The long and short of it: Global liberalization, poverty and inequality

Global deregulation of current and capital account is often touted as successful means to reduce poverty and inequality. On the face of it, though, the evidence does not support this claim. Rising intra-country inequality is widespread, income inequality between countries grows, the absolute number of people living in poverty increases, and poverty rate reductions are geographically isolated. Critics of global deregulation have charged that more deregulated trade flows result in a worse income distribution and unregulated capital flows in more macro economic instabilities that are especially harmful to the poor. Using data from the World Bank, the IMF and the UN, we test the impact of increased deregulation on the incomes of the poor. Our results indicate that global deregulation of trade and capital markets does hurt the poor. We find that the income share of the poor is generally lower in deregulated and in macro economically less stable environments, which are more prone to occur after capital account liberalization. The evidence also suggests that trade flows in more regulated environments may be good for growth and, by extension, for the poor in the long-run.