Financial Development and Income Inequality

We investigate the impact of financial development on income inequality differentiating between depth, efficiency and access to financial markets and institutions. We apply panel Bayesian model averaging framework to address model uncertainty to reveal that financial development has a complex relationship with the income distribution within countries. The access to and efficiency of banking decrease income inequality. The size of the markets has no relevance for overall income inequality but relates to the higher top income shares. Moreover, unemployment, along with investment into non-tangible assets increase income inequality while more redistribution implies lower levels of inequality.

Illicit Financial Flows and Trade Mispricing: Decomposing the Trade Reporting Gap (with A. Cobham, P. Jansky)

Trade mispricing is a real phenomenon, documented by numerous case studies, and identified as a major risk to international development. What is less clear is the scale of illicit financial outflows contained within any given pattern of mispricing, because there are multiple reasons for distortions in the data, and because individual methodologies may not allow clear separation of these. In this paper we review critically the existing methodologies to estimate trade mispricing. We find that some studies providing estimates for many countries are not reliable; while some studies using confidential customs data provide more robust findings that are unlikely to be easily replicated soon for many, especially low-income, countries. Both streams of literature are unsatisfactory since they do not provide us with an answer to the question of the scale of illicit financial flows due to trade mispricing, either globally or facing low-income countries in particular. The relatively novel focus of our review on decomposing the trade reporting gap into its component elements suggests a new methodological approach, which may combine robustness and broad coverage of countries. To this end, we present an explorative analysis using UN Comtrade data.