economic and financial development, and income inequality

Economic and Financial Development, and

Income Inequality

4th OECD-AMRO-ADB Asian Regional Roundtable Tokyo, Japan, May 14th, 2015

Kwanho Shin

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?

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.

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.

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.

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.

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.

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.

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

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)

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

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

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

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.

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.


• 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

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


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


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***


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


Number of groups 154 132 122 154 132 122


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


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**


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


Number of groups 102 96 93 102 96 93

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


• 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.

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.

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.

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


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*


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


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***


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**


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


Number of groups 121 113 107 122 114 108 92 88 87

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.

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


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


A Growth Form: Private Credit to GDP (%) VARIABLES Growth of GINI coefficient (market)

[1] [2] [3] [1] [2] [3] [1] [2] [3]


[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


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]



Agriculture employment share -0.033* -0.039** -0.035


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


A Growth Form: Stock Market Capitalization VARIABLES Growth of GINI coefficient (market)

[1] [2] [3] [1] [2] [3] [1] [2] [3]


[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


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]



Agriculture employment share -0.037 -0.049* -0.030


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


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.

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.


• 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.


• 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.

economic and financial development, and income inequality

Economy & Finance

income inequality measures

financial development

financial system

better financial services

gini coefficient variables

cubic of gdp

nonlinear relationship

square of gdp