Evaluation of Financial Liberalization : A General Equilibrium Model with Constrained Occupation Choice
The objective of this paper is to assess both the aggregate growth effects and the distributional consequences of financial liberalization as observed in Thailand from 1976 to 1996. A general equilibrium occupational choice model with two sectors, one without intermediation, and the other with borrowing and lending, is taken to Thai data. Key parameters of the production technology and the distribution of entrepreneurial talent are estimated by maximizing the likelihood of transition into business given initial wealth as observed in two distinct datasets. Other parameters of the model are calibrated to try to match the two decades of growth as well as observed changes in inequality, labor share, savings, and the number of entrepreneurs. Without an expansion in the size of the intermediated sector, Thailand would have evolved very differently, namely, with a drastically lower growth rate, high residual subsistence sector, non-increasing wages, but lower inequality. The financial liberalization brings welfare gains and losses to different subsets of the population. Primary winners are talented would-be entrepreneurs who lack credit and cannot otherwise go into business (or invest little capital). Mean gains for these winners range from 17 to 34 percent of observed overall average household income. But liberalization also induces greater demand by entrepreneurs for workers resulting in increases in the wage and lower profits of relatively rich entrepreneurs of the same order of magnitude as the observed overall average income of firm owners. Foreign capital has no significant impact on growth or the distribution of observed income.
Summary: | The objective of this paper is to assess
both the aggregate growth effects and the distributional
consequences of financial liberalization as observed in
Thailand from 1976 to 1996. A general equilibrium
occupational choice model with two sectors, one without
intermediation, and the other with borrowing and lending, is
taken to Thai data. Key parameters of the production
technology and the distribution of entrepreneurial talent
are estimated by maximizing the likelihood of transition
into business given initial wealth as observed in two
distinct datasets. Other parameters of the model are
calibrated to try to match the two decades of growth as well
as observed changes in inequality, labor share, savings, and
the number of entrepreneurs. Without an expansion in the
size of the intermediated sector, Thailand would have
evolved very differently, namely, with a drastically lower
growth rate, high residual subsistence sector,
non-increasing wages, but lower inequality. The financial
liberalization brings welfare gains and losses to different
subsets of the population. Primary winners are talented
would-be entrepreneurs who lack credit and cannot otherwise
go into business (or invest little capital). Mean gains for
these winners range from 17 to 34 percent of observed
overall average household income. But liberalization also
induces greater demand by entrepreneurs for workers
resulting in increases in the wage and lower profits of
relatively rich entrepreneurs of the same order of magnitude
as the observed overall average income of firm owners.
Foreign capital has no significant impact on growth or the
distribution of observed income. |
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