Welfare State, Inequality, and Globalization: Role of International-capital-flow Direction

Assaf Razin and Efraim Sadka

No 13684, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Globalization, in the form of financial flows, which is always advantageous on an aggregative level, typically creates winners and losers, if left exclusively to market forces. The effects of financial globalization on income inequality depends on whether the country exports its capital to the rest of the world or imports capital from abroad. In the capital-exporting case, financial globalization drives up return to savings and drives down wages. In the capital-importing case, financial globalization tends to raise wages but lower return on savings. Therefore, the distributive policies of the welfare state in its role of spreading the gains from financial globalization to various income groups varies, depending on whether the country exports, or imports capital. The paper demonstrates that typical welfare-state redistribution policies, governed by a majority of the population, spreads the globalization’s gains from trade to all income groups, even those who are low skilled and have small capital endowments. Therefore, financial globalization of a welfare- state economy generates a Pareto improvement. At the same time, globalization, through enhanced capital mobility and high-skill emigration diminishes the generosity of the welfare state.

Keywords: Capital export; Capital import; Gains from trade; Generosity of welfare state (search for similar items in EconPapers)
Date: 2019-04
New Economics Papers: this item is included in nep-int
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Citations: View citations in EconPapers (2)

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