Abstract
PurposeThis paper examines credit composition and income inequality reduction in Vietnam. In particular, the authors focus on the distinction between policy and commercial credits and investigate whether these two types of credit adversely affect on income inequality. The authors also examine whether the educational level and institutional quality condition the impact of policy credit on income inequality.Design/methodology/approachThe authors use the primary data set, which contains a panel of 60 provinces collected from the General Statistics Office of Vietnam from 2002 to 2016. The authors employ the generalized method of moments to solve the endogenous problem.FindingsThe authors show that while commercial credit increases income inequality, policy credit reduces income inequality in Vietnam. In addition, we provide evidence that the institutional quality and educational level condition the impact of policy credit on income inequality. Based on the findings, the paper implies that it was not the size of the private credit but its composition that mattered in reducing income inequality due to the asymmetric effects of different types of credit.Practical implicationThe government should focus on credit for the poor by helping them to exit poverty through investing in human capital, health and micro enterprises activities.Originality/valueThis is the first study that examines the links between the two components of credit and income inequality as well as the constraints of the links. The authors argue that analyzing the separate effects of commercial and policy credits is more important for explaining the role of credit in income inequality than the size of total credit.
Highlights
Income inequality is a widespread concern worldwide, especially in developing countries
Conclusion and policy implications On dissecting a panel data 60 provinces/cities in Vietnam over the period 2002–2016, this paper finds empirical evidence proving the important role of policy credit on reducing income inequality
Our findings are in line with the theoretical predictions of Galor and Zeira (1993), Banerjee and Newman (1993), which suggest that the impact of credit on reducing the income inequality goes through policy credit rather than commercial credit
Summary
Income inequality is a widespread concern worldwide, especially in developing countries. The impact of financial development in general and credit in particular on income inequality has been theoretically and empirically investigated. There are many different views on the impact of credit on income inequality. Imperfect information and credit transaction costs may create constraints on the poor such as a lack of collateral, loosening these credit restrictions is considered to be beneficial for the poor (Beck et al, 2007). In another theoretical view, Greenwood and JEL Classification — O11, O16, G00 © Le Quoc Hoi and Hương Lan Trần. The full terms of this licence may be seen at http://creativecommons.org/ licences/by/4.0/legalcode
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