Episodes of account liberalization increase the Gini measure of inequality, based on panel data estimates for 149 countries from 1970 to 2010. These episodes are also associated with a persistent increase in the share of income going to the top. The authors investigate 3 channels through which these impacts could occur. First, the impact of liberalization on inequality is stronger where credit markets lack depth and financial inclusion is low; positive impacts of liberalization on poverty rates also vanish when financial inclusion is low. Second, the impact on inequality is also stronger when liberalization is followed by a financial crisis. Third, liberalization seems to alter the relative bargaining power of firms and workers: the labor share of income falls in the aftermath of capital account liberalization.
This work is part of the ‘Macroeconomics in Low-income countries’ programme
Davide Furceri, Prakash Loungani, The distributional effects of capital account liberalization, Journal of Development Economics, Volume 130, 2018, Pages 127-144, https://doi.org/10.1016/j.jdeveco.2017.09.007.
The distributional effects of capital account liberalization
Published 7 September 2017