Financial Development, Inequality and Poverty: Some International Evidence

Abstract

This paper provides evidence on the link between financial development and income distribution. Several dimensions of financial development are considered: financial access, efficiency, stability, and liberalization. Each aspect is represented by two indicators: one related to financial institutions, and the other to financial markets. Using a sample of 143 countries from 1961 to 2011, the paper finds that four of the five dimensions of financial development can significantly reduce income inequality and poverty, except financial liberalization, which tends to exacerbate them. Also, banking sector development tends to provide a more significant impact on changing income distribution than stock market development. Together, these findings are consistent with the view that macroeconomic stability and reforms that strengthen creditor rights, contract enforcement, and financial institution regulation are needed to ensure that financial development and liberalization fully support the reduction of poverty and income equality. JEL Classification Numbers: G10; G20; I30

Finance and Income Inequality: A Review and New Evidence

“…They construct a set of annual indicators of banking and capital market size, robustness, efficiency and international integration and then estimate the determinants of income distribution using a panel structural vector autoregressive model for 49 countries over the 1994-2002 period. 9 These authors conclude that financial sector development increases income inequality and that this impact seems to run primarily via the banking sector; Naceur and Zhang (2016) reach the same conclusion.…”

“…5 Although several studies report that countries with higher levels of financial development have less income inequality (see e.g. Li et al 1998, Clarke et al, 2006, Beck et al, 2007, Kappel, 2010, Hamori and Hashiguchi, 2012and Naceur and Zhang, 2016, 6 other studies report a non-linear relationship (e.g. Kim andLin, 2011 andLaw et al, 2014), 7 mixed results (Bahmani-Oskooee and Zhang, 2015), 8 or a than size should be examined.…”

“…Kim andLin, 2011 andLaw et al, 2014), 7 mixed results (Bahmani-Oskooee and Zhang, 2015), 8 or a than size should be examined. Most empirical research focuses, however, on financial sector size, a recent exception being the study by Naceur and Zhang (2016). 5 Here we only discuss research using macro data for a large set of countries.…”

“…Hamori and Hashiguchi (2012) use annual panel data for a sample of 126 countries over the 1963-2002 period and find that both M2/GDP and private credit-to-GDP reduce estimated household income inequality when they use panel fixed effects and GMM. Naceur and Zhang (2016) use a sample of 143 countries from 1961 to 2011 and find that several dimensions of financial development considered (access, efficiency, deepening and stability) can significantly reduce income inequality and poverty, while financial liberalization tends to exacerbate them. 7 Based on a sample of 65 countries for 1960-2005, Kim and Lin (2011 find that the benefits of financial development on income distribution occur only when the country has reached a threshold level of financial development.…”

“…For instance, Beck et al (2010) assess the impact of U.S. bank deregulation of the 1970s to the 1990s on the distribution of income and find that deregulation significantly reduces inequality by boosting incomes in the lower part of the income distribution but has little impact on incomes above the median. Likewise, some recent studies Delis et al, 2014;Li and Yu, 2014) based on crosscountry data report that financial liberalization reduces income inequality, but Jaumotte and Osuorio Buitron (2015) and Naceur and Zhang (2016) conclude that financial liberalization increases inequality (see section 2 for more details). Bumann and Lensink (2016) suggest that the impact of financial liberalization on inequality is conditioned by financial development.…”