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A Study on the Effect of Financial Inclusion on the Relationship Between Income Inequality and Economic Growth

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  • Jong-Hee Kim

Abstract

In this article, we attempt to estimate whether financial inclusion, expressed as financial accessibility, has a positive effect on reducing income inequality. Furthermore, we estimate the effect of such financial inclusion on economic growth by reducing income inequality. From the results of our empirical analysis, we can draw the following three conclusions. First, income inequality has a very negative effect on GDP growth. The negative relationship between income inequality and GDP growth is strong in low-income countries. In addition, income inequality has a stronger effect on reducing economic growth in high-fragility countries. Second, progressivity is not a major factor in reducing income inequality in low-income countries or in high-fragility countries. Finally, financial inclusion improves the relationship between income inequality and economic growth. The reduction in income inequality through financial inclusion changes the negative relationship between income inequality and economic growth into a positive relationship. This trend is stronger in high-fragility countries than in low-fragility countries.

Suggested Citation

  • Jong-Hee Kim, 2016. "A Study on the Effect of Financial Inclusion on the Relationship Between Income Inequality and Economic Growth," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 52(2), pages 498-512, February.
    • Handle: RePEc:mes:emfitr:v:52:y:2016:i:2:p:498-512
    DOI: 10.1080/1540496X.2016.1110467
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