Proceedings of The 9th International Conference on New Ideas in Management, Economics and Accounting
Financial Development and Distribution of Income in Low Income and Lower-Middle-Income Countries
Etsub Tekola Jemberu
While there are studies on the nexus between financial development and income distribution, there seems to be no consensus established. There are also theoretical grounds for both a positive and negative relationship between these variables. This study empirically examines the relationship between financial development and the distribution of income in low-income and lower-middle-income countries. To this effect, a dynamic panel estimation technique, the system Generalized Method of Moments, is employed on a dataset covering 44 economies over the period 1995-2010. Unlike most of the empirical literature on the subject, to capture the development level of financial institutions and financial markets in terms of their depth, access, and efficiency of the countries considered, the study used a comprehensive index proposed by IMF. And Gini coefficient is used as an indicator for income inequality. In addition to the main variable of interest, other variables that have been found important in the determination of income inequality in previous research, like GDP per capita, human capital, inflation, government consumption, openness, and unemployment are used as control variables. The findings of the study indicate the existence of a U-shaped relationship between financial development and income inequality. Financial development decreases income inequality until the development reaches a certain level. Beyond that level, however, as financial development continues further, it increases inequality. The results also provide evidence for the Kuznets curve hypothesis, indicating an inverted U-shaped relationship between GDP per capita and income inequality.
keywords: Financial development, income inequality, LI, LMICs.