ChainWhat it assumes · how to break it
Start
Multinationals set up plants in the capital city and in coastal export zones of a developing economy.
1
As a result, the multinational hires local workers directly to build and staff the plant, since labour is a derived demand.
derived demand
derived demand
Assumes: The multinational recruits locally rather than bringing in its own staff.
But: Managerial and technical posts are often filled by expatriates, and a highly automated plant may employ few workers.
2
This means the multinational pays higher wages than local firms to attract workers, especially those with education and skills, who are concentrated in cities.
wage differentials
wage differentials
Assumes: The multinational pays above local wages.
But: In low-skill assembly, multinationals may pay close to the local minimum wage.
3
As a result, a gap opens between a modern, high-productivity urban sector and a traditional rural sector where incomes stay low.
dual economy
dual economy
Best link to attack
Assumes: The benefits stay in the modern sector and do not spread to rural areas.
Assumes: The benefits stay in the modern sector and do not spread to rural areas.
But: As the modern sector grows it draws in more rural workers, and money sent home by migrant workers raises rural incomes.
4
In addition, profits go to foreign owners and local shareholders, who are already among the richest, rather than to workers.
profit repatriation · functional distribution of income
profit repatriation · functional distribution of income
Assumes: Profits are a large share of the income created.
But: Taxes on the multinational's profits can fund public services that benefit poorer households.
5
Therefore, income inequality widens, the Lorenz curve moves further from the line of equality and the Gini coefficient rises.
Lorenz curve · Gini coefficient
Lorenz curve · Gini coefficient
Assumes: The gains at the top are larger than any gains at the bottom.
But: If the jobs go mainly to poor workers leaving subsistence farming, incomes at the bottom rise too and inequality may fall.
End
Income inequality widens as a dual economy develops between the modern, foreign-invested sector and the traditional rural sector.
Evaluation chain
- E1However, whether the dual economy persists depends on how long the modern sector takes to absorb workers from the traditional sector.
- E2Because the modern sector keeps expanding while FDI continues, it draws more and more rural workers into higher-paid jobs over time.
- E3As a result, inequality may rise in the early stages of development and then fall as the surplus rural labour is used up, as the Kuznets curve suggests.
- E4So FDI is likely to widen inequality in the short run, but the effect may be reversed over a longer period, especially if the government taxes and spends to share the gains.
Another way to attack it: Absolute poverty can still fall even while inequality widens, because the jobs created pay more than subsistence farming.
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Questions this answers
- Assess the impact of multinational investment on income inequality in developing countries.
- Discuss whether globalisation has increased inequality within emerging economies.
- Explain what is meant by a dual economy and how FDI might create one.
Diagram
Lorenz curve moving further from the line of equality, with the Gini coefficient rising.
Reverse and related
Withdrawal of FDI → modern-sector jobs lost; the urban-rural gap may narrow, but mainly because urban incomes fall.