## Openness and Inequality: Distributional Impacts of Capital Account Liberalization

_IMF Blog, November 24, 2015_

## Source details

**Canonical URL:** [Openness and Inequality: Distributional Impacts of Capital Account Liberalization](https://www.imf.org/en/blogs/articles/2015/11/24/openness-and-inequality-distributional-impacts-of-capital-account-liberalization)

## Other formats

- [Markdown version](/en/blogs/articles/2015/11/24/openness-and-inequality-distributional-impacts-of-capital-account-liberalization/index.md)
- [Structured JSON version](/en/blogs/articles/2015/11/24/openness-and-inequality-distributional-impacts-of-capital-account-liberalization/index.json)
- [Bundle manifest](/en/blogs/articles/2015/11/24/openness-and-inequality-distributional-impacts-of-capital-account-liberalization/bundle-manifest.json)

## Bibliographic details
- Authors: Davide Furceri, Prakash Loungani
- Published: November 24, 2015

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### Overview and dataset
- Authors: Davide Furceri, Prakash Loungani
- Publication date: November 24, 2015
- Dataset: nearly 150 countries from 1970 to 2010
- Measure of capital account openness: the Chinn-Ito index (based on restrictions on cross-border financial transactions reported by the IMF)

### Main empirical findings
- Capital account liberalization is followed by increases in inequality, as measured by the Gini coefficient.
- Capital account openness increased across all income groups, with a significant rise at the beginning of the 1990s.
- Quantified impacts:
  - Capital account liberalization has typically increased the Gini index by 1 percent within two years of the liberalization.
  - Capital account liberalization has typically increased the Gini index by 1.5 percent within five years of the liberalization.
- Robustness: the qualitative result is said to be robust to various stress tests documented in the paper.

### Channels and heterogeneity in effects
- Financial development and inclusion:
  - The increase in inequality after liberalization is smaller in countries with higher levels of financial development and inclusion.
  - The increase in inequality is higher in countries where financial inclusion is lower (as illustrated by Chart 2 referenced in the text).
- Crisis transmission:
  - Liberalization that is not well managed or well sequenced increases the likelihood of financial crises.
  - The impact of openness on inequality is sharply higher in cases where there is a financial crisis in the immediate aftermath of liberalization (as illustrated by Chart 3 referenced in the text).

### Policy implications and recommendations
- The results do not imply that countries should not liberalize capital accounts; capital flows can provide substantial benefits, including enhancing efficiency, promoting financial sector competitiveness, and facilitating greater productive investment and consumption smoothing.
- Cautions and design considerations:
  - Proceed with caution because capital flows can be volatile and—given their large size relative to domestic markets—pose risks to economic and financial stability.
  - Where reducing inequality is an important policy goal, design liberalization to address its potential impact on inequality.
  - Follow the IMF’s institutional view that capital flow liberalization is generally more beneficial and less risky if countries have reached certain levels or thresholds of financial and institutional development.
  - Ensure liberalization is well managed and accompanied by higher financial inclusion to mute adverse distributional effects.

*Source: Openness and Inequality: Distributional Impacts of Capital Account Liberalization (IMF blog post, November 24, 2015).*

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## Content in this bundle

- **Content unit 111412 — "The Liberalization and Management of Capital Flows"**
  - [Content unit 111412 — "The Liberalization and Management of Capital Flows" (Markdown version)](/external/np/pp/eng/2012/111412.pdf.md){rel="alternate" type="text/markdown"}
  - [Content unit 111412 — "The Liberalization and Management of Capital Flows" (PDF)](/external/np/pp/eng/2012/111412.pdf){rel="external" type="application/pdf"}

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## References

- [Our paper](http://www.imf.org/external/pubs/cat/longres.aspx?sk=43414.0)
- [institutional](http://www.imf.org/external/pubs/ft/survey/so/2012/POL120312A.htm)

_Source: https://www.imf.org/en/blogs/articles/2015/11/24/openness-and-inequality-distributional-impacts-of-capital-account-liberalization_