Examination of financial liberalization in the context of inequality phenomenon and empirical findings

Bretton Woods system has acted as the roof of the financial system until the early 1970s; and in the last quarter of the 20th century, collapse of the system and the stagnation of capital accumulation in developed world led to the seek of a new financial system. This new system is based on neoliberal economic policies that center on financial liberalization. These policies were firstly adopted by developed countries and then by developing countries struggling with the debt crisis of the 1980s within the framework of the Washington Consensus. These policies were considered as prerequisites by Bretton Woods institutions like the IMF and the World Bank, for sustainable development of developing countries against their development problems. Thus, financial capital accumulation in developed countries and financing necessity of developing countries could be complemented each other in this process by the adoption of financial liberalization policies. Afterwards, apart from currency and debt crises one after another in developing countries, upward trend in inequality within countries after 1970-1980 period with the leading position of developed countries, have recently led to the questioning of the effect of financial liberalization and financial development on inequality in income distribution and thus expected returns and efficiency gains from neoliberal policies. This study aims to investigate this issue on which there is no consensus, for the period of 1996-2016 through static and dynamic, linear and nonlinear panel data analyses for a sample of 52 developed and developing countries. For this purpose, a variety of variables and indices measuring financial liberalization from different perspectives and Gini coefficient as income inequality measure were used. The results of the analysis provide strong evidence that an increase in credit expansion does not improve income distribution. On the other hand, there is no evidence that the indicators measuring the capital account liberalization and thus financial openness alleviate income inequality. Such that, coefficients of the rules-based de-jure indicators were found to be positive but insignificant. Moreover, as an actual de-facto indicator, some clues were obtained that an increase in the ratio of foreign direct investment stock to GDP increases income inequality. This linkage is affected by mediator factors such as economic growth and institutional quality measured by interaction terms, however no finding could be acquired as of the mediation effect is nonlinear.