The Effects Of Financial Development On Income Inequality And Poverty

Although many developing countries have made significant progress in promoting economic growth over the past three decades.However,most of the gains from economic growth are owned by the capitalists,making economic growth a key determinants of increasing poverty and inequality in those countries.As the growing disparity between the rich and the poor has becoming a global threat,income inequality and poverty reduction has become the top priority for the policymakers.Most studies use a rather narrow definition of financial development,such as the value of credit issued by financial intermediaries to the private sector divided by GDP.The main reason for the wide use of this measure in empirical studies is its availability across countries and time.However,financial development clearly has more dimensions,such as depth,access,efficiency,stability and so on.In this respect,principal components analysis is utilized in this paper to construct satisfactory and reliable indicators of bank and stock market developments.Then,we examine both separate and simultaneous effects of bank and stock market development on income inequality and poverty.By using system GMM method with a sample of 18 Asian emerging countries for the period of 1987-2014,the aim of this paper is to empirically investigate the effects of financial development on inequality and poverty.The results show that financial development does not benefits low-income groups in the 18 Asian emerging countries.We find that there is a statistically significant relationship between the bank development and the growth rate of the Gini coefficient,indicating a U-shaped influence of financial development on income inequality.In other words,financial development reduces income inequality up to a threshold but then exacerbates it.And I find similar results when I rerun the same regression for overall financial development but not with the stock market.In short,bank development has a greater and more significant impact on income inequality and poverty than stock market development,and this effect is negative for most Asian emerging countries considering their current level of financial development.Further deepening of the financial system will worsen income inequality and poverty in these countries.