Income Inequality : The Aftermath of Stock Market Liberalization in Emerging Markets

Early research has documented that the large scale equity market liberalizations of the last decade led the subsequent rise in aggregate equity indices, investment booms, capital flows and economic growth. An important and unaddressed issue is the normative question of whether and how these reforms shifted the distribution of incomes in the aftermath of equity market liberalization. In careful empirical analysis, we find a pattern indicating that income share growth accrued almost wholly to the top quintile of the income distribution at the expense of a "middle class" that we define as the three middle quintiles of the income distribution. A surprising finding is that the lowest income share remained effectively unchanged in the event of liberalization. These patterns are robust to the inclusion of a wide variety of controls for global shocks, country specific factors, and contemporaneously implemented privatization and stabilization policies