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Devaluation and Income Inequality Nexus: Evidence from Pakistan

Listed author(s):
  • Muhammad Shahbaz

    ()

    (Department of Management Sciences, COMSATS Institute of Information Technology,Lahore, Pakistan)

  • Faridul Islam

    (Department of Finance and Economics, Utah Valley University, USA)

  • Muhammad Sabihuddin Butt

    (Applied Economic Research Centre, Karachi University, Karachi, Pakistan)

The paper examines the impact of nominal devaluation on income distribution in Pakistan. In the empirical model we include economic growth, measured per capita; tradeopenness; foreign direct investment; unemployment and inflation rates which appear well justified in the particular context of the economy of Pakistan. The Auto Regressive Distributed Lag (ARDL) bounds testing approach to cointegration has been employed for the long run relation; and the Vector Error Correction Model (VECM) for the short run dynamics. We also test the Kuznets inverted-U relation between income inequality and economic growth. We find long run relationship among the series; and that nominal devaluation worsens income inequality. Though economic growth appears to deteriorate income distribution, the non-linear link between the variables depicts Kuznets’ (1955) type inverted-U relationship. This is reassuring for Pakistan in the long run. We also find FDI and trade-openness worsens income distribution. Inflation lowers income inequality but unemployment aggravates it in Pakistan. This paperopens up new insights for policy makers to reduce income inequality in Pakistan.

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Article provided by The Economics and Social Development Organization (TESDO) in its journal International Journal of Economics and Empirical Research (IJEER).

Volume (Year): 1 (2013)
Issue (Month): 4 (April)
Pages: 48-58

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Handle: RePEc:ijr:journl:v:1:y:2013:i:4:p:48-58
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  1. Muhammad Shahbaz Akmal & Qazi Masood Ahmad & Mohsin Hussain Ahmad & Muhammad Sabihuddin Butt, 2007. "An Empirical Investigation of the Relationship between Trade Liberalization and Poverty Reduction: A Case for Pakistan," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 12(1), pages 99-118, Jan-Jun.
  2. Muhammad Shahbaz & Naveed Aamir, 2007. "Rural-Urban Income Inequality under Financial Development and Trade Openness in Pakistan: The Econometric Evidence," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 46(4), pages 657-672.
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  7. Muhammad Shahbaz, 2010. "Income inequality-economic growth and non-linearity: a case of Pakistan," International Journal of Social Economics, Emerald Group Publishing, vol. 37(8), pages 613-636, July.
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  9. Muhammad Shahbaz & Faridul Islam & Naveed Aamir, 2012. "Is devaluation contractionary? Empirical evidence for Pakistan," Economic Change and Restructuring, Springer, vol. 45(4), pages 299-316, November.
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  11. Doyle, Chris, 1996. "The Distributional Consequences during the Early Stages of Russia's Transition," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 42(4), pages 493-505, December.
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