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  • FINANCIAL LIBERALIZATION AND ITS

    DISTRIBUTIONAL CONSEQUENCES: AN

    EMPIRICAL EXPLORATION

    A Dissertation Presented

    by

    ARJUN JAYADEV

    Submitted to the Graduate School of the University of Massachusetts Amherst in partial fulfillment

    of the requirements for the degree of

    DOCTOR OF PHILOSOPHY

    September 2005

    Economics

  • c© Copyright by Arjun Jayadev 2005

    All Rights Reserved

  • FINANCIAL LIBERALIZATION AND ITS

    DISTRIBUTIONAL CONSEQUENCES: AN

    EMPIRICAL EXPLORATION

    A Dissertation Presented

    by

    ARJUN JAYADEV

    Approved as to style and content by:

    J. Mohan Rao, Chair

    Gerald Epstein, Member

    Michael Ash, Member

    James Heintz, Member

    Diane Flaherty, Department Chair Economics

  • ACKNOWLEDGEMENTS

    It is a daunting task to properly thank the many dozens of people who have

    made my graduate years in Amherst such a memorable experience. While I will

    undoubtedly omit a few, this allows me a chance to acknowledge collectively the

    people who have been my life of the last 7 years.

    It is customary to begin by thanking one’s committee,and with excellent

    reason. It is clear to me that whatever good there is in this dissertation is a

    result of their collective wisdom. J Mohan Rao, who directed this work, showed

    me the meaning of what it means to be a guide. He allowed me to explore freely,

    but whenever I would get lost in endless mazes of theory or come upon seemingly

    intractable barricades of inadequate data, his hand would be outstretched to

    firmly return me to a walkable path. Most people are lucky to find one advisor,

    but I have been incredibly fortunate in having two. Jerry Epstein’s extraordinary

    kindness, constant support, generosity and intellectual and emotional guidance

    ensured that what could have been a difficult time turned out to be a happy

    and productive one. As a mentor, he also provided me a home at PERI where

    he helped me navigate through the difficult but exciting questions that I wanted

    to ask. James Heintz and Michael Ash were also critical in making this PhD

    better. They both warmly and openly welcomed my (many) intrusions into their

    time, offered incisive comments, and even more constructive ideas. Wherever my

    future academic life takes me, it will bear the imprint of these four scholars.

    I have greatly benefitted also from my classes, conversations and collabora-

    tions with many of the other wonderful professors at UMass. I should like to

    acknowledge with the deepest of gratitude, Sam Bowles and ‘Uncle’ Jim Crotty,

    iv

  • for providing me with an unbelievably broad ranging and profound set of ideas

    about the world and our place in it. Just as one’s genetic inheritance remains

    through one’s life, the intellectual heritage I have gained by just knowing and

    talking to them will happily absorb my thoughts for a very long time. Many

    other professors have been kind and generous with their time and energies. Pe-

    ter Skott, Herb Gintis, and David Kotz have, at various times, been greatly

    encouraging.

    Doing graduate studies is much more, of course,than producing a dissertation.

    My life here has been made immeasurably more meaningful and rich because

    of my fellow graduate students of EGSO and the wonderful collective funding

    system of the group. My fellow graduate students have provided a rich and

    productive environment in which to think about how to use our studies to make

    meaningful change in the world. Vamsi and Smriti welcomed me to UMass and

    to radical thought, and remained true friends through our years here together.

    The A-Team (Alper, Armagan, Anil, Andong, KK, Oz) helped push me through

    my work, while also providing me with wonderful dinners every fortnight. My

    long conversations with the friday afternoon bowlesians (Malcolm and Justine,

    Jung-Kyoo and Suresh) ensured that I remained philosophically committed to

    science and causality. Hanging out with Maliha and her crew ensured that I

    would be conflicted in doing so! Several other graduate students and other

    friends also made my stay here happy. In no particular order: Priya, Kabir,

    Sowmya, Paul, Jonathan, Geert, Mathieu, Ceren, Yahya, Kenan, Burak, Mark,

    Pavel, Bob, Khaled, Gul, Sue, Yong Jin, Fabian, Tom, Sevinc and Josh shared

    many great experiences with me.

    Outside the department, I was lucky to find an extended family. Keerthi,

    Michael (and later, Jalen) always welcomed me into their lives. Sunitha and

    Niall then welcomed me, quite literally,into their home and their lives. Ravi

    v

  • and I really grew up only when coming to Amherst in the same year: it is a

    fraternal bond that has only grown in depth. In New York, the Padukone family

    made me one of their own. Without the love of all these people, life in the U.S

    would have been much more barren. Back home in India, I enjoyed the constant

    support and encouragement of those at the Centre For Learning(here, I should

    single out Venu, who first taught me economics) and some now at the Valley

    School. Also my oldest friends (Avi, Venku, Keshav, Sippi and Amol) were a

    constant source of support. The PhD was bookended by the passing away of my

    two grandparents- my grandmother in 1997 and most recently my grandfather

    earlier this year. I miss them both. My sister and father tolerated, encouraged,

    cheered and then celebrated my oddness in studying so long.

    Finally, I want to thank with all my heart,the two people who were most

    important to my life here. In their honor, I would like to dedicate this dissertation

    to them both. With great love then, this dissertation is for Kade- without whom

    nothing much would be worth doing, and Mum- without whom nothing could

    have been done.

    vi

  • ABSTRACT

    FINANCIAL LIBERALIZATION AND ITS

    DISTRIBUTIONAL CONSEQUENCES: AN

    EMPIRICAL EXPLORATION

    SEPTEMBER 2005

    ARJUN JAYADEV

    BSc., UNIVERSITY OF LONDON

    Ph.D., UNIVERSITY OF MASSACHUSETTS AMHERST

    Directed by: Professor J. Mohan Rao

    Although there has been growing interest in the social impacts of financial

    deregulation in economies across the world, a large research gap persists. Despite

    voluminous literature, there has been very little empirical work addressing the

    distributional consequences of a liberal financial regime.

    This dissertation seeks to make such an assessment. Developing a theoretical

    model and a new and improved index of deregulation, this dissertation uses panel

    data analysis to test the effects of international capital mobility on the share of

    labor in national income. The results suggest that capital account openness

    reduces the labor share of national income, thereby providing evidence for the

    thesis that capital mobility alters the bargaining power of labor and capital to

    the detriment of the former.

    vii

  • The cross country study is supplemented by two case studies of India and In-

    donesia which assess the impacts of both international and domestic deregulation

    on other aspects of distribution. The results suggest that despite the contrast-

    ing approaches to financial liberalization, in both economies it has considerably

    reduced the scope for policy makers to undertake egalitarian developmental poli-

    cies and to protect vulnerable sections of society.

    viii

  • TABLE OF CONTENTS

    Page

    ACKNOWLEDGEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iv

    ABSTRACT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vii

    LIST OF TABLES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xii

    LIST OF FIGURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xv

    CHAPTER

    1. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

    1.1 Motivation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.2 Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

    2. CAPITAL ACCOUNT OPENNESS AND THE LABOR

    SHARE OF INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

    2.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.2 A Wage Bargaining Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

    2.2.1 Labor Share Under Increasing Openness . . . . . . . . . . . . . . . . . 14

    2.3 Data and Trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

    2.3.1 Measuring Financial Openness . . . . . . . . . . . . . . . . . . . . . . . . . 15 2.3.2 Measuring Labor Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 2.3.3 Control Variables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

    2.4 Estimation Results . . . . . . . . . . . .