Financial Liberalization, Inequality and Inclusion in Low-Income Countries

Abstract

This paper examines the distributional impact of capital account reforms and the linkage among liberalization, inequality and inclusion in low-income countries. Using a panel data for 29 low-income countries from 1970 to 2010, we find that capital account liberalization reforms are associated with statistically significant and persistent increase in income inequality in both short and medium term. We also highlight that the level of financial development has an important role in determining the response of inequality to liberalization: impact of capital account liberalization on inequality is larger in countries with lower level of credit market development and financial inclusion.