Re-investigation of Financial Development on Income Inequality: An Empirical Analysis for G-20 Emerging Economies

Abstract

This research examines effects of financial development, economic growth, government expenditures, urbanization, and trade openness on income inequality in the leading emerging economies of the G-20 (Argentina, Brazil, China, India, Indonesia, Mexico, Russia, and Turkiye) for the period from 1989 to 2021. The findings confirm the existence of a cointegration nexus among the variables over the long-term. According to the common correlated effects mean group estimator, financial development has negative effects on income inequality in the panel. Factors such as government expenditures and trade openness demonstrate positive effects on income inequality. In the country-specific effects, we find that the impact of financial development on income inequality is negative and statistically significant in Argentina, India, and Russia. The influence of economic growth on income inequality is positive and significant in Indonesia, Mexico, and Turkiye. Government expenditures on income inequality appear to be positive in Argentina, Indonesia, and Mexico. Finally, trade openness demonstrates a positive and significant effect in India, Indonesia, Mexico, and Turkiye. Among the reasons for the differences in test results across countries are variations in their political structures, particularly the high inflation and macroeconomic instability in Turkey, the presence of the informal economy and corruption in Brazil, Indonesia, Turkey, and China, as well as regional inequalities. In this context, based on the overall panel test results, it is recommended that policymakers increase financial inclusion, reduce regional disparities, reduce corruption, increase social assistance, and balanced trade policy to enhance the impact of financial development on income distribution.