Financial development and income inequality in South Africa

Abstract

The persistent inequality in South Africa has been the subject of considerable debate over two decades. This chapter examines the effect of financial sector development on income inequality in South Africa. Using cointegrating regressions (DOLS, CCR and FMOLS), the findings show the inverted U-shaped association between financial development and income inequality. This suggests that income inequality first rises as the financial sector develops but later declines with further development of the financial sector. The findings also show that irrespective of the level of growth and trade openness, financial sector development is crucial in reducing income inequality in the long run.