Inequality, finance and development : evidence from low-income developing economies

Abstract EN

The purpose of this study is to examine the impact of financial and economic development on cross-country income inequality using a panel data set from 50 low-income developing counties.

The empirical analysis is based on fixed effects 2SLS model.

The results show that a non-monotonic relationship between financial development and inequality, predicted by Greenwood and Jovanovic (1990), does hold.

The study, also, finds a non-monotonic relationship between inequality and the level of economic development, which supports Kuznets’s inverted-U hypothesis.

The government emerges as a major player in reducing income inequalities as its role is significant in all models.

The study suggests that the policy makers must focus primarily on economic development to reduce inequalities.

Since financial development, at higher levels, also reduces inequalities, policy makers also need to encourage financial reforms.