The impact of fossil fuel subsidies on income inequality: accounting for the interactive roles of corruption and economic uncertainty

Abstract

PurposeThe aim of this empirical study is to examine the determinants of income inequality with particular concentration on the impact of fossil fuel subsidies, while controlling for corruption, economic uncertainty and democratisation in developing nations.Design/methodology/approachGeneralised method of moments (GMM) is the principal method used in this study due to time and cross-sectional dimensions of the series under observation. Augmented mean group (AMG) method has been used as an alternative estimator.FindingsThe results revealed that increase in fossil fuel subsidies causes greater income inequality. The results indicate that corruption and uncertainty aggravate the impact of fossil fuel subsidies on inequality. The results are not materially different when an alternative estimation technique is used to estimate the regressions.Research limitations/implicationsThis study uses data for 31 developing countries. So, with availability of more datasets in the future, further studies can include more countries in their analyses.Practical implicationsPrice reforms resulting in a major decrease in the fossil fuel subsidies is needed in these developing countries. The authorities must ensure that fiscal savings, structural adjustment and enhanced efficiency in production resulting from energy price reforms serve as catalyst to promote income distribution in these countries.Originality/valueThe author’s first addition to the literature is that the study has concentrated on the fossil fuel subsidies and income inequality relationship, which has not been sufficiently treated in the existing literature. Without adequately knowing the key factors determining income inequality, it may be difficult to use appropriate programmes that will safeguard appropriate income distribution.Peer reviewThe peer review history for this article is available at: https://publons.com/publon/10.1108/IJSE-11-2021-0675