by Joseph Joyce
The global financial crisis slowed the pace of financial globalization, while the impact of the pandemic on its future course is unclear. But enough time has elapsed to assess the record of integrated financial markets that greatly expanded in the 1990s and early 2000s. The evidence on one issue—financial openness and inequality—is clear: financial globalization has increased inequality.
Enrico D’Elia of the Italian Ministry of Economy and Finance and the Italian Institute of Statistics (ISTAT) and Roberta De Santiss, also of ISTAT, analyzed this issue in their 2019 working paper, “Growth Divergence and Income Inequality in OECD Countries: The Role of Trade and Financial Openness.” They used an error-correction model to differentiate between short- and long-run effects on the Gini index, and divided the OECD countries into low-, middle- and high income over the period of 1995-2016. Increases in financial integration, as measured by foreign assts and liabilities scaled by GDP, increased income disparities in both the short- and long-run in the total sample. In the long-run there is a negative effect on the Gini index within the low-income countries, but there is a much larger positive impact within the high-income group. They attribute this finding to the advantage that the financial sector derives from financial innovation in those countries. In their results relating to growth, they reported that financial openness had a positive impact on the economic growth of the middle-income group alone, and it only occurred in the short-run.