Financial intermediation,inclusion, Fintech,and income inequality in Africa: Robust evidence from the supply and demand side data

The current literature on the finance-inequality nexus fall short of providing extensive evidence. This paper fills the gap by framing the financial sector; to the development of financial intermediation (supply side) and individual use of financial services (demand side). The first approach decouples the financial sector into the banking and stock market. We use the 5-year nonoverlapping averaged data from 1980 to 2017 across 49 countries and employ a panel data fixed effect and two-stage least squared estimation (2sls). We show that banking and stock market development widens income inequality. Besides, the effect is more prominent in countries that have a banking and stock market than countries only with the banking sector. The second approach uses financial inclusion and financial technology (Fintech) data from three waves of survey data in 2011, 2014 and 2017 on the individual use of financial services across 39 countries. We obtain three key findings. First, institutional quality significantly affects financial inclusion and Fintech. Second, Fintech positively affects inclusion and savings. Third, financial inclusion and Fintech exacerbate income inequality. Our result asserts a natural tendency that financial sector development exacerbate income inequality in Africa.     

Finance,income inequality and income redistribution

Using a panel fixed effects model for a large sample of countries covering 1975–2005, we test the hypothesis that income inequality caused by finance (financial development, financial liberalization and banking crises) is related to more income redistribution than inequality caused by other factors. Our results provide evidence in support of this hypothesis. We also find that the impact of inequality on redistribution is conditioned by ethno-linguistic fractionalization. Our findings are robust to the inclusion of several control variables suggested by previous studies.     

PERMANENT INCOME, CONVERGENCE AND INEQUALITY AMONG COUNTRIES

The literature on inequality has generally focused on the analysis of annual per capita income. This paper adopts a different approach by considering the life-cycle dimension of inequality and convergence between economies from 1960 to 2000. We analyze the present value of the set of incomes individuals obtain throughout their whole life (permanent income). On the basis of this approach, various simulations are made to determine the effect on inequality in permanent income of variables such as survival rates and the long-run growth rates in current income. The results indicate that survival rates are an important source of inequality. Inequality in permanent income is about one third higher than in current income. The implication of this finding is that if the whole life-cycle dimension is not considered, the level of inequality among economies is being underestimated.     

Exploring the link between household debt and income inequality: an asymmetric approach

We investigate the relationship between household debt and income inequality in the USA, allowing for asymmetry, using data over the period 1913–2008. We find evidence of an asymmetric cointegration between household debt and inequality for different regimes. Our results indicate household debt only responds to positive changes in income inequality, while there is no evidence of falling inequality significantly affecting household debt. The presence of this asymmetry provides further empirical insights into the emerging literature on household debt and inequality.     

Income inequality and financial reform in Asia: the role of human capital

We investigate whether financial reform can reduce income inequality in Asia, with particular emphasis on the role of human capital. Extending Galor and Zeira (1993), we demonstrate that financial reform is effective in reducing income inequality, and the effect is more profound in a country with higher human capital. Using the data for 18 countries in Asia, the region with the most promising financial reform, we confirm our theoretical finding. In addition, among disaggregated financial reforms, lift of credit control, better banking supervision and security market development seem to be significantly associated with reduction of income inequality.     

How Does Fiscal Consolidation Impact on Income Inequality?

In this paper, we assess the impact of fiscal consolidation on income inequality. Using a panel of 18 industrialized countries from 1978 to 2009, we find that income inequality significantly rises during periods of fiscal consolidation. In addition, while fiscal policy that is driven by spending cuts seems to be detrimental for income distribution, tax hikes seem to have an equalizing effect. We also show that the size of the fiscal consolidation program (in percentage of GDP) has an impact on income inequality. In particular, when consolidation plans represent a small share of GDP, the income gap widens, suggesting that the burden associated with the effort affects disproportionately households at the bottom of the income distribution. Considering the linkages between banking crises and fiscal consolidation, we find that the effect on the income gap is amplified when fiscal adjustments take place after the resolution of such financial turmoil. Similarly, fiscal consolidation programs combined with inflation are likely to increase inequality and the effects of fiscal adjustments on inequality are amplified during periods of relatively low growth. Our results also provide support for a non‐linear relationship between inequality and income and corroborate the idea that trade can promote a more equal distribution of income.     

Taking down the wall: Transition and inequality

In this article, we investigate the main determinants of income inequality in the transition countries of Central and Eastern Europe and the Commonwealth of Independent States during the period 1990–2018. To this end, we address a major methodological challenge that lies at the core of the cross‐country literature on income inequality: the potential endogeneity of income per capita, which is largely ignored by most empirical studies. We adopt a two‐pronged empirical strategy by (1) using trading partners’ weighted average real GDP as an instrumental variable and (2) estimating the model via the two‐stage least squares approach for static models and the generalized method of moments estimator for dynamic models. Our empirical findings are consistent with the Kuznets curve that illustrates a nonlinear relationship between income inequality and the level of economic development. We also find that the redistributive impact of fiscal policy is statistically insignificant and taxation and government spending appear to have the opposing effects on income inequality in transition economies over the sample period.     

Do Piketty and Saez Misstate Income Inequality? Critiquing the Critiques

A large body of literature points to sharply growing income inequality over the past half century. The Piketty and Saez dataset that measures income distribution provides empirical support for this claim. Our article evaluates three prominent criticisms of this dataset as well as the responses of Piketty and Saez to these criticisms. One key argument against using their dataset is that Piketty and Saez do not control for income shifting by top income earners in response to the Tax Reform Act of 1986 (TRA86) and thus overstate income inequality. In evaluating this criticism we find that a segment of their dataset likely understates income inequality; this is just the opposite of what critics assert. This implies that the Piketty–Saez dataset is a valuable resource for income inequality research and that scholars can use it to build more refined, accurate and insightful measures of income inequality.     

On the ambiguous economic freedom–inequality relationship

Previous research on the relationship between economic freedom and income inequality has produced mixed results. We provide a short survey of this literature, identifying potential causes for this empirical heterogeneity. Next, we replicate the results from two significant studies using six alternative measures of income inequality for an updated dataset of up to 112 countries over the period 1970–2010. Notably, we use the latest release of the Standardized World Income Inequality Dataset, which allows us to account for the uncertainty of the estimated Gini coefficients. We find that the results of previous studies are sensitive to the choice of country sample, time period and/or inequality measure used. We conclude with suggestions for future research in the area.     

The effects of economic growth on income inequality in the US

The paper analyzes the relation between growth and income inequality in the US during the post-war years (1953–2008). We show that the income of the top income groups is more sensitive to growth, defined broadly as current growth and changes in expectations of future growth, compared to the income of the lower income groups. We provide evidence that this increased sensitivity arises for two reasons: (a) the top income groups receive a large portion of their income from wealth, which is more sensitive to growth than labor income and (b) the top income groups receive a large portion of their labor income in the form of pay-for-performance (equity compensation), which is also sensitive to growth. Consequently, we conclude that growth and income inequality are positively associated.     

Foreign direct investment and income inequality: Does the relationship vary with absorptive capacity?

There has been little systematic empirical literature on the linkage between income inequality and FDI (Basu and Guariglia, 2007; Tsai, 1995). This paper analyzes the effects of foreign direct investment (FDI) on income inequality and asks whether the relationship depends on absorptive capacity or not, by using a cross-sectional dataset taken from 54 countries over the period 1980–2005. We adopt the endogenous threshold regression model proposed by Hansen (2000) and Caner and Hansen (2004) and find strong evidence of a two-regime split in our sample. That is, FDI is likely to be harmful to the income distribution of those host countries with low levels of absorptive capacity. By contrast, our results support the perspective that FDI has little effect on income inequality in the case of countries with better absorptive capacity. It is also shown that international trade can lead to more equal income distribution.     

BANK COMPETITION,FINANCIAL DEVELOPMENT,AND INCOME INEQUALITY

Income inequality rises with financial development initially and then drops. We reach this conclusion by numerically solving a heterogeneous agent model parameterized to the Chinese economy. The model features a banking sector with Cournot competition, and the process of financial development in the model economy begins with the deregulation of the banking sector. Based on regressions with the fixed effects and the system generalized method of moments, the empirical analysis also suggests an inverted‐U relationship between income inequality and financial development using provincial data from China. (JEL E25, G21, G28)     

Inequality and volatility moderation in Russia: Evidence from micro-level panel data on consumption and income

We construct key household and individual economic variables using a panel micro data set from the Russia Longitudinal Monitoring Survey (RLMS) for 1994–2005. We analyze cross-sectional income and consumption inequality trends and find that inequality decreased during the 2000–2005 economic recovery. The decrease appears to be driven by falling volatility of transitory income shocks. The response of consumption to permanent and transitory income shocks becomes weaker later in the sample, consistent with greater self-insurance against permanent shocks and greater smoothing of transitory shocks. Finally, expenditure and income inequality in Russia are not far apart.     

Financial deepening and income inequality: Is there any financial Kuznets curve in China? The political economy analysis

The interconnectedness of financial deepening and income inequality has been a highly controversial discussion which has not been concluded despite many empirical and theoretical studies up to date. One of the basic building blocks for many research designs is the reliance upon the Kuznets inverted U-shaped curve which postulates that in the first phase of economic growth income inequality increases, peaks and then decreases to a tolerable level in the later phase after a certain income level had been attained. The role of financial deepening in financing economic growth is an indispensable and necessary condition enabling us to easily draw an analogy between financial deepening and income inequality in a financial version of the Kuznets curve. In spite of 30 years of economic and financial reforms in China, which represents a fairly young history of economic growth and development, there are many indicators that Chinese experience significantly deviates from the presupposed inverted U-shaped curve trajectory and its final equalizing effect. This paper relies on financial deepening data measured by monetary aggregate M2/GDP and domestic banking credit/GDP ratios in its claim that they significantly correlate with rising income inequality. The author’s intention consists not in claiming that financial deepening per se causes income inequality, but provides a political economy analysis of the specific institutional and power configuration which leads to their positive relationship. This configuration is determined by the prevailing banking model, the hukou system, financial repression and the decentralized authoritarian system. On the other hand, the absence of inequality-narrowing institutitons further aggravate the problem. All the aforementioned factors are geared at avoiding mechanical and spurious claims that financial deepening increases or decreases income inequality across countries. A historical institutionalism approach to explain China’s path related to the Kuznets curve prediction shows the central validity of open and inclusive institutions in generating inequality-narrowing benefits of financial deepening.     

The urban–rural divide

A vast literature has related perceptions of income inequality to individuals' income: the higher the level of income, the less inequality is perceived. Here, examining the perceptions of income and social inequality, we argue that rural or urban residence affects both inequality perceptions and the impact of income on these perceptions. We test the theory using survey data from 12 Central and Eastern European countries and we find that income negatively affects inequality perceptions but only in urban areas. These findings confirm the importance of accounting for urbanity to understand what drives individuals' perceptions of inequality.     

CAN HOUSEHOLDS AND WELFARE STATES MITIGATE RISING EARNINGS INSTABILITY?

We compare the evolution of earnings instability in Germany and the United Kingdom, two countries which stand for different types of welfare states. Deploying data from the German Socio‐Economic Panel (SOEP) and the British Household Panel Survey (BHPS), we estimate permanent and transitory variances of male income over the period 1984–2009 and 1991–2006, respectively. Studies in this literature generally use individual labor earnings. To uncover the role of welfare state and households in smoothening earnings shocks, we compute different income concepts ranging from gross earnings to net equivalent household income. We find evidence that the overall inequality of earnings in Germany and the United Kingdom has been rising throughout the period due to both higher permanent earnings inequality and higher earnings volatility. However, taking institutions of the welfare state and risk‐sharing households into account, we find that the volatility of net household income has remained fairly stable. Furthermore, redistribution and risk insurance provided by the welfare state is more pronounced in Germany than in the United Kingdom.     

The relationship between income inequality and aggregate saving: an empirical analysis using cross-country panel data

If the rich save more than the poor, an increase in income inequality raises aggregate saving. We investigate whether income inequality is positively related to aggregate saving ratio by estimating a fixed-effect model based on a panel data of 48 countries for the period 1991–2010. We find evidence that aggregate saving ratio increases with income inequality using various inequality measures. In particular, the effect of income distribution on saving is greater and statistically more significant with in financially developed, rich and OECD countries. It suggests that the rich save much more than the poor under advanced financial system and in a rich country. We also find that the relationship between income inequality and saving ratio is closer in the 2000s than the 1990s. This finding may result from financial development and the high income level in the 2000s.     

Modeling income inequality and openness in the framework of Kuznets curve: New evidence from China

This article tests the relationship between openness and income inequality in openness Kuznets curve framework. The Auto Regressive Distributed Lag (ARDL) estimator is employed to establish the long run relationship between openness and income inequality. We add to the literature by noting that Kuznets curve fits the relationship between openness and income equality in the case of China. This evidence is new and in line with the Kuznets hypothesis that income inequality rises with the increase of openness and then starts fall after a critical point.     

Income inequality and economic growth

Despite the extensive existing literature on income inequality and economic growth, there remains considerable disagreement on the effect of inequality on economic growth. Existing literatures find either a positive or a negative relationship. In this paper, we attempt to theoretically examine that relationship with a stochastic optimal growth model. We make the disagreement clear within a single model. We conclude (i) that both are possible – that is, higher inequality can retard growth in the early stage of economic development, and can encourage growth in a near steady state, (ii) that income redistribution by high income tax does not always reduce income inequality. Income inequality can be reduced by higher income tax in a near steady state, but it cannot be reduced in the early stage of economic development, and (iii) that two government polices – rapid economic growth and low income inequality – can be achieved by low income tax in the early stage of economic development, but both cannot be achieved simultaneously in a near steady state.     

Finance and inequality: a study of Indian states

Although a large literature exists on finance and economic growth, few studies have empirically examined the relationship between finance and inequality. Using grouped national household sample survey data on monthly household consumption expenditure at the sub-national level for the years 1999–2000 to 2006–2007, we examine the relationship between Financial Development (FD) and rural and urban inequality in India. The results indicate that FD is associated with a reduction in inequality, but only in the urban areas. Further, inequality is found to be higher in the richer states compared to less developed and low income states, and as state income increases, inequality also increases both in the rural and urban areas. Finally, our results show that increase in population per bank branch leads to higher inequality in urban areas but decline in rural areas.