Finance and Inequality – Evidence from East Asia

The economic debate about inequality has occupied a huge place in the scientific discourse of the last decades. Several factors have been identified as causes for the rising wealth and income inequality in various regions such as economic growth, capital return and intergenerational wealth. In this paper, East Asia is chosen as a regional focus for the analysis due to the region’s specific characteristics and history regarding inequality. Until the end of the 1980s, the region experienced a period of so-called “growth with equity” where high economic growth rates were associated with decreasing poverty and inequality. In recent years, however, growth in East Asia has gone hand in hand with inequality. This shift from “growth with equity” to “growth with inequality” makes the region worth investigating. The paper focuses particularly on the size of the financial sector, analyzing its role and impact on the development of inequality. Therefore, the theoretical connection and the natural relationship between poverty, inequality, economic growth as well as the size of the financial sector are discussed. Indicators, proxies and measurements for these variables are identified, based on existing literature. The main analysis delivers an answer to the research question of whether and how financial development affects the inequality in a society. For the analysis, cross-country and panel data for the ASEAN+3 countries from 1960-2012 are used.