Capital Openness and Income Inequality: Smooth Sailing or Troubled Waters
In recent decades, rising inequalities in national income and wealth have been accompanied by inequality in living standards between developed and developing countries. A new book, “International Policy Rules and Inequality: Implications for Global Economic Governance” edited by Jose Antonio Ocampo, analyzes the question: to what extent are the rules that govern the global economy – or the lack of them – basic determinants of these trends?
The book features a chapter titled “Capital Openness and Income Inequality: Smooth Sailing or Troubled Waters” by Kevin P. Gallagher, Guillermo Lagarda and Jennifer Linares. The authors conduct a big data econometric exercise and find that the deregulation of cross-border financial markets in developing economies lessens inequality during an economic boom, but significantly increases inequality during busts. The group also finds that regulating financial markets during busts lessens the downward pressure on inequality.
This work has important lessons for policy: unbridled financial markets can accentuate inequality over time, and nations need the institutional capability and policy space to regulate such financial markets. Given that an increasing number of trade and investment treaties make it more difficult to regulate cross-border financial markets, current systems of global economic governance may yield more inequality and instability. Moving forward, trade and investment treaties need reform to allow nations the policy space to regulate cross-border finance.