Capital Account Liberalization and Inequality

My paper with Davide Furceri on the effects of capital account liberalization on inequality is now forthcoming in the Journal of Development Economics and is available (link) at the JDE website. We find that capital account liberalization is associated with a persistent increase in the share of income going to the top. We investigate three 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. For those without access to the JDE, an earlier working paper (link) version is available.

Figure 10. The effect of capital account liberalization on the top income shares


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Labels: Inclusive Growth


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