The Role of Financial Globalization through FDI in Driving Inequality in the Sub-Saharan Region

Abstract

This paper examines the relationship between globalization and income inequality in Sub-Saharan Africa (SSA). Globalization is here measured using trade variables like the openness rate (TO), financial variables including FDI while income inequality is measured by the GINI coefficient. This was achieved by using data from 26 countries over the period 2005-2014, using the System Generalized Method of Moments (SGMM) estimator to obtain results from the African context. The results suggested that trade openness exerted an equalizing effect while financial globalization through FDI has been the critical factor driving inequality in the SSA since 2005. The results also showed that outside of FDI, corruption contributes greatly to widening inequality by about 3%. The effect of the other control variables was all together insignificant. The prevailing economic status as portrayed following on the back of the 2008 financial crisis has led to an increase in inequalities in SSA countries. These results are robust to the using of the KOF Globalization index. Through this research, governments and policymakers have to introduce robust and appropriate policies and interventions in their drive for economic growth to decisively deal with corruption and so direct FDI to economically sound targeted priority programs.