On the Impact of Financial Globalization on Income Inequality: Evidence from Vietnam
Title: On the Impact of Financial Globalization on Income Inequality: Evidence from Vietnam (with Michael Binder)
Abstract: Vietnam between 2000 and 2019 saw its GDP per capita in PPP terms quadrupling, and thus within one generation turned from one of the world’s poorest economies into a middle-income economy. This development is widely attributed to policy reforms, including the Law on Foreign Investment enacted in 1986, as well as benefits from subsequent financial and trade globalization (between 2000 and 2019, Vietnam’s net foreign assets grew by a factor of more than 22). It is widely perceived among economists, though, that financial globalization – and foreign direct investment in particular – is associated with an increase in income inequality. We take up this issue for the case of Vietnam and study the impact of increases in foreign direct investment on income inequality. Employing eleven rounds of the biannual Vietnam’s Living Standard Measurement Survey between 2002 and 2020, we find that the overall adjusted Gini coefficient for Vietnam has fallen from 0.562 in 2002 to 0.365 in 2022. However, this development was not shared among all provinces, with the level of inequality even increasing in some provinces. Using our panel, we find that income inequality within a province falls when, following an increase in foreign direct investment, increases in the number of foreign direct investment sector jobs are accompanied by increases in the number of private sector jobs, allowing rural workers to diversify their income away from farming sources. Given the same magnitude of foreign direct investment inflows, provinces that allow for the expansion of the labor share within the domestic private sector see a reduction of income equality. In contrast, state capital, known to be strongly redistributive by taxing the wealthier provinces to invest in the infrastructure of poorer provinces, only plays a role as an incubator when a province is still relatively poor. The impact of state capital, on the other hand, reverses when the private sector is relatively strong. Our findings are robust to a variety of sensitivity analyses.