International Journal of Research and Innovation in Social Science (IJRISS) | Volume III, Issue II, February 2019 | ISSN 2454–6186

The Nexus between Globalization and Income Inequality in Sri Lanka

H.R.A.C. Thilanka

Department of Economics and Statistics, University of Peradeniya, Sri Lanka

Abstract: This study examines the impact of globalization on income inequality in Sri Lanka for the period of 1980-2015 based on the Cointegration technique and Vector Error Correction Model. The results of the study show that foreign direct inflows affect negatively the income inequality in long run implying that FDI inflows help to mitigate the income inequality. However, trade openness affects positively the income inequality in long run showing that although the country engages in global trade and does have comparative advantages, the income accumulation through this process is convergent. Moreover, School enrollment ratio (primary) has the negative impact on the income inequality implying that increasing the school education level may lead to have high level of employment and then it leads to decrease the income inequality through the distribution of income. These findings of the study lead to timely guidance for policy compilations on income inequality in the country. The government can tend to give more incentives for attracting FDI while imposing proper restrictions on imports, incentives for more exports and ensuring fair distribution of benefits from external trade. Moreover, it is necessary to create more employment opportunities to rise up the labor force participation through increasing the level of education.

Keywords: Foreign Direct Investment, Trade Openness, Income Inequality, Cointegration Technique, Error Correction Model

I. INTRODUCTION

Globalization tightens the interaction and integration among diverse economies and countries together through international trade, investments, information technology and outsourced manufacturing. Benefits as well as adverse effects can be arisen due to globalization. Among those, the impact of globalization on inequality is under heated debate. Globalization leads to increase in inequality because, trade increases differentials in returns to education and skills, and globalization marginalizes certain groups of people or geographic regions (Wan et al, 2007). In contrast, globalization helps to reduce the inequality (Srinivasan & Bhagwati; 2002 & Ben- David; 1993). Thus, it is clear that existing empirical evidences support both for negative and positive impacts of globalization on income inequality.

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