Research projects

The goal of the research project submitted to Fundación Ramón Areces was to understand how the New Globalization affects inequality in the long run. The term New Globalization is used to define the increase in world trade in intermediate goods that took place in the 1990s and that resulted in the formation of a global supply chain. The poster child of this global supply chain is the production of the iPhone. The iPhone is designed in the U.S., but it is assembled in China, which imports parts and components from all over the world. The first challenge of the project was to identify the main difference between intermediate goods and final goods. We documented that intermediate goods were more heterogeneous in the capital (per worker) required for production than final goods.

Once we highlighted this difference, the ensuing goal was to analyze how trade in intermediate goods affects the world distribution of income (and welfare). We found that the New Globalization exacerbates income (and welfare) inequality across countries. The reason is that rich countries specialize in intermediate goods intensive in capital, they accumulate more capital and they become even richer in the long run. The last challenge was to analyze how the New Globalization changes the income distribution within the country. The first result was to show that inequality increases in all countries. In addition, we showed that the increase in inequality has a U-shape in the level of productivity of the country. That is, within-country inequality increases more in very productive countries. The reason is that these very productive countries specialize in intermediate goods that are very intensive in capital and, thus, the return on capital (with respect to labor) increase a lot.