Revisiting the Fiscal Policy–Income Inequality Nexus in Sub‐Saharan Africa: Does Institutional Quality Matter?

While the global economy has witnessed robust economic performance over the past few years, millions of households remain financially deprived. This indicates that universal access to financial services is critical for the global community to achieve the United Nations’ sustainable development goals (SDGs). Although there is a burgeoning body of literature on the nexus between financial inclusion and income inequality, empirical evidence on the contribution of financial inclusion and institutional quality to income inequality remains sparse. This research, therefore, examines the effect of financial inclusion and institutional quality on income inequality in Brazil, Russia, India, China, and South Africa (BRICS) economies from 2004 to 2015. The empirical analysis employed the cross-sectional autoregressive distributed lag (CS-ARDL) and common correlated effects mean group (CCEMG) techniques to obviate cross-sectional dependency and heterogeneity concerns. The empirical outcome demonstrates that financial inclusion promotes income inequality reduction in BRICS economies in the long and short run. Additionally, improvements in institutional quality further enhance the accessibility and usage of financial services by financially excluded individuals, thereby fostering equitable income distribution in the BRICS countries. Based on these findings, BRICS economies need to increase their awareness of the available financial services, effective microfinance, financial capability, and infrastructural access in rural areas to improve financial inclusivity and thus promote equitable income distribution. JEL Classification D02, D33, E02, G21, O15

Economic justice and equitable distribution of income, along with important issues such as economic growth and development, the reduction of inflation and unemployment, have always been of concern to economists. Fair distribution of income and reduction of income inequality in society, and the identification of factors affecting income inequality to make the right policy are necessary and obvious. The purpose of this paper is to examine the impact of income tax on income distribution in Iran. In this regard, Autoregressive Distributed Lag (ARDL) approach has been used to investigate the existence of a long-run relationship between variables and to estimate the coefficients related to long-run and error correction models for income inequality from 1978 to 2012. The results indicate a long-run relationship among the variables and show that an increase in income tax revenues leads to a reduction in income inequality.

Institutional Quality and Income Distribution

This study explores the relationship between energy consumption and income inequality across 10 Central and Eastern European (CEE) countries over the period from 2007 to 2020. By employing a panel Autoregressive Distributed Lag (ARDL) approach, the research aims to determine whether increased energy consumption can play a role in mitigating income inequality in these countries. The results demonstrate a significant and negative relationship between energy consumption and income inequality in the long-term, indicating that higher energy consumption may lead to a reduction in income disparities. These findings suggest that energy policies to increase access to energy resources could serve as a valuable tool in addressing socioeconomic inequality within the CEE region. The study underscores the importance of energy consumption not just as an economic driver but also as a potential lever for promoting greater social equity, offering insights for policymakers seeking to balance economic growth with inclusive development.

Globally increasing income disparity, both across and within countries, suggests attention be paid to the role of fiscal policy in mitigating the problem. However, conventional wisdom suggests this can be achieved only at the cost of economic efficiency. This suggests fiscal policy has two incompatible major, long-term targets: economic growth and income equality. Thus economic growth, income inequality and fiscal policy variables are neither independent nor separately determinable. The implication is that it is essential to determine empirically the impact of fiscal policy on economic growth and income inequality and to do so in a way that allows for their interdependence. Consequently a conceptual framework is developed in which economic growth, income inequality and fiscal policy are interdependently determined. Within this framework, and based on a large body of empirical research, a system of simultaneous equations (SSEs) is constructed, with each endogenous variable treated as a function of the other endogenous variables, and also as a set of controlled variables taken from the theoretical and empirical literature. The following six hypotheses are developed from the literature in such a way that they can be parameterized and tested as individual system coefficients of the SSEs. The first hypothesis is that redistributive government expenditures involve a trade-off between economic growth (efficiency) and income equality (equity). The second hypothesis is that direct taxation receipts reduce income inequality, while indirect taxation receipts and non-redistributive expenditures increase income inequality. Within hypothesis 3, redistributive government expenditures are assumed to largely reduce income inequality when they are financed by direct taxes rather than by debt. Hypothesis 4 posits that non-redistributive expenditures reduce economic growth when they are financed by direct taxes rather than by debt. Outside the policy arena, hypothesis 5 is that income inequality reduces economic growth, while hypothesis 6 is that economic growth reduces income inequality. The SSEs are then specified as an empirically measurable simultaneous equations model (SEM), taking country- and time-specific unobservable factors into account. The SEM is estimated using the three-stage least-squares method (3SLS) to test the validity of the hypotheses using the three-year averages of data for 1995–2015 for a balance panel of 19 high-income OECD countries. A reduced-form version using a structural vector autoregressive (SVAR) model and a structural vector error correction (SVEC) model is also estimated using country-specific annual time series data from Australia and Sri Lanka for 1965–2014 and 1981–2013 respectively. A small SVAR model for an open economy is constructed for contemporaneous identification. Based on evidence of one cointegrating vector among the variables, a SVEC model is specified for the long run and is estimated to examine the impact of three permanent fiscal shocks (i.e. direct and indirect taxation receipts and government expenditure) on aggregate output and income inequality. Estimation of the SEM provides statistically significance evidence for all except the first and fifth hypotheses. An increase in redistributive expenditures reduces income inequality but is without a statistically significant impact on economic growth. The total net effect of direct taxation receipts, indirect taxation receipts and non-redistributive expenditures on income inequality is positive: increases inequality. Financing non-redistributive expenditures by debt is less harmful for economic growth than financing them by direct taxes, while lowering non-redistributive expenditures increases economic growth and decreases income inequality. The Australian SVEC model shows that an increase in direct taxation receipts permanently reduces per capita real GDP but has no statistically significant impact on income inequality. Conversely, an increase in deficit-financed government expenditures does not affect per capita real GDP but permanently reduces income inequality. An increase in indirect taxation receipts permanently increases income inequality, while the adverse effect of indirect taxation receipts on income inequality is greater than the redistributive effect of government expenditure. The Sri Lankan SVEC model shows that an increase in deficit-financed government expenditures permanently reduces both income inequality and per capita real GDP. An increase in indirect taxation receipts permanently increases income inequality. However, indirect taxation receipts have a statistically significant positive impact on long-run per capita real GDP. From these results a range of fiscal policy implications are drawn. For the SEM model this includes increasing redistributive expenditures financed by direct taxes to reduce income inequality, while cutting non-redistributive expenditures to help achieve both efficiency and equity objectives. The SVEC models imply that Australian fiscal policy did little to either influence the efficiency–equity trade-off or ameliorate its effects in the long run, while for Sri Lanka continued reliance on indirect taxes exacerbates equity problems.

Previous studies have primarily focused on issues related to income inequality, aiming to identify the underlying causes and urging swift action to mitigate such disparities. In this context, the current article expands upon existing literature by introducing the influence of corruption and institutional quality. This study contributes to the existing knowledge by investigating the interplay between institutional quality, corruption, and income inequality within SAARC countries spanning 2000 to 2021, sourced from World Governance Indicators, Transparency International, Global Consumption and Income Project, and World Development Indicators. After analysed the properties of data, FMOLS analytical approach employed. The empirical analysis validates the enduring effects of the examined factors on income inequality over the long term. The findings indicate that institutional quality exerts a notable and favorable influence in reducing income inequality. Conversely, corruption, the combined impact of corruption and institutional quality substantially and adversely affect income inequality. Addressing the imperative of ensuring an equitable income distribution across the SAARC economies necessitates implementing comprehensive strategies to foster enduring institutional quality and effectively manage corruption. Study’s conceptual and empirical advancements carry significant implications for policy formulation within this region. They offer valuable insights for the region’s endeavors to ameliorate income inequality. This study underscores the importance of measures to enhance institutional quality and combat corruption within SAARC countries. Such measures should be strategically designed to tackle income distribution challenges and promote greater equity.

PurposeThe authors reinforce the existing literature on the effect of overall globalization on institutional quality (IQ), while incorporating the effects of economic, political and social aspects of globalization, human capital, government expenditure and population growth. To this end, the authors estimate panel data models for a sample of 36 member countries of the Organization of Islamic Cooperation (OIC) during 1984–2016.Design/methodology/approachThe authors employ the cross-sectional autoregressive distributed lags (CS-ARDL) approach.FindingsThe study’s investigation affirms the presence of an inverted U-shaped (nonlinear) relation between overall globalization and IQ indexes for the sample countries, which suggests no additional room for improvement in IQ. It also underpins the existence of an inverted-U-shaped (nonlinear) relation between political globalization and IQ. In contrast, economic and social globalizations have a U-shaped relation with IQ, implying more scope for improvement.Research limitations/implicationsThe findings have key policy implications. First, policy makers should consider a long-run approach for improving IQ and globalization over time. Second, quick reforms in the short run may not improve IQ.Practical implicationsThe results suggest that policy makers should approach the globalization process from a long-run perspective as well by designing appropriate strategies to provide a continuous but gradual increase in globalization so as to systematically monitor the threshold limits to IQ from improving globalizationOriginality/valueTo the best of the authors’ knowledge, this work is the first to empirically investigate the overall role of globalization in promoting IQ under the conditions of short-run heterogeneity and long-run homogeneity. The authors focus on the member countries of the OIC, many of which are ruled by authoritarian regimes and suffer from a poor domestic institutional setting.

This study aims to determine the role of globalization, electronic government, financial development, concerning the moderation of institutional quality in reducing income inequality and poverty in One Belt One Road countries. The electronic government and regional integration of the economies of the One Belt One Road countries has increased globalization and can play a vital role in reducing income inequality and poverty. However, this globalization and digital transformation of government systems can only be beneficial in the presence of good institutional quality. The sample includes 64 One Belt One Road countries from 2003 to 2018. We employed a two-step system generalized method of moment (Sys-GMM) and a robustness check through Driscoll–Kraay standard errors regression. Our findings show that globalization, economic growth, e-government development, government expenditure, and inflation have a statistically significant and negative impact on income inequality and are key to eradicating income inequality and poverty. On the other hand, financial development, gross capital formation, and population size positively influence income inequality, which causes an increase in poverty and income inequality as financial development and population levels increase. Moderating variable institutional quality also positively impacts income inequality, which means that institutional quality in Belt and Road Countries is weak, as they are mostly developing countries that need to improve their systems. Moreover, the marginal effect also revealed that institutional quality has a corrective effect on the factors’ relationship with income inequality. Our findings endorse and conclude that globalization and e-government development improve economic growth and eradicate poverty and income inequality by boosting digitalization, investments, job creation, and wage increases for semi-skilled and unskilled human capital in Belt and Road countries. The sustainable utilization of financial and institutional resources plays a vital role in reducing income inequality and poverty in Belt and Road countries.

This study explores the short-to-medium-term effects of fiscal consolidation on income inequality in 40 Sub-Saharan African countries from 1990 to 2021 by applying the quantile local projection method at the median. The study finds that periods of fiscal consolidation reduce inequality in the short run, with spending-driven consolidation having a positive effect on income parity, while tax-driven consolidations have an insignificant impact. The study concludes that the distributional effects of fiscal consolidation in SSA countries are “progressive,” implying that well-designed and targeted fiscal measures contribute to more equitable income distribution.

Focusing on selected Asian countries offers a regional perspective on income inequality dynamics, contributing to a better understanding of the factors driving income disparities in diverse socio-economic contexts. Income inequality is a pervasive and pressing issue in many Asian countries, posing significant challenges to inclusive economic growth, social cohesion, and sustainable development. Despite efforts to address income disparities through various policy interventions, the factors contributing to lessening income inequality remain poorly understood, particularly in the context of institutional quality and financial inclusion. Therefore, there is a need for empirical research to examine the role of institutional quality and financial inclusion in mitigating income inequality across selected Asian countries. This study has investigated the impact of financial inclusion with institutional quality, economic growth, and foreign direct investment on income inequality in Asian emerging economies. The authors have used data from 2012 to 2020 to check the relationship between dependent and independent variables. We have used the Gini index as a dependent variable and financial inclusion, institutional quality, GDP per capita, and foreign direct investment are taken as independent variables. GMM results show that financial inclusion and institutional quality are contributing towards lessening poverty in these economies. Moreover, foreign direct investment and GDP per capita also decrease the income disparity of these nations. It is suggested for better financial services provision and a stable environment for high growth and foreign direct investment.

Over the past few years, the deterioration in income distribution has remained a significant impediment to achieving the Sustainable Development Goal 10 (SDG-10), thereby necessitating a global policy discourse among policymakers and scholars to make collaborative commitments to address income inequality concerns. While there is growing scholarly evidence on the linkages between monetary policy and income inequality, empirical examination of asymmetric monetary–income inequality remains elusive in the literature. This study seeks to address this gap in the literature by exploring the asymmetric nexus between monetary policy and income inequality in Nigeria from 1980 to 2020 employing a nonlinear autoregressive distributed lag (NARDL) approach. The empirical outcomes demonstrate that the adoption of both monetary policy stances has different effects on income inequality in Nigeria. Specifically, the findings indicate that resorting to contractionary (interest rate) and expansionary (money supply) monetary policies is more effective in ameliorating income inequality in Nigeria. This research offers insightful implications for policymakers regarding the implementation of effective monetary policy and equitable distribution of income in Nigeria. JEL Classification D31, E17, E42

This paper investigates the causality among fiscal policy, economic growth and income inequality in some twenty six selected sub- African countries with a view to identifying the direction of causation among these variables; thus aiding the identification of policy choice variables whose impact could predict the behaviour of some other variables. This approach would ultimately provide solutions to income inequality and economic growth problems in sub-Saharan African countries. To achieve this objective, the sub-Saharan African countries were divided into three–low income countries, lower middle income countries and upper middle income countries. The methodology of multivariate Granger causality was applied to investigate the causality among fiscal policy, economic growth and income inequality variables. The findings show that in low income countries and lower middle income countries, no designable causality could be established among the three variables probably suggesting lack of effective policy cordination in SSA countries. However, a uni-directional causality running fron economic growth to income inequality was found in upper middle income countries.

PurposeThis study aims to present an empirical investigation on the effect of natural resource rent on income inequality in Algeria over the period 1980–2020.Design/methodology/approachThe analysis is carried out by using the novel developed method dynamic autoregressive distributed lag (ARDL) simulation technique alongside the Kernel-based regularized least squares.FindingsThe bounds test revealed a long-run relationship between natural resource rent and income inequality. Our estimation results suggest that natural resource rent, GDP per capita and government expenditures are all associated with lower income inequality in the short and long term. Moreover, the author found that better institutional quality is more likely to reduce income inequality in Algeria. This empirical finding is further validated by the counterfactual shocks from the dynamic ARDL simulation, which reveal a significant decrease in predicted income inequality following a positive change in resource rents and a gradual, significant increase in inequality after a negative change in resource rents.Originality/valueThe present study is the first to use the dynamic ARDL model to investigate the impact of positive and negative changes in natural resource rent on income inequality in Algeria.

The relative effectiveness of fiscal and monetary policies in promoting economic growth is not sufficiently examined at the empirical level for developing countries, including Egypt in particular. Hence, this paper is the first attempt to empirically examine the relative effectiveness of fiscal and monetary policies in promoting Egypt’s output growth utilizing a time-series data set over the time-period (1960–2019). The study employs the Autoregressive Distributed Lag (ARDL) Bounds testing approach to cointegration to investigate the long run and short run effects of fiscal and monetary policies on Egypt’s output growth under a modified version of the St. Louis equation model. The study finds that both monetary and fiscal policies have a positive impact on the economic activity in the long run. However, while monetary policy seems to be more effective than fiscal policy in stimulating the growth rate of nominal GDP, fiscal policy tends to have a larger, more predictable and faster impact than monetary policy on the real economic activity. Accordingly, Egypt’s policymakers are advised to follow the Keynesian’s prescription in terms of increasing the reliance on fiscal policy compared to monetary policy to achieve macroeconomic stability in both the short run and long run.

This paper investigates the role of fiscal policy on financial development in Sub-Saharan African economies, drawing on a sample of 23 countries from 2000 to 2021 using the panel ARDL method after evidencing stationarity and co-integration properties among the variables. Our results show that an increase in fiscal policy and institutional quality decreases financial development in the long run. An increase in taxation and expenditure by the government affects the development of finance in SSA countries. Our results also show that an increase in foreign capital and industrial growth increases financial development in the long term. The outcome evidence that the interaction between fiscal policy and institutional quality exhibits a positive effect on financial development. Causality results reveal no directional link between fiscal policy, foreign capital, industrialization, and financial development with institutional quality indicating a single direction. The study suggested that SSA countries should focus on developing policies to track the implementation of adequate fiscal policy systems and structures. Institutional coherence within and between SSA nations is required for efficient fiscal policy development.