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Economic and Financial Development, and Income Inequality

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Relationship between growth, financial development and income inequality.
- Is there nonlinearity in the relationship?
- What are the factors that affect the degree of impact of financial development on income inequality?

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Economic and Financial Development, and Income Inequality

  1. 1. Economic and Financial Development, and Income Inequality 4th OECD-AMRO-ADB Asian Regional Roundtable Tokyo, Japan, May 14th, 2015 Kwanho Shin
  2. 2. Objective of the Paper • The paper empirically examines the relationship between growth, financial development and income inequality.  Is there nonlinearity in the relationship?  What are the factors that affect the degree of impact of financial development on income inequality?
  3. 3. Background 1 • Kuznets curve – Income inequality worsens during the early stages of economic development – However, income will eventually be more equally distributed as more and more workers join the high- paying sectors.
  4. 4. Background 2 • Financial development lowers income inequality? – Economic theory provides conflicting predictions – Financial development, by increasing the availability of financial services to the poor, can reduce income inequality – If financial development results largely in more and better financial services for the rich, then it may worsen income inequality.
  5. 5. Findings  We find an inverted U shape relationship between per capita income and income inequality up to a certain level of per capita income, in line with the Kuznets curve.  But as per capita income continues to increase, income inequality starts to deteriorate again.  As the financial system develops, inequality improves until it reaches around the mean level, but as the financial system continues to develop, it aggravates income inequality.
  6. 6. Findings  We look at three factors for which there are conceptual grounds for an effect on the finance- inequality nexus – ratio of primary schooling to total schooling, law and order, and macroeconomic stability.  As expected, our evidence indicates that when the ratio of primary schooling increases and law and order improves, financial development is more effective in reducing inequality.  On the other hand, macroeconomic stability does not affect the relationship.
  7. 7. Growth and Income Inequality • Since Kuznets found a non-linear relationship between economic development and income inequality, a number of studies have confirmed it. • However, more recent studies find some inconsistencies. Capital taxation is lowering r.  IMF (2007) found that income inequality in advanced countries is actually worse than in less developed countries  OECD (2008) also found that income inequality is becoming worse in most advanced countries.
  8. 8. Testing Kuznets Curve • Two measures of income inequality – GINI coefficients (market, disposable incomes) – Top 1% income share • We collect both data from the Standardized World Income Inequality Database (SWIID) • Regress the income inequality measures on linear, quadratic and cubic terms of per capita GDP.
  9. 9. Per Capita GDP and GINI Coefficient VARIABLES Pooling Panel GINI coefficient (disposable) GINI coefficient (market) GINI coefficient (disposable) GINI coefficient (market) GDP per capita 1.432*** 1.309*** 1.192* 1.987*** (constant 2005 US$) [0.151] [0.134] [0.676] [0.554] Square of GDP per capita -0.163*** -0.160*** -0.158* -0.268*** (constant 2005 US$) [0.019] [0.017] [0.084] [0.071] Cubic of GDP per capita 0.006*** 0.006*** 0.007* 0.012*** (constant 2005 US$) [0.001] [0.001] [0.003] [0.003] Constant -0.157 0.361 0.737 -0.952 [0.386] [0.347] [1.790] [1.422] Observations 4,173 4,173 4,173 4,173 Adjusted R-squared 0.328 0.057 0.013 0.046 Number of groups 162 162
  10. 10. GINI Coefficient of Market Income and Its Prediction 2.5 3 3.5 4 4.5 4 6 8 10 12 - Fitted Line (Pooling Regression) Local max: (6.69 , 3.81) Local min: 3.81 3.64 6.69 10.516.21 9.2 3.83 3.67 - Fitted Line (Panel Regreesion) Local max: (6.21 , 3.83) Local min: (9.20 , 3.67)
  11. 11. GINI Coefficient of Disposable Income and Its Prediction 2.5 3 3.5 4 4.5 4 6 8 10 12 - Fitted Line (Pooling Regresssion) Local max: (6.69 , 3.80) 3.80 6.69 - Fitted Line (Panel Regreesion) Local max: (6.45 , 3.67) Local min: (9.06 , 3.61) 6.45 9.06 3.67 3.61
  12. 12. Per Capita GDP and Top 1% income share VARIABLES Pooling Panel Income share (top 1%) Income share (top 1%) GDP per capita 1.662*** 1.638 (constant 2005 US$) [0.278] [1.102] Square of GDP per capita -0.173*** -0.251* (constant 2005 US$) [0.035] [0.144] Cubic of GDP per capita 0.006*** 0.012** (constant 2005 US$) [0.001] [0.006] Constant -2.874*** -1.168 [0.714] [2.699] Observations 4,173 4,173 Adjusted R-squared 0.047 0.042 Number of groups 162
  13. 13. Top 1% income share and Its Prediction by Panel Data Regression 0.5 1 1.5 2 2.5 3 3.5 4 6 8 10 12 - Fitted Line (Pooling Regression) Local max: (7.67 , 2.24) 2.24 7.67 - Fitted Line (Panel Regression) Local max: (5.23 , 2.26) Local min: (8.70 , 2.01) 8.705.23 2.26 2.01
  14. 14. Findings: Kuznets Curve • There is an inverted U shape relationship a là Kuznets up to a certain level. • But as the per capita income continues to increase, the income inequality starts to become worse again. • Two turning points – per capita GDP reaches $804 US in year-2005 constant prices, where the predicted GINI coefficient is 45.2 . – per capita GDP reaches $36,680 US in year-2005 constant prices where the predicted the GINI coefficient is 38.1. • This deterioration is less visible if the GINI coefficient is based on deposable income. – Taxes and transfers in advanced countries are, to a certain degree, offsetting the tendency.
  15. 15. Financial Development and Income Inequality • As posited earlier, it is likely that there is a nonlinear relationship. • The nonlinear impact of financial development is also evident on the relationship between financial development and growth. – Arcand et al. (2012) and Cecchetti and Kharroubi (2012) found that there is a threshold (credit to the private sector reaches 90-100% of GDP) above which financial development no longer has a positive effect.
  16. 16. Financial Development and Income Inequality • We use three measures for financial development: (1) ratio of liquidity liabilities to GDP, (2) ratio of private credit by deposit money banks to GDP, and (3) ratio of stock market capitalization to GDP. • We report results from a panel regression with fixed effects
  17. 17. Financial Development and GINI Coefficient: Liquid Liabilities to GDP (%) VARIABLES GINI index (market) GINI index (disposable) [1] [2] [3] [4] [5] [6] Liquid liabilities -0.080 -0.209** -0.224 -0.107* -0.251*** -0.234* (% of GDP) [0.050] [0.099] [0.138] [0.059] [0.091] [0.128] Square of Liquid liabilities 0.012 0.027* 0.034* 0.015* 0.034** 0.034** (% of GDP) [0.008] [0.014] [0.018] [0.009] [0.013] [0.017] GDP per capita 1.844** 2.708* -0.742 0.589 1.598 -0.955 (constant 2005 US$) [0.720] [1.589] [1.763] [0.829] [1.642] [1.842] Square of GDP per capita -0.238*** -0.346* 0.053 -0.073 -0.189 0.094 (constant 2005 US$) [0.087] [0.180] [0.199] [0.100] [0.185] [0.208] Cubic of GDP per capita 0.010*** 0.015** -0.001 0.003 0.008 -0.003 (constant 2005 US$) [0.003] [0.007] [0.007] [0.004] [0.007] [0.008] Openness (export + import) -0.000 -0.000 -0.000 -0.000 (% of GDP) [0.000] [0.000] [0.000] [0.000] Employment in agriculture -0.001 0.000 -0.001 -0.000 (% of total employment) [0.001] [0.001] [0.001] [0.001] Government expenditure 0.006* 0.002 0.004 -0.001 (% of GDP) [0.003] [0.003] [0.003] [0.003] High-technology exports 0.001** 0.002*** (% of manufactured exports) [0.001] [0.001] Constant -0.698 -3.015 6.929 2.241 -0.604 7.014 [1.930] [4.578] [5.098] [2.223] [4.757] [5.360] Observations 3,475 1,961 1,524 3,475 1,961 1,524 Adjusted R-squared 0.034 0.161 0.107 0.009 0.091 0.074 Number of groups 153 131 121 153 131 121
  18. 18. Financial Development and GINI Coefficient: Private Credit by Deposit Money Banks to GDP (%)VARIABLES GINI index (market) GINI index (disposable) [1] [2] [3] [4] [5] [6] Private credit by deposit money bank -0.049 -0.131** -0.070 -0.064* -0.162*** -0.101 (% of GDP) [0.035] [0.059] [0.083] [0.036] [0.059] [0.087] Square of private credit by 0.010* 0.019** 0.012 0.010* 0.021** 0.013 deposit money bank (% of GDP) [0.005] [0.009] [0.011] [0.006] [0.009] [0.012] GDP per capita 1.842** 2.943* -0.265 0.795 2.111 -0.358 (constant 2005 US$) [0.744] [1.593] [1.685] [0.841] [1.559] [1.752] Square of GDP per capita -0.240*** -0.370** -0.001 -0.095 -0.242 0.030 (constant 2005 US$) [0.090] [0.180] [0.192] [0.101] [0.178] [0.202] Cubic of GDP per capita 0.010*** 0.015** 0.001 0.004 0.009 -0.001 (constant 2005 US$) [0.004] [0.007] [0.007] [0.004] [0.007] [0.008] Openness (export + import) -0.000 0.000 -0.000 -0.000 (% of GDP) [0.000] [0.000] [0.000] [0.000] Employment in agriculture -0.000 0.000 -0.001 -0.001 (% of total employment) [0.001] [0.001] [0.001] [0.001] Government expenditure 0.006** 0.003 0.004 -0.000 (% of GDP) [0.003] [0.003] [0.003] [0.003] High-technology exports 0.002*** 0.002*** (% of manufactured exports) [0.001] [0.001] Constant -0.684 -3.887 5.299 1.549 -2.412 4.939 [2.020] [4.636] [4.930] [2.270] [4.488] [5.054] Observations 3,467 1,961 1,523 3,467 1,961 1,523 Adjusted R-squared 0.040 0.184 0.112 0.010 0.120 0.074 Number of groups 154 132 122 154 132 122
  19. 19. Financial Development and GINI Coefficient: Stock Market Capitalization to GDP (%) VARIABLES GINI index (market) GINI index (disposable) [1] [2] [3] [4] [5] [6] Stock mkt capitalization 0.014* 0.011** 0.020** 0.009 0.009 0.025** (% of GDP) [0.007] [0.005] [0.008] [0.007] [0.007] [0.011] Square of stock mkt capitalization 0.000 0.001 -0.001 0.000 0.001 -0.002 (% of GDP) [0.001] [0.001] [0.002] [0.001] [0.001] [0.002] GDP per capita 1.446 2.563 1.970 0.773 2.901** 2.839* (constant 2005 US$) [1.311] [1.614] [1.685] [1.331] [1.333] [1.480] Square of GDP per capita -0.205 -0.328* -0.260 -0.109 -0.345** -0.342* (constant 2005 US$) [0.152] [0.182] [0.189] [0.152] [0.154] [0.173] Cubic of GDP per capita 0.009 0.014** 0.011 0.005 0.014** 0.014** (constant 2005 US$) [0.006] [0.007] [0.007] [0.006] [0.006] [0.007] Openness (export + import) 0.000 0.000 0.000 -0.000 (% of GDP) [0.000] [0.000] [0.000] [0.000] Employment in agriculture -0.000 -0.000 -0.001 -0.001 (% of total employment) [0.001] [0.001] [0.001] [0.001] Government expenditure 0.002 0.002 -0.001 -0.002 (% of GDP) [0.002] [0.002] [0.002] [0.003] High-technology exports 0.001 0.001** (% of manufactured exports) [0.001] [0.001] Constant 0.515 -2.829 -1.131 1.721 -4.546 -4.297 [3.715] [4.731] [4.974] [3.810] [3.747] [4.137] Observations 1,734 1,414 1,341 1,734 1,414 1,341 Adjusted R-squared 0.078 0.111 0.084 0.046 0.088 0.092 Number of groups 102 96 93 102 96 93
  20. 20. Financial Development and Top 1% Income Share VARIABLES Income share (top 1%) [1] [2] [3] [4] [5] [6] [7] [8] [9] Liquid liabilities -0.116 -0.187 -0.186 (% of GDP) [0.102] [0.136] [0.186] Square of Liquid liabilities 0.015 0.019 0.023 (% of GDP) [0.017] [0.021] [0.024] Private credit by deposit money bank -0.073 -0.156* -0.052 (% of GDP) [0.056] [0.086] [0.110] Square of private credit by deposit money bank 0.013 0.021 0.003 (% of GDP) [0.010] [0.013] [0.016] Stock mkt capitalization 0.037*** 0.037*** 0.022 (% of GDP) [0.012] [0.011] [0.020] Square of stock mkt capitalization -0.002 -0.003 -0.002 (% of GDP) [0.003] [0.003] [0.004] GDP per capita 2.589* 4.031 0.605 2.798* 4.636* 1.781 2.415 2.497 3.737 (constant 2005 US$) [1.415] [2.797] [3.171] [1.425] [2.623] [3.035] [2.007] [2.907] [2.938] Square of GDP per capita -0.329* -0.506 -0.129 -0.353** -0.573* -0.269 -0.320 -0.330 -0.479 (constant 2005 US$) [0.176] [0.331] [0.366] [0.177] [0.314] [0.358] [0.241] [0.334] [0.339] Cubic of GDP per capita 0.014* 0.022* 0.008 0.015** 0.024* 0.014 0.015 0.015 0.021 (constant 2005 US$) [0.007] [0.013] [0.014] [0.007] [0.012] [0.014] [0.009] [0.013] [0.013] Openness (export + import) -0.000 0.000 -0.000 0.000 -0.000 0.000 (% of GDP) [0.001] [0.001] [0.001] [0.001] [0.001] [0.001] Employment in agriculture -0.003 -0.003* -0.002 -0.003* -0.003** -0.003** (% of total employment) [0.002] [0.002] [0.002] [0.002] [0.001] [0.001] Government expenditure 0.006 0.004 0.007 0.008* 0.004 0.003 (% of GDP) [0.005] [0.004] [0.004] [0.004] [0.004] [0.004] High-technology exports 0.002* 0.002** 0.002 (% of manufactured exports) [0.001] [0.001] [0.001] Constant -4.457 -8.816 1.354 -5.087 -10.650 -2.141 -4.545 -4.820 -8.182 [3.718] [7.762] [9.065] [3.764] [7.174] [8.554] [5.502] [8.398] [8.432] Observations 3,475 1,961 1,524 3,467 1,961 1,523 1,734 1,414 1,341 Adjusted R-squared 0.039 0.223 0.241 0.040 0.221 0.235 0.176 0.241 0.252 Number of groups 153 131 121 154 132 122 102 96 93
  21. 21. Financial Development and Income Inequality • We found a U-shaped influence of financial development on income inequality. – Financial development improves income inequality up to a threshold and afterward it worsens income inequality. – This is not true if we use the stock market capitalization. • The threshold is around where the ratio of liquid liabilities to GDP reaches its mean (the private credit to GDP ratio is 28%) – The threshold of financial development for income inequality occur much earlier than its threshold for growth.
  22. 22. Kuznets Curve Again • The coefficients of the three capita GDP terms become much less significant when we include the financial development terms. – Market vs Disposable incomes • A possibility that the worsening of income inequality in advanced countries might be related to their high levels of financial development.
  23. 23. The above results do not provide a causal relationship • IV regression – legal origins or latitude: not time varying – Law and order • A growth form – ln 𝑦𝑖𝑡 − ln 𝑦𝑖𝑡−1 = 𝛼𝑦𝑖𝑡−1 + 𝛽𝐹𝐷𝑖𝑡−1 + 𝛾𝑋𝑖𝑡−1 + 𝜀𝑖𝑡 – Used in the empirical growth literature – The dependent variable is 5-year growth rate of inequality measures – The regressors are initial values.
  24. 24. IV Regression VARIABLES GINI index (market) [1] [2] [3] [4] [5] [6] [7] [8] [9] Liquid liabilities -0.231*** -0.217** -0.214** (% of GDP) [0.075] [0.091] [0.103] Square of Liquid liabilities 0.035*** 0.031*** 0.036*** (% of GDP) [0.005] [0.006] [0.007] Private credit by deposit money bank -0.048 -0.042 0.025 (% of GDP) [0.029] [0.038] [0.041] Square of private credit by deposit money bank 0.007*** 0.007** -0.002 (% of GDP) [0.002] [0.003] [0.004] Stock mkt capitalization 0.250*** 0.122 0.110 (% of GDP) [0.085] [0.094] [0.103] Square of stock mkt capitalization 0.002** 0.001 -0.000 (% of GDP) [0.001] [0.001] [0.001] GDP per capita 0.857*** 3.049*** 0.624 1.120*** 3.590*** 1.314** 1.797*** 2.863*** 2.262*** (constant 2005 US$) [0.298] [0.441] [0.551] [0.297] [0.431] [0.539] [0.402] [0.527] [0.557] Square of GDP per capita -0.124*** -0.372*** -0.094 -0.159*** -0.437*** -0.184*** -0.249*** -0.367*** -0.297*** (constant 2005 US$) [0.036] [0.052] [0.065] [0.036] [0.051] [0.064] [0.048] [0.061] [0.065] Cubic of GDP per capita 0.006*** 0.015*** 0.004* 0.007*** 0.018*** 0.008*** 0.011*** 0.015*** 0.012*** (constant 2005 US$) [0.001] [0.002] [0.002] [0.001] [0.002] [0.002] [0.002] [0.002] [0.003] Openness (export + import) -0.000 -0.000 0.000 0.000 0.000** 0.000 (% of GDP) [0.000] [0.000] [0.000] [0.000] [0.000] [0.000] Employment in agriculture 0.001 0.001** 0.000 0.001** -0.000 -0.000 (% of total employment) [0.000] [0.000] [0.000] [0.000] [0.000] [0.000] Government expenditure 0.004*** 0.001 0.005*** 0.003** 0.003** 0.003** (% of GDP) [0.001] [0.001] [0.001] [0.001] [0.001] [0.001] High-technology exports 0.001*** 0.001*** 0.001* (% of manufactured exports) [0.000] [0.000] [0.000] Constant 2.146*** -4.344*** 2.696* 1.253 -6.082*** 0.676 -1.122 -3.906*** -2.134 [0.808] [1.249] [1.572] [0.789] [1.189] [1.501] [1.118] [1.491] [1.577] Observations 2,318 1,654 1,374 2,319 1,656 1,376 1,538 1,292 1,234 Number of groups 121 113 107 122 114 108 92 88 87 Adjusted R-squared 0.051 0.108 0.025 0.035 0.104 0.019 0.049 0.067 0.029
  25. 25. IV Regression: Top 1% Income Share VARIABLES Income share (top 1%) [1] [2] [3] [4] [5] [6] [7] [8] [9] Liquid liabilities -0.717*** -0.663*** -0.359* (% of GDP) [0.142] [0.178] [0.194] Square of Liquid liabilities 0.030*** 0.012 0.009 (% of GDP) [0.009] [0.011] [0.014] Private credit by deposit money bank -0.248*** -0.211*** 0.077 (% of GDP) [0.056] [0.074] [0.078] Square of private credit by deposit money bank 0.008* 0.002 -0.024*** (% of GDP) [0.004] [0.006] [0.007] Stock mkt capitalization -0.058 -0.319* -0.266 (% of GDP) [0.173] [0.180] [0.196] Square of stock mkt capitalization -0.001 -0.003* -0.003 (% of GDP) [0.002] [0.002] [0.002] GDP per capita -0.072 2.442*** 2.436** 0.306 2.987*** 4.012*** 2.388*** 2.969*** 4.287*** (constant 2005 US$) [0.564] [0.857] [1.038] [0.564] [0.843] [1.018] [0.820] [1.009] [1.062] Square of GDP per capita -0.021 -0.309*** -0.335*** -0.069 -0.378*** -0.541*** -0.320*** -0.391*** -0.550*** (constant 2005 US$) [0.069] [0.101] [0.122] [0.069] [0.100] [0.120] [0.098] [0.117] [0.124] Cubic of GDP per capita 0.003 0.014*** 0.016*** 0.005* 0.017*** 0.025*** 0.015*** 0.018*** 0.024*** (constant 2005 US$) [0.003] [0.004] [0.005] [0.003] [0.004] [0.005] [0.004] [0.004] [0.005] Openness (export + import) -0.000 0.000 0.000 0.000 0.000 0.000 (% of GDP) [0.000] [0.000] [0.000] [0.000] [0.000] [0.000] Employment in agriculture -0.002** -0.002*** -0.002*** -0.002*** -0.003*** -0.003*** (% of total employment) [0.001] [0.001] [0.001] [0.001] [0.001] [0.001] Government expenditure 0.006*** 0.004* 0.006*** 0.008*** 0.007*** 0.005** (% of GDP) [0.002] [0.002] [0.002] [0.002] [0.002] [0.002] High-technology exports 0.002*** 0.002*** 0.002** (% of manufactured exports) [0.001] [0.001] [0.001] Constant 4.421*** -2.822 -3.115 2.022 -5.758** -8.211*** -4.102* -4.794* -8.562*** [1.529] [2.429] [2.962] [1.496] [2.325] [2.833] [2.282] [2.856] [3.006] Observations 2,318 1,654 1,374 2,319 1,656 1,376 1,538 1,292 1,234 Adjusted R-squared 0.126 0.194 0.196 0.113 0.184 0.200 0.136 0.197 0.203 Number of groups 121 113 107 122 114 108 92 88 87
  26. 26. Factors that influence the degree of impact of financial development on income inequality. • Ratio of primary schooling – A main channel through which financial development influences income inequality is by providing opportunities for the poor to accumulate human capital. • Institutions – Under stronger institutions and better governance, financial institutions lend on the basis of commercial merit rather than connections, and provide more opportunities to the poor. • Macroeconomic stability – Macroeconomic stability increases the benefits of financial development.
  27. 27. A Growth Form: Liquid Liabilities to GDP (%) VARIABLES Growth of GINI coefficient (market) [1] [2] [3] [1] [2] [3] [1] [2] [3] Log of initial GINI index (market) -0.102*** -0.102*** -0.176*** -0.138*** -0.144*** -0.162*** -0.102*** -0.103*** -0.165*** [0.008] [0.008] [0.016] [0.012] [0.011] [0.021] [0.009] [0.009] [0.022] Initial liquid liabilities 0.017*** 0.011 0.028 0.000 -0.002 -0.010 0.001 -0.001 -0.013* (% of GDP) [0.006] [0.007] [0.027] [0.003] [0.003] [0.007] [0.003] [0.003] [0.007] Initial liquid liabilities (initial) -0.024*** -0.017** -0.069* × Ratio of primary schooling (years) [0.007] [0.008] [0.039] Initial liquid liabilities 0.000 -0.000 -0.001* × Law and Order [0.000] [0.000] [0.001] Initial liquid liabilities -0.002 -0.002* -0.008 × Growth of CPI [0.001] [0.001] [0.006] Initial Human capital -0.047*** -0.045** -0.181** 0.001 -0.009 -0.100** -0.006 -0.025* -0.087* [0.018] [0.018] [0.072] [0.017] [0.022] [0.045] [0.012] [0.013] [0.044] Initial GDP per capita 0.007 0.024 0.014** 0.041*** 0.011*** 0.036*** (constant 2005 US$) [0.004] [0.014] [0.006] [0.012] [0.004] [0.012] Log of openness (exports + imports) -0.003 -0.006 -0.011** -0.010 -0.004 -0.011 (% of GDP) [0.004] [0.009] [0.005] [0.009] [0.004] [0.009] Average government expenditure 0.001 -0.000 0.001** 0.000 0.001** 0.000 (% of GDP) [0.000] [0.001] [0.000] [0.001] [0.000] [0.001] Log of high-technology exports -0.002 -0.005 -0.003 (% of manufactured exports) [0.002] [0.003] [0.002] Agriculture employment share -0.040** -0.047*** -0.043** (% of total employment) [0.017] [0.018] [0.019] Constant 0.407*** 0.357*** 0.671*** 0.522*** 0.471*** 0.442*** 0.385*** 0.319*** 0.468*** [0.035] [0.048] [0.136] [0.044] [0.062] [0.113] [0.036] [0.044] [0.116] Observations 631 625 233 435 434 226 622 617 231 Number of code 113 113 82 99 99 79 112 112 81 Adjusted R-squared 0.299 0.306 0.549 0.439 0.459 0.513 0.287 0.305 0.524
  28. 28. A Growth Form: Private Credit to GDP (%) VARIABLES Growth of GINI coefficient (market) [1] [2] [3] [1] [2] [3] [1] [2] [3] Log of initial GINI index (market) -0.103*** -0.104*** -0.173*** -0.142*** -0.145*** -0.171*** -0.104*** -0.105*** -0.170*** [0.009] [0.009] [0.019] [0.011] [0.011] [0.019] [0.009] [0.009] [0.020] Initial private credit by deposit money bank 0.017*** 0.016** 0.015 0.007** 0.006* 0.009 0.005** 0.005* 0.003 (% of GDP) [0.005] [0.006] [0.019] [0.003] [0.003] [0.006] [0.002] [0.003] [0.006] Initial private credit by deposit money bank -0.020** -0.017* -0.024 × Ratio of primary schooling (years) [0.008] [0.009] [0.025] Initial private credit by deposit money bank -0.000 -0.000 -0.001** × Law and Order [0.000] [0.000] [0.001] Initial private credit by deposit money bank -0.002 -0.002 -0.009 × Growth of CPI [0.002] [0.002] [0.011] Initial Human capital -0.048*** -0.043*** -0.110** -0.010 -0.008 -0.090** -0.020* -0.026** -0.077* [0.017] [0.016] [0.053] [0.017] [0.020] [0.042] [0.012] [0.013] [0.040] Initial GDP per capita 0.001 0.017 0.007 0.019 0.005 0.018 (constant 2005 US$) [0.005] [0.017] [0.006] [0.015] [0.004] [0.013] Log of openness (exports + imports) -0.003 -0.010 -0.012** -0.010 -0.004 -0.011 (% of GDP) [0.004] [0.009] [0.005] [0.009] [0.004] [0.009] Average government expenditure 0.001 0.000 0.001* 0.000 0.001* 0.000 (% of GDP) [0.000] [0.001] [0.000] [0.001] [0.000] [0.001] Log of high-technology exports -0.002 -0.004 -0.003 (% of manufactured exports) [0.002] [0.003] [0.002] Agriculture employment share -0.033* -0.039** -0.035 (% of total employment) [0.020] [0.019] [0.021] Constant 0.403*** 0.394*** 0.619*** 0.523*** 0.515*** 0.577*** 0.387*** 0.359*** 0.576*** [0.034] [0.058] [0.144] [0.043] [0.063] [0.113] [0.036] [0.052] [0.100] Observations 631 625 237 437 436 230 622 617 235 Number of code 115 115 84 101 101 81 114 114 83 Adjusted R-squared 0.303 0.309 0.500 0.449 0.462 0.497 0.297 0.307 0.502
  29. 29. A Growth Form: Stock Market Capitalization VARIABLES Growth of GINI coefficient (market) [1] [2] [3] [1] [2] [3] [1] [2] [3] Log of initial GINI index (market) -0.184*** -0.181*** -0.182*** -0.179*** -0.179*** -0.177*** -0.180*** -0.179*** -0.181*** [0.015] [0.016] [0.022] [0.018] [0.018] [0.024] [0.017] [0.018] [0.024] Initial stock mkt capitalization 0.013 0.007 0.009 0.003 0.003 0.006 0.001 -0.000 -0.001 (% of GDP) [0.012] [0.014] [0.017] [0.004] [0.004] [0.005] [0.002] [0.002] [0.002] Initial stock mkt capitalization -0.017 -0.010 -0.010 × Ratio of primary schooling (years) [0.020] [0.022] [0.028] Initial stock mkt capitalization -0.000 -0.000 -0.001 × Average Law and Order [0.001] [0.001] [0.001] Initial stock mkt capitalization 0.011* 0.010 0.021*** × Growth of CPI [0.006] [0.007] [0.008] Initial Human capital -0.079 -0.097** -0.099 -0.057 -0.095** -0.092* -0.032 -0.069* -0.067 [0.050] [0.045] [0.066] [0.038] [0.040] [0.049] [0.036] [0.038] [0.045] Initial GDP per capita 0.023** 0.020 0.024** 0.020 0.023** 0.023* (constant 2005 US$) [0.012] [0.013] [0.010] [0.012] [0.009] [0.012] Log of openness (exports + imports) -0.008 -0.013 -0.007 -0.010 -0.006 -0.008 (% of GDP) [0.008] [0.011] [0.008] [0.011] [0.008] [0.011] Average government expenditure 0.000 0.001 0.001 0.001 0.001 0.001 (% of GDP) [0.001] [0.001] [0.001] [0.001] [0.001] [0.001] Log of high-technology exports -0.002 -0.005 -0.002 (% of manufactured exports) [0.003] [0.004] [0.003] Agriculture employment share -0.037 -0.049* -0.030 (% of total employment) [0.027] [0.027] [0.025] Constant 0.739*** 0.567*** 0.615*** 0.708*** 0.540*** 0.589*** 0.693*** 0.535*** 0.542*** [0.059] [0.123] [0.135] [0.068] [0.101] [0.135] [0.062] [0.094] [0.137] Observations 260 260 210 246 246 205 257 257 208 Number of code 87 87 75 81 81 73 86 86 74 Adjusted R-squared 0.480 0.491 0.475 0.476 0.488 0.476 0.483 0.495 0.491
  30. 30. Factors that influence the degree of impact of financial development on income inequality. • Financial development has a stronger pro-equity impact when the ratio of primary schooling is higher. • The pro-equity effect of financial development becomes stronger when law and order improves. • Macroeconomic stability has mixed evidence.
  31. 31. Policy Implication 1 • As per capita GDP increases, we find an inverted U shape relationship between per capita income and income inequality up to a certain level of per capita income, in line with the Kuznets curve. • But as per capita income continues to increase, income inequality starts to deteriorate again. Growth helps resolve the inequality issue only up to a certain level of development. As the economy further grows, we need to devise some specific policies to improve income inequality.
  32. 32. Policy Implication 2 • Financial development has a U shaped effect on income inequality. • As the financial system develops, inequality improves until it reaches around the mean level, but as the financial system continues to develop, it aggravates income inequality.  Financial development helps alleviate income inequality only up to a certain level. We need to think about how to prevent further financial development from aggravating income inequality.
  33. 33. Policy Implication 3 • We find that when the ratio of primary schooling increases and law and order improves, financial development is more effective in reducing inequality. There are two ways for financial development to improve income inequality. (1) Financial development should provide more chances for less educated people to accumulate human capital. (2) We need to develop high-quality institutions to encourage financial lending on the basis of commercial merit rather than connections.

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