One of the mantras of mainstream economics is that financial globalization—capital account liberalization, in the parlance—benefits everyone. Therefore, countries should adopt policies that facilitate the free movement of capital across national boundaries.
Support for financial globalization is, of course, part of a larger mainstream discourse that celebrates free markets. To wit, when markets exist, they should be free from any and all regulations and extra-market interventions; and, when markets don’t exist, they should be created. The idea is that free markets—of goods and services, as well as of capital, labor, and land—are necessary for an efficient allocation of resources.
It’s the argument that was made for deregulating Wall Street. And it’s the same argument that has been made by mainstream economists for cross-border flows of capital. Finance should flow freely both within and between countries.
But, of course, not everyone benefits from freeing up financial institutions and flows of capital, neither domestically nor internationally. The effects of financial liberalization are so unevenly distributed even the International Monetary Fund has taken notice.*
According to a recent study by Davide Furceri and Prakash Loungani (pdf), episodes of capital account liberalization are associated with a persistent increase in the share of income going to those at the top. In particular, liberalization has typically led to a medium-term increase in the top 1 percent income share of about 1 percent, and to a medium-term increase in the top 5 and top 10 percent income shares of about 2 percent. Not surprisingly, the impact of liberalization is stronger when financial inclusion is low and when liberalization is followed by a financial crisis.
But it’s the third mechanism that is of particular interest, since its effects are most felt in advanced economies. I’m referring to the relative bargaining power of employers and workers, in that capital account liberalization increases the threat to relocate production and jobs abroad. It therefore worsens the bargaining power of workers with respect to their employers.
According to Furceri and Loungani,
capital liberalization episodes have statistically significant and long-lasting effects on the labor share of income. In particular, the estimates suggest that reforms have typically decreased the labor share of income by about 0.6 percentage point in the short term—1 year after the reform—and by about 0.8 percentage point in the medium term—5 years after the reform.
So, as it turns out, not everyone benefits from financial globalization. Capital account liberalization hurts workers and increases the share of income going to those at the top.
It’s become increasingly clear, then, even to the IMF, that mainstream economists are responsible for celebrating a set of “sound” economic policies and an economic system that have generated the grotesque levels of inequality we see in the world today.
*Here’s the link to the IMF’s primer on its own research concerning the causes and consequences of inequality.