Abstract
Income distribution directly affects economic growth and the spending patterns in an economy. This paper employs an ordered probit panel to measure the effect of the Great Recession on income inequality in Latin American and Eastern EU members. The results suggest the crisis increased inequality in studied countries overall. However, those countries with low levels of inequality saw their Gini coefficients decrease further, while the crisis increased inequality in countries with already high inequality. Additionally, the results show that European Union membership on average contributed to lower likelihood of high Gini coefficients. Furthermore, marginal effects lend additional evidence of lower income gap for the Eastern EU members as they generally show negative marginal effects for countries with initially high inequality and positive for those with low Gini coefficients. Finally, we find no evidence that FDI and capital incentives have any direct impact on inequality, while GDP growth, poverty, and export incentives are associated with higher and tax revenues and export growth with lower income inequality.
Highlights
Income inequality across the globe is high with Gini indices between 55 and 70 and it has been increasing in advanced economies (Piketty and Saez [1]), reaching 37.2 for the US and 35.5 for UK in 2012 (Dabla-Norris et al [2])
We find that economic crisis and poverty, along with GDP growth and export incentives, increase the likelihood of higher income inequality in a country
We used an ordered probit panel to examine the effect of the Great Recession on income inequality in Latin American and Eastern EU members
Summary
Income inequality across the globe is high with Gini indices between 55 and 70 and it has been increasing in advanced economies (Piketty and Saez [1]), reaching 37.2 for the US and 35.5 for UK in 2012 (Dabla-Norris et al [2]). Even with the recent trend of decreasing income inequality, Latin America remains the regions with the most unequal distribution of income in the world (Tsounta and Osueke [7]), with Gini index of 44.22 (as opposed to 42 for Sub-Saharan Africa and 30 for Europe – Dabla-Norris et al [2]) This has slowed economic growth in the region and widened the gap between developed nations and most Latin America’s countries (Lopez and Perry [8]). Compared to the rest of the EU, income inequality is relatively high in its Eastern European members with “Eastern Europe experiencing marked increases in inequality” (Dabla-Norris et al [2]; Baiardi and Morana [9]) Both regions are in proximity of wealthy neighbors and have developed strong trade and economic ties with them. The fourth section presents the results while the last section draws conclusions
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