The Unassuming Economist

From a VOX post by Davide Furceri, Prakash Loungani, and Jonathan D. Ostry:

“Free trade has contributed to a ‘great convergence’ of emerging market countries toward incomes in industrialised nations in recent decades. It is less clear whether free mobility of capital across national boundaries has conferred similar benefits. This column presents evidence suggesting that the gains in average incomes have been – at best – small, while increases in income inequality and the decline in the labour share of income have been significant. Financial globalisation thus poses far more difficult equity-efficiency trade-offs than free trade and should be at the centre of debates about how to make globalisation inclusive.

Even some staunch defenders of international trade have long been sceptical of the benefits of financial globalisation (e.g. Bhagwati 1998). Rodrik (1998) famously wrote that letting capital flow freely across the world would leave economies “hostage to the whims and fancies of two dozen or so thirty-somethings in London, Frankfurt and New York”. Arteta et al. (2001) concluded that any evidence of a positive impact of capital account liberalisation on growth is “decidedly fragile”, a finding that has largely held up in the literature that has followed.

Our recent work takes a fresh look at the effects of policies to liberalise international capital flows for a group of nearly 150 countries over the period 1970-2015 (Furceri et al. 2019). There are two novel aspects of our work.

• First, we look at the impact on both average (or aggregate) income as well as the distribution of income. While the potential for international trade to generate ‘winners and losers’ has long been recognised – and has been the source of much recent debate – financial globalisation has tended to go scot free of similar scrutiny.

• Second, we use industry-level data to identify some of the causal mechanisms through which financial globalisation has aggregate and distributional impacts.”

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