Nonlinear Relationship between Economic Growth and Nuances of Globalization with Income Stratification: Roles of Financial Development and Governance

We study the effect of overall globalization on economic growth in a neoclassical macroeconomic growth model. We further assess our model by considering the decomposed measures of globalization including economic, political and social globalization components. To this end, we estimate panel data models by applying the Cross-Sectional Dependency-Autoregressive Distributed Lags (CS-ARDL) approach as well as the two step System GMM method under the collapse option for a sample of 116 countries during the available time period 1980-2015. We classified our sample into upper middle, lower middle and high-income groups to minimize country specific heterogeneity. Our results affirm the presence of a quadratic (non-linear) U-shaped relationship between the overall
globalization (including the economic, political, social components) and
economic growth for the lower middle and upper middle-income group.
However, they provide evidence of a positive linear relationship between
globalization and economic growth for the high-income countries. Given
the arguments that the impact of globalization on growth is conditional
with local financial development (FD) and quality of governance (QoG)
hence we incorporate their role. We provide a fresh evidence that the
impacts of globalization on economic growth are more profound in the
countries with a higher QoG and a higher deepening of FD. We further
check robustness of our analysis applying U-test and dynamic GMM
approach. We finally provide several policy implications.