DP12998 Financial Globalization and the Welfare State

Author(s): Assaf Razin, Efraim Sadka
Publication Date: June 2018
Programme Areas: International Macroeconomics and Finance
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=12998

The economic link between globalization and income distribution has been rigorously studied from the perspectives of the international-trade paradigm. However, the international-trade viewpoint does not address the impact of globalization on inequality-reducing redistribution policies. Financial globalization, not much studied in relation to income inequality, has first-order effects on international allocation of capital. Consequently it may trigger tax competition, which is directly related to redistribution policy. To understand a key mechanism which links financial globalization to redistribution policy, this paper develops a stripped-down model, where easing the country access to the world capital markets induces political-economy based policy changes that impact income inequality. We motivate the model's assumptions and predictions with evidence on financial globalization, international tax competition, and changes in the generosity of the welfare state.