Income distribution and financial crises in the light of neoliberal policies: An investigation on selected countries

In recent years, the target of fair income distribution has begun to be shown among the priority of strategic planning targets for many countries. The distribution of equitable income which is examined within the theories of distribution in economics has been examined by all schools of economic thought that have dominated the global economic system throughout the history. Neoliberalism, which is accepted as one of the modern dominant economic thought, is also proposing two basic policies, which are economic globalization and economic liberalization, as a solution of the problem of increasing income inequality. However, the success of economic globalization policies in reducing the income inequality is still a matter of debate in the economic literature. Moreover, there are controversies that liberalization policies aimed at reducing income inequality play a key role in the emergence of financial crises. Based on above discussions, the main purpose of this study is to examine the effects of economic globalization and liberalization policies which are suggested as a solution of income inequality by Neoliberal thought on income distribution and to investigate the roles of these policies on financial crises. To this end, the effects of economic globalization on income inequality is examined in a panel of 70 countries consisting of developed, developing and underdeveloped countries for the period from 1991 to 2013, taking into account the basic factors considered to affect income inequality. In doing so, the second generation panel data methodologies which take into account the cross-sectional dependency are utilized in order not to ignore the possible cross-sectional dependence among countries. Then, a second empirical model has been constructed to examine the role of financial deregulation policies implemented against the problem of increasing income inequality in the financial crisis, and 10 developed countries are observed for that model. In this model, in accordance with the literature, credit expansion has been used as an indicator of financial crises and the effects of the income inequality on the credit expansion have been investigated without regard to the basic factors that have influenced credit expansion. Within the scope of this model, the causality relations between variables are examined with time series methods in order to obtain results separately for each observed country and the causal relationship between income inequality and credit expansion is also investigated with the rolling window causality procedure. When the findings of the first model examining the effects of economic globalization on income inequality are evaluated on a global scale, it is seen that economic growth and economic globalization increase income inequality; and the accumulation of human capital reduces income inequality. In the second model, the hypothesis that the financial deregulation policies applied against the problem of income inequality play a key role in the emergence of financial crises seems to be valid for the countries which are accepted as Anglo-Saxon model but not for the Scandinavian model and the Continental European model countries.