A New Index of Globalization: Measuring Impacts of Integration on Economic Growth and Income Inequality

Abstract

The purpose of this study is twofold. The first is to develop a new composite index of globalization based on data on 158 economies over the period 2006–2014. The second intention is to use the new index to evaluate empirically the possible effects of globalization on economic growth and income inequality. The index comprises 25 indicators that represent the key socioeconomic components of global integration. Principal component analysis is used to weight each component and construct an aggregate measure. Unlike previous composite indexes, this study separates the contributions of intraregional and extraregional integration in the construction of the globalization index. The results show that although globalization promotes economic growth, it may worsen income inequality. High-income countries benefit most in that the positive effect of globalization on economic growth is strongest among them than on other income groups, and they experience a less pronounced widening of income inequality. Between the two drivers of global economic integration, intraregional integration is far more important than extraregional integration. The analysis also finds extraregional integration to be mainly responsible for the rise in income inequality that has accompanied globalization.