Distributional Impacts of Capital Flows_IMF OECD WB Conference Sept 2020

Distributional Impacts of Capital Flows Discussion of Eichengreen, Csonto, El-Ganainy and Koczan (2020) and Liu, Spiegel and Zhang (2020)

Olivier Jeanne, Johns Hopkins University Third Joint IMF-OECD-World Bank Conference on Structural Reforms: Improving the Income Distribution Effect of Market Reforms in a Post-COVID-19 World

September 2020

Olivier Jeanne (JHU)

Distributional Impacts of Capital Flows

Capital Account Liberalization and Inequality Long-standing questions about capital account liberalization and growth positive impact? at what pace to liberalize? sequencing? large and largely inconclusive literature (e.g., Kose, Prasad, Rogoff and Wei, 2009; Jeanne, Subramanian and Williamson, 2011, etc.)

What is the impact of capital account liberalization on income inequality?

The answer should be more complicated than for growth

Capital Account Liberalization

?

Olivier Jeanne (JHU)

Growth

?

Inequality

Distributional Impacts of Capital Flows

Capital Account Liberalization and Inequality The best we can expect is a list of possible answers with many conditions and caveats Eichengreen et al (ECEK) gives a complete and careful discussion of the mechanisms at work and how they could lead to opposite effects this should become the go-to review of possible links between financial globalization and inequality

The empirical evidence that they provide is ambiguous (except for remittances) cross-country, capital account liberalizations (on FDI or not) tend to be associated with increases in income inequality in Mexico, however, states that received more FDI had larger decreases in income inequality Olivier Jeanne (JHU)

Distributional Impacts of Capital Flows

Capital Account Liberalization and Inequality Three main mechanisms, leading to ambiguous answers 1

Capital account liberalization reduces capital scarcity (through FDI but not only): K % if homogeneous labor, Y = F (K , L), less inequality but in general, ambiguous results because capital could complement high-skill more than low-kill labor and I would add: capital could substitute rather than complement labor (robotization)

2

Portfolio diversification: helps to smooth consumption against income shocks, with no robust implications for income inequality

3

Political economy: capital account liberalization reduces the bargaining power of labor and the ability to redistribute (more inequality)

ECEK’s policy recommendations are mostly “motherhood and apple pie” except for the recommendation to adapt the composition of FDI inflows to domestic supply of skills (but how to do that in practice?)

Olivier Jeanne (JHU)

Distributional Impacts of Capital Flows

Capital Account Liberalization and Inequality Liu, Spiegel and Zhang (LSZ) present a model that makes clear predictions and test the predictions Model has capital scarcity channel: they assume Y = F (K , L) Tobin’s q, overlapping generations and a variety of financial frictions

hold K, price q Entrepreneurs

inflows

Banks outflows

Households

Olivier Jeanne (JHU)

Distributional Impacts of Capital Flows

Capital Account Liberalization and Inequality Model predictions In the long run, capital account liberalization reduces inequality main channel is capital scarcity: K and W %

In the “short run� (1 period=10 years), this depends on the impact on the price of capital q liberalization of inflows raises price of capital and increases inequality liberalization of outflows lowers price of capital and decreases inequality more generally, gross inflows (outflows) are correlated with increases (decreases) in inequality this is empirically validated with annual data on gross capital flows and Gini coefficients for a sample of 86 emerging market economies Olivier Jeanne (JHU)

Distributional Impacts of Capital Flows

Capital Account Liberalization and Inequality

Gross inflows Gross outflows Official reserves Stock market index (right axis)

Percent of trend GDP

12 10

100 80 60

8

40

6

20

4

0

2

-20

Deviation from trend (percent)

14

-40

0 2000

2002

2004

2006

2008

2010

2012

2014

2016

Figure: Gross capital flows in EMs (Source: Jeanne and Sandri (2020)

Olivier Jeanne (JHU)

Distributional Impacts of Capital Flows

Capital Account Liberalization and Inequality

Conclusion Taken together, the two papers illustrate how complicated it is to predict the impact of capital account liberalization on inequality Asset prices may be the dominant influence in the short run Powerful opposite influences in the long run (capital intensity, redistribution,...) that seem hard to identify in the data

Olivier Jeanne (JHU)

Distributional Impacts of Capital Flows