are shown in Figure 3. Income inequality
in 1980 has a signicant positive effect (beta 5 .49) on fertility rate change 19801990 that is
1.63 times greater than the positive effect of fertility rates in 1980 on income inequality
change over the same period (betas 5 .30). Secondary education has a negative effect on
income inequality change, with a beta of 2.39, but no signicant effect on fertility rate. These
ndings are net of the control variables of GNP and GNP per capita.
Discussion
The goal of this research was to examine the impact of globalization on income inequal-
ity, population growth and economic development in a single unied model. It is clear from
the results of these analyses that global processes do, in fact, have an impact on these intra-
national processes. Foreign investment dependence in 1980 has a signicant positive effect on
growth of income inequality 19801990. This nding supports the prior work of Alderson and
Nielsen 1999, Bornschier and Ballmer-Cao 1979, Bornschier and Chase-Dunn 1985, Born-
schier, Chase-Dunn, and Rubinson 1978, and Evans and Timberlake 1980. The negative effect
of gross domestic investment on inequality is a new nding, and one that deserves further
attention. There are several possible explanations for this effect. It is likely that domestic
investment expands employment opportunities. It may also have broader positive effects on
the social structure, what might be termed positive externalities. These unintended conse-
quences of domestic capital ows may include greater capital retention and higher tax reve-
nues, generating a more highly developed infrastructure that includes better health care and
education. The lack of gross domestic investments effect on economic growth is not surpris-
ing. Dixon and Boswell (1996) also failed to nd a signicant effect on domestic capital stocks
Figure 3 Standardized Coefcients of The Effects of Income Inequality, Fertility Rates and
Secondary Education 1980 on Changes in Income Inequality and Fertility Rates
19801990, Controlling for GNP and GNP pc 1980 (R Squares in bold italics)
on economic development. The most likely explanation for the results in this case is that
domestic investment rate has a shorter-term effect than the lag period examined here.
The nding that population growth has an overall negative effect on economic develop-
ment lends support to Firebaughs (1999) hypotheses. Evidently, high fertility rates in less
developed countries increase the non-productive (dependent) segment of the population,
resulting in a classic pyramidal population distribution. This exacerbates the demand for
scarce resources, without access to an infrastructure that permits the development or utiliza-
tion of technological advances suggested by Crenshaw, Ameen, and Christenson (1997) and
Simon (1981). The reciprocal, positive effect of economic development on population growth
supports Fleggs (1979) ndings, and reects a complex relationship between these variables.
This work also claries the impact of income inequality on population growth and eco-
nomic development. In these models, income inequality does not have a signicant, direct
effect on economic development. Rather, I nd that that inequality has an indirect, negative effect
on economic development via its positive effect on population growth. This positive effect on
population growth is mediated by growth in fertility rates. These ndings support the earlier
works of Repetto (1979), Flegg (1979) Moreland (1984) and Heerink (1994). It is interesting,
and comforting, to note that the nding here that the effect of income inequality is 1.63 times
greater than the reciprocal effect of fertility on inequality, similar to Repettos (1979) nding
that inequality had twice the effect on fertility rates as the opposite.
The effects of education on these national processes are unclear. Secondary education in
1980 has a negative effect on growth of income inequality 19801990, which supports the
ndings of Alderson and Nielsen (1999). However, secondary education has no signicant
effect on changes in the fertility rate over the same period of time. I suspect this is because the
effect may be an indirect one, generated by educations negative effect on income inequality.
We would, therefore, need to examine the change of fertility rates over a different time
period, such as 19901997, to determine the effect.
I have reserved discussion of one signicant nding for last: the effect of foreign capital
dependence on economic growth. These analyses conrm that foreign capital dependence has
a signicant long-term negative effect on GNP per capita growth, controlling for fertility rates,
foreign investment ows, gross domestic investment, trade/GDP, education, GNP and GNP per
capita. This claries the (apparently) contradictory ndings of Kentor (1998) and Soysa and
Oneal (1999), and emphasizes the need for a long-term perspective on these global processes.
These (negative) ndings have been demonstrated in so many different models, with different
cases and different indicators that one wonders if there is any evidence that will sufce to
quell this controversy among those who question its validity.
Conclusion
It is evident from this research that national inequality, population growth, and economic
development are inter-related parts of a complex system nested within a multi-dimensional
global network of unequal economic, social and political relationships. Further, these dynamics
are best understood as a single, unied process that occurs over an extended period of time.
This work also suggests that it is not productive to construe globalization as simply good
or bad. Rather, we need to explore the (sometimes competing) effects of the various compo-
nents of this global process. This study nds that one aspect of globalization, foreign capital
penetration, has a long-term negative effect on per capita GNP growth, while a second dimen-
sion, trade openness, has a positive impact. It is only by decomposing these differential effects
that that we can develop an accurate understanding of the overall outcome of what we refer
to as globalization, and allow us to generate informed policy decisions.
While this research identied two aspects of globalization that have signicant impacts on
the intra-national processes included in these analyses, there are other aspects of global inte-
452 KENTOR
gration that warrant our attention as well. These include various aspects of trade dependence
(commodity concentration, partner concentration, trade composition), as well as other forms
of capital dependence (portfolio investment, debt, foreign aid). These are all worthwhile ave-
nues for future study.
References
Alderson, Arthur, and Francois Nielsen
1999 Income inequality, development and dependence: A reconsideration. American Sociological
Review 64:606631.
Alesina, Alberto, and Roberto Perotti
1996 Income distribution, political instability, and investment. European Economic Review
40, 6:12031228.
Alesina, Alberto, and Dani Rodrik
1994 Distributive politics and economic growth. Quarterly Journal of Economics 109:465490.
Amin, Samir
1976 Unequal Development. New York. Monthly Review Press.
Appendix A Correlation Coefcients and Cases Available for All Variables Included in the Analyses
FIF ENRL FERT FRTc GDI TRAD GNPc GNP INEQ INQc POPg GNPg
(2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13)
(1) Foreign Inv. stocks/GDP 1980 .51 .25 .11 .18 .34 .52 .42 2.22 .16 .24 2.00 2.13
N 71 61 72 71 72 73 73 72 34 28 73 71
(2) Foreign Investment Flows 1980 .02 .06 .13 .37 .35 .27 2.13 .03 2.03 2.02 .01
N 67 78 77 81 82 82 80 35 28 81 80
(3) 2ndary School Enroll 1980 .11 .09 .14 .23 2.19 2.25 2.09 2.41 .14 .00
N 69 68 67 68 69 67 28 24 68 67
(4) Fertility Rate 1980 .05 .03 2.05 2.10 2.14 .24 .34 .76 2.49
N 80 79 80 81 79 34 28 80 78
(5) Fertility Rate Change 19801990 2.29 .12 2.31 2.50 .56 .24 .34 2.37
N 78 79 80 78 28 28 80 77
(6) Gross Domestic Invest 1980 .50 .39 2.14 2.25 2.03 2.19 .13
N 86 86 84 35 28 85 84
(7) Trade/GDP 1980
.24 2.58 .13 2.04 2.10 .13
N 87 85 35 28 86 85
(8) GNPpc 1980 .39 .22 .44 2.48 .29
N 86 35 28 87 85
(9) GNP 1980
2.22 .20 2.20 .27
N 34 28 86 83
(10) Income Inequality 1980 .12 .25 2.16
N 28 34 34
(11) Income Inequality 19801990
.13 2.25
N 28 28
(12) Population Growth 19901997
2.44
N 85
(13) GNPpc Growth 19901997
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