Distributional Effects of Structural Reforms in Developing Countries: Evidence from Financial Liberalization

This paper examines the redistributive effects of financial liberalization, including domestic and external finance reforms, implemented in 64 emerging and low-income countries over the past four decades. To identify these effects, we employ a “doubly robust” estimation approach and generate impulse responses using the local projections method. Our findings reveal that financial reforms significantly reduce income inequality. These results are robust and hold across various specifications and alternative methods. We find that reducing income inequalities through financial reforms depends on several factors, including improved access to financial services, level of public expenditures, and institutional quality. Furthermore, we demonstrate that governments adopting a reform approach that considers sequencing and potential complementarity of measures can significantly reduce income inequality. Taking the business cycle into account, we observe that implementing financial reforms during periods of relatively slower economic growth would be more beneficial for developing countries. Financial reforms have an impact on reducing income inequality by increasing the income of individuals located at the bottom of the distribution while decreasing the income of individuals located at the top of the distribution.