The distributional consequences of globalization: a nonlinear analysis of Canada’s economic, social, and political dimensions

Abstract

This study examines the effects of globalization on income inequality with its economic, social, and political dimensions in the period 1995–2022, in the case of Canada. The model measures income inequality using the Gini Index as the dependent variable and incorporates three globalization dimensions, along with control variables like human capital, GDP per capita, foreign direct investment, and urban population growth. We employ Fully Modified Ordinary Least Squares (FMOLS) and Canonical Cointegration Regression (CCR) methods to assess long-term relationships. The study addresses the nonlinear effects of globalization’s economic, social, and political dimensions on income inequality. The findings indicate that economic and social globalization initially exacerbate income inequality, but eventually lead to improvements in income distribution as their effects reverse beyond a certain threshold. This demonstrates the nonlinear nature of these impacts on income distribution. Additionally, we find that human capital, foreign direct investment, and urban population growth reduce income inequality. However, GDP per capita exhibits a nonlinear relationship with income inequality, consistent with the Kuznets Curve hypothesis. Initially, GDP growth worsens income distribution, but at higher levels, it contributes to improving equality. This relationship was confirmed by the FMOLS estimates, but the CCR method did not confirm this result, suggesting that the impact of GDP on inequality should be interpreted with caution. Similarly, while FMOLS indicates a significant effect of political globalization on income inequality, the CCR method does not confirm this result, implying that the findings for political globalization should also be considered carefully. Overall, this study shows that economic and social globalization initially increase inequality, but their impact diminishes at higher levels. While human capital, foreign direct investment, and urban population growth all contribute to reducing inequality, these results reveal that when income equality is taken into consideration, globalization policies and economic growth strategies should be designed more carefully, with balancing policies aimed at reducing income inequality. In this context, a more detailed examination of the effects of different dimensions of globalization on income distribution will have important implications for policymakers.