The Aggregate and Distributional Effects of Financial Globalization: Evidence from Macro and Sectoral Data

Abstract

We take a fresh look at the aggregate and distributional effects of policies to liberalize international capital flows—financial globalization. Both country‐ and industry‐level results suggest that such policies have led on average to limited output gains while contributing to significant increases in inequality. The country‐level results are based on 228 capital account liberalization episodes spanning 149 advanced and developing economies from 1970 to the present. Difference‐in‐difference estimation using industry‐level data for 23 advanced economies suggests that liberalization episodes reduce the share of labor income, particularly for industries with higher external financial dependence, higher natural propensity to use layoffs to adjust to idiosyncratic shocks, and higher elasticity of substitution between capital and labor.

The Political Costs of Reforms

“…(continued) Figure 7). 11 These results are consistent with prior findings suggesting that financial sector reforms are prone to engender increased income inequality (see, for example, de Han and Sturm 2017; Furceri and Loungani 2018;others 2018, 2019;Furceri, Loungani, and Ostry forthcoming). 12 The results presented in Figure A3.1 of Online Annex 3 corroborate these findings and show that while financial sector reforms are associated with increased inequality, real sectoral reforms have minor distributional consequences.…”

Populism and the economics of globalization

“…In a remarkable series of papers, researchers at the IMF have documented these negative inequality impacts (Jaumotte et al 2013;Furceri and Loungani 2015). Most noteworthy is the recent analysis by Furceri et al (2017) that looks at 224 episodes of capital account liberalization, most of them taking place during the last couple of decades. Liberalization episodes are identified by big changes in a standard measure of financial openness (the Chinn-Ito index) and large subsequent capital flows.…”

Capital Controls and Income Inequality

“…For example, Furceri and Loungani (2018) find that episodes of capital account liberalization are associated with increased inequality as measured by Gini coefficients. Furceri et al (2019) examine cross-country industry-level data and obtain similar results. Moreover, when inflow reversals inevitably do occur, their burdens are likely to fall disproportionately on the poor [e.g.…”

“…Households work, consume, and save for retirement when they are young; and consume their accumulated wealth when they are old. Entrepreneurs consume, invest, and borrow to finance their spending when they are young, and consume 1 Furceri et al (2019) find that countries with less developed financial systems experience larger increases in income inequality following capital account liberallization.…”