2. capital strongaccountstrong liberalization, growth and the labor share.pdf

2. Capital Account Liberalization, Growth and the Labor Share of Income: Reviewing and Extending the Cross-country Evidence Kang-kook Lee and Arjun Jayadev ______________________________________________________________ INTRODUCTION The next moment soldiers came running through the wood, at first in twos and threes, then ten or twenty together, and at last in such crowds that they seemed to fill the whole forest. Alice got behind a tree, for fear of being run over, and watched them go by. Lewis Carroll (Alice Through the Looking Glass) One of the most significant changes in the international economy over the last three decades has been the growing importance of international capital flows between countries. Flows to developing countries, less than $10 billion in 1973, experienced a 30-fold increase to over $300 billion in 1997.1 This has been partly the consequence of improvements in financial technology and products, as evidenced by the vast increase in financial vehicles available to investors. A more important cause, however, has been the dismantling of barriers to cross-country capital flows in various parts of the world over this period, broadly subsumed under the label of capital account liberalization, a principle that has allowed capital to flow much more freely and in larger volumes across nations. This policy, in its various forms, has been spurred in part by the adoption of the Washington Consensus2 by numerous policy makers in a variety of contexts, and in part by the conditionalities imposed by international lending institutions. While the forms and the pace of these deregulations have taken many constellations (see E