Globalization, decentralization and income inequality: The case of China

The current study examines the effect of trade liberalization and expansion of foreign direct investment inflows, together with the pursuit of decentralization, on China's income inequality between 1985 and 2007. As the degrees of integration of the concerned variables are revealed to be different,Stock and Watson (1993) dynamic ordinary least squares method is employed to reveal the cointegrating relationship. The empirical evidence shows that trade liberalization has led to the higher income inequality, discrediting the Stolper-Samuelson theorem in international trade. There is mixed evidence relating to the effect of FDI inflows on income inequality. Decentralization is shown not to influence it.

► The effect of globalization and decentralization on inequality is analyzed. ► The data set covers the case of China during 1985-2007. ► Trade liberalization has a positive effect on income inequality. ► Decentralization is not related to income inequality.