Financial globalisation and the welfare state

A new VOX column by Assaf Razin and Efraim Sadka argues that “Financial globalisation shifts the tax burden away from the mobile factor – i.e. domestic capital – to the immobile factor – i.e.  labour. However, the total tax burden becomes smaller, and consequently the provision of the social benefit is reduced. These results obtain regardless of which skill type form the majority. Naturally, the tax rates on capital and labour are higher when a low-skilled type form the majority than when the high-skilled type forms the majority. […] the welfare system, either under the high-skilled regime or under the low-skilled regime, acts as a device that compensates the loser at the expense of the winner in such a way that financial globalisation generates Pareto-improving changes.”

In my recent paper with Davide Furceri and Jonathan Ostry, we find that financial globalisation has led, “on average, to limited output gains while contributing to significant increases in inequality. Behind this average lies considerable heterogeneity according to country characteristics. Liberalization increases output in countries with high financial depth and that avoid financial crises (and vice-versa), but distributional effects are more pronounced in countries with low financial depth and inclusion, and whose liberalization is followed by a financial crisis.” My paper is available here.

Posted by at 5:55 PM

Labels: Inclusive Growth


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