Financial Development and Income Inequality in Newly Industrialized Countries: Does Financial Kuznets Curve Exists?

Abstract

The aim of this study is to test the validity of the classical Kuznets curve and financial Kuznets curve (FKC) hypotheses. In addition, in this study, the relationship between financial development and income inequality is discussed, the effect of financial development on income inequality is empirically explored, and policy recommendations are made within the framework of the analysis in 10 newly ındustrialized countries. The annual data spanning 1985–2019 were collected to examine the nexus among financial development, per capita GDP, and income inequality. Moreover, control variables of government expenditures, urban population, foreign direct investment, and economic globalization index were added to the empirical model as explanatory variables. Income inequality is measured by Gini coefficient. Panel autoregressive distributed lag model (Panel ARDL) and panel generalized moment method-system (Panel GMM) were used in the analyses. According to the results obtained in the study, while economic globalization increases income inequality, government expenditures, and urban population and foreign direct investments reduce income inequality. However, while GDP and financial development itself increased the Gini coefficient, it decreased the squares. Therefore, it is concluded that both classical Kuznets curve and financial Kuznets curve hypotheses are valid for newly ındustrialized countries. It is possible that the findings obtained in the analysis will be used by the policy makers of these countries for the development of financial systems in order to reduce inequality. Increasing the efficiency of the financial sector with structural regulations and various incentive policies is important for countries with financially underdeveloped.