The relationship between income inequality and financial development: Is the financial kuznets curve valid in middle-income countries?

Abstract

Income Equality is one of the most significant ongoing problems on the national and global scales. It is accepted that Income Equality has many causes and is a social problem encountered by countries on both national and international levels. In terms of its consequences, it is seen to create negative situations including low growth rates, increased inequality of social opportunities in various areas such as health, education, nutrition and housing, and poverty. While fields such as development economics, fiscal policy and social policy are employed in terms of proposing solutions to Income Equality, it is argued that increased Financial Development would also contribute to the solution to this issue. The aim of this study is to test the validity of the Financial Kuznets Curve hypothesis. The study covers the period 2002-2018. 21 middle-income countries were used and analyzes were made using panel data. According to the analysis made by Fixed Effects, Pooled OLS and Two-Stage System GMM methods, an inverse U relationship was found between Financial Development indicators and Income Equality. In other words, it was concluded that the Financial Kuznets Curve hypothesis is valid in the 21 middle-income countries examined in this study. Accordingly, Financial Development can be considered as an important tool for reducing Income Equality.