Financial Development, Human Capital Development and Income Inequality: Evidence from Developing Countries

Abstract

This study investigates the nexus between financial deepening and income equality in developing countries. Two indicators of income inequality, the Gini coefficient, and the income share of the bottom quintile of the population, are used for this analysis of 31 developing countries spanning the period 1996 to 2019. The system generalized method of moment (GMM) is used to tackle the problem of endogeneity. This study finds the inverted U-shaped relationship between gross domestic product (GDP) per capita and income inequality, while the non-linear relationship is observed between financial deepening and income inequality. This implies that at an early stage of financial development income inequality increases and as a certain threshold level of financial development is marked, income inequality decreases. Moreover educated and healthy human capital has negative impacts on income inequality in developing countries. Therefore this study infers to enhance human capital development in developing countries to crush down income inequality.