Income Inequality, Finance, and Economic Growth Relationships

Abstract

Since the early 1980s, income inequality has risen between and within countries in the neo-liberal era. In literature, there are different views on the relationship of financial sector and the real economy with income inequality. Two main hypotheses in the literature regarding this relationship are as follows: The first hypothesis claims that developments in financial sector can only benefit people with higher incomes. Those with higher incomes can offer collateral and are more likely to repay loans, while those with low-income levels may have difficulty in getting loans, and this may increase inequality. The second hypothesis argues that the growth of the financial sector can provide previously excluded low-income individuals with access to credit. This hypothesis suggests that income inequality decreases when financial markets are developed. This study presents the income inequality, finance, and growth relationships via panel data methodology. Our dataset consists of emerging markets, and our data source is the World Bank database. Our study contributes to the existing literature with its results, which give evidence of a negative relationship between income inequality and economic growth with policy implications. Specific policies toward the financial sector and the real sector would be implemented for poverty alleviation.