## Inequality and the Structure of Countries’ External Liabilities

_IMF Working Papers, July 8, 2022_

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**Canonical URL:** [Inequality and the Structure of Countries’ External Liabilities](https://www.imf.org/en/publications/wp/issues/2022/07/08/inequality-and-the-structure-of-countries-external-liabilities-517758)

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## Bibliographic details
- Authors: Philipp Harms, Mathias Hoffmann, Miriam Kohl, Tobias Krahnke
- Published: July 8, 2022
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798400210372.001

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### Summary
- Higher income inequality is associated with a greater equity share in countries' external liabilities.
- The paper develops a theoretical model to explain this empirical observation in the context of a small open economy with traded and nontraded goods.
- Entry barriers in nontraded industries depress entrepreneurial activity, raise income inequality, create space for foreign firms in the domestic market, and reduce external borrowing.
- The model suggests that barriers to entrepreneurial activity could be conducive to attract equity-type capital inflows.
- The authors' empirical results lend some support to this conjecture.

### Empirical findings
- Observed association: higher income inequality → greater equity share in external liabilities.
- Empirical results provide supportive evidence for the model's conjecture linking entry barriers, entrepreneurship, inequality, and the composition of external liabilities.

### Theoretical model (framework and mechanisms)
- Environment: small open economy featuring traded and nontraded goods.
- Mechanism:
  - Entry barriers depress entrepreneurial activity in nontraded industries.
  - Reduced domestic nontraded-goods firm entry raises income inequality.
  - Fewer domestic nontraded-goods firms leave room for foreign firms to operate domestically.
  - Presence of foreign firms and fewer domestic borrowers reduce external borrowing, increasing the equity share of external liabilities.
- Implication: barriers to entrepreneurial activity can be conducive to attracting equity-type capital inflows.

### Policy implications and interpretation
- Barriers to entrepreneurial activity affect both income distribution and the structure of external liabilities.
- Policies that lower entry barriers may influence the composition of external liabilities by altering domestic entrepreneurial activity and the scope for foreign firm entry.
- The link between inequality and external liability composition suggests that reforms targeting entrepreneurship and market entry could have cross-cutting effects on external finance composition.

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_Source: https://www.imf.org/en/publications/wp/issues/2022/07/08/inequality-and-the-structure-of-countries-external-liabilities-517758_