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, weestimate panel data models by applying the Cross-Sectional DependencyAutoregressive 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 the upper-middle, lower-middle and high-income groups to minimizecountry-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 the robustness of our analysis applying U-test and dynamic GMM approach. We finally provide several policy implications