How financial development shapes globalization's impact on income inequality in Asia?

Globalization in the form of increased trade, technological advancements, and capital flows has spurred economic growth and lifted millions out of poverty across Asia, but these advantages have not been equally distributed, leading to income inequality. While previous research has highlighted globalization’s role in income inequality, little attention has been given to the moderating role of financial development. As Asian economies become more integrated into the global system, understanding how financial development mediates effects of globalization on income disparity has become crucial for policymakers, researchers, and practitioners. This study empirically investigates how financial development shapes the impact of globalization (trade, technological, and financial) on income inequality in Asian countries. Using a fixed effect panel data model with data for 22 Asian countries, we show that while all three modes of globalization—trade, technological and financial—aggravate the income gap, the influence of these types of globalization on income inequality is reduced when financial development takes place. In particular, the study finds that if a country is financially developed, the net effect of all types of globalization on income inequality is negative, meaning that in a financially developed country, globalization may actually help reduce income inequality. In response to these findings, we suggest policy recommendations, including increasing access to banking services and promoting financial literacy for financial inclusion, prioritizing sectors with high job creation potential, and providing reskilling support for globalization.