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70%, and by the early 2000s they ranged up to 115% in countries such as the
From the perspective of this column, a high loan-to-value ratio is a good thing.
Borrowing allows households within countries to buffer the ups and downs of
international competition without having to rely on collective redistribution and
makes it possible to reap the fruits of globalisation in terms of overall competitiveness.
For individual households, it is beneficial to be able to borrow a lot and
go bankrupt upon negative income shocks. But there can be too much of a good
If individual repayment risk is not properly packaged and diversified, financial
market development can be a source of aggregate instability. Financial markets are
indeed in trouble and, if our perspective on past developments is correct, their
fragility does not bode well for globalisation. The breakdown of private financial
markets excites calls for stronger redistribution. If redistribution is national (as it
has to be as long as politics are national), it will only be sustainable if national borders
become less permeable to economic activity.
Researchers will be looking carefully at signs of such reversals. Not only financial
market development, but also trade and social policies will change as a consequence
of the current economic turmoil. The character of these developments
may foster confidence in the structural character of the empirical relationships we
detect in our paper, which could so far be spuriously driven by trending factors
other than those we focus on.
And policymakers should also be keenly aware of these mechanisms. The path
that led to the Great Depression was paved by protectionism and an increasing
role of government. Rescuing financial institutions fosters confidence, but using
the rising power of governments in the current financial storm to bail out manufacturers
distorts competition and reduces confidence in further economic
growth. To steer clear of the Great Depression path in a world where redistribution
is no longer very effective and financial markets are key to the sustainability of
international integration, we must develop an internationally coordinated finan-
Finance, redistribution, globalization 95
cial regulation framework and avoid retracing backwards decades of international
integration and financial development.
Bertola, Giuseppe, and Anna Lo Prete (2008), ‘Openness, Financial Markets, and
Policies: Cross-Country and Dynamic Patterns’, CEPR Discussion Paper 7048.
Jappelli, Tullio and Marco Pagano (1994), ‘Savings, Growth, and Liquidity
Constraints’, Quarterly Journal of Economics, 109(1), 83–109.
Rodrik, Dani (1998), ‘Why Do More Open Economies Have Bigger Governments?,’
Journal of Political Economy, 106(5), 997–1032.

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