Sergi Basco, Martí Mestieri — The new globalisation and income inequality

Trade in intermediates (or ‘unbundling of production') and trade in capital have become increasingly important in last 25 years. This column shows that trade in intermediates generates a reallocation of capital across countries that exacerbates world inequality in both income and welfare. Unbundling of production hurts middle-income countries but helps those with high productivity. Trade in intermediates also increases within-country inequality, and this increase is U-shaped in the aggregate productivity level of the country....

There exists a general consensus among economists that globalisation is good at the world level. However, the increasing discontent with globalisation in developed countries has forced economists to better understand the mechanisms through which it affects the distribution of income between and within countries. In this column, we have discussed that in the most developed (productive) economies, the new globalisation is good at the country level but it generates a redistribution of income towards capital. Thus, the optimal policy for these countries does not seem to be to put the brakes on the emergence of global supply chains but to better redistribute income within the country. Finally, it is worth mentioning that since the new globalisation amplifies competition among countries, the returns to productivity enhancing policies (like education or infrastructure) have increased. 

VoxEU
The new globalisation and income inequality
Sergi Basco, Martí Mestieri