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Theoretical Holism in the Sociology of Development: Another Look at Foreign Direct Investment, Private Markets and Earnings Inequality During Post-Socialist Transition

Abstract

In this article, I apply Alderson and Nielsen’s (1999) holistic approach to the sociology of development by revisiting the consequences of private markets and foreign direct investment (FDI) for earnings inequality during post-socialist transition. I begin by arguing that FDI increases the pace of private market expansion and thereby affects inequality through an indirect causal pathway unrecognized in the literature. The total effect of FDI thus depends in part on how private markets drive distributional change. I then introduce a maturation thesis to reconcile debates over the distributional consequences of private markets, where private markets first reduce and then increase inequality. If FDI increases the pace of private market expansion and if the distributional consequences of private markets increase as they expand, then FDI’s total effect on inequality should grow with the expansion of private markets. Evidence drawn from a time-series cross-section regression analysis of earnings inequality among 18 transition countries supports this intervention. FDI increases the pace of private market expansion, and the effect of private markets changes from negative to positive as private markets expand. Thus the total effect of FDI increases with the size of the private market. I conclude by implicating these findings in debates about post-socialist transition and the sociology of development more generally.

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