Does Globalization Affect Inequality? An Analysis of Vietnamese Data

Abstract:The relationship between economic integration and income inequality is extremely contentious due to its complicated impact across key channels of globalization. This paper analyses the distributional effects of globalization through foreign direct investment (FDI) inflow and foreign trade (FT) volume. Data collected from Vietnam over the 2006–16 period provide evidence in support of the government's advocacy efforts to join the global economy. The two-step system generalized method of moments is used to construct the key estimate for this analysis with two cases: simultaneous effect and single causal effect. The findings show that while FDI worsens inequality, FT counteracts this effect to a greater magnitude, and the aggregate impact of globalization on inequality is negative. As openness is found to be generally beneficial to Vietnam's economy in terms of income distribution, this study also examines potential policies related to the country's globalization ambitions.