Geoscience Reference
In-Depth Information
9
Integration, Contagion, and Income
Distribution
Iwan J. Azis
Abstract
The 2008/2009 global financial crisis and the unprecedented policy response in
advanced economies have a worldwide impact. The episode also led many to
question the standard framework of economic thinking on regional integration,
financial liberalization and their repercussions on income disparity. The paper
argues that one needs to take a balanced view on integration—not just the
benefits but also the risks. If regional integration leads to greater inequality,
the expected growth and prospect of improved welfare can be diminished.
Utilizing a general equilibrium framework, it is also shown how financial
liberalization and the surge of capital inflows can produce not only financial
instability but also worsening income disparity. By combining model-based
results and theory-based ranking applied to the Asian case, and considering the
benefits, opportunities, costs and risks of alternative policies, it is revealed that
imposing levy on bank-led flows can be used to reduce instability and inequality.
This type of macro-prudential policy reflects a departure from the 'First Best' to
the 'Second Best' approach of liberalization, where the frictionless outcome of
the former is seriously questioned.
9.1
Introduction
Whether we understand it or not, what began the latter part of last decade is
changing global economic thinking. The subprime crisis, the resultant collapse of
Lehman Brothers in the United States (US), and the subsequent Eurozone crisis
humbled economists and regional scientists. Given that these two are the world's
biggest, most advanced economies, it is not difficult to imagine the extent of
