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Inequality, Financial Development and Government: Evidence from Low-Income Developing Countries


  • Majeed, Dr. Muhammad Tariq


The purpose of this study is to examine the impact of financial and economic development on cross-country income inequality using a panel data set from 50 low-income developing counties over a long period 1970-2008. The results show that financial development helps in reducing inequalities, however a non-monotonic relationship between financial development and inequality does not hold. The study finds a non-monotonic relationship between inequality and level of economic development, thus this study supports Kuznets inverted-U hypothesis. The government emerges as a major player in reducing income inequalities as its role is significant in all models. Policy makers should primarily focus on achieving the higher levels of economic development to reduce increasing inequalities. Since financial development, reduces inequalities irrespective of its level, policy makers need to focus more on improvements in financial reforms.

Suggested Citation

  • Majeed, Dr. Muhammad Tariq, 2013. "Inequality, Financial Development and Government: Evidence from Low-Income Developing Countries," MPRA Paper 50296, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:50296

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    References listed on IDEAS

    1. Oded Galor & Omer Moav, 2004. "From Physical to Human Capital Accumulation: Inequality and the Process of Development," Review of Economic Studies, Oxford University Press, vol. 71(4), pages 1001-1026.
    2. Greenwood, Jeremy & Jovanovic, Boyan, 1990. "Financial Development, Growth, and the Distribution of Income," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 1076-1107, October.
    3. Georg R. G. Clarke & Lixin Colin Xu & Heng-fu Zou, 2006. "Finance and Income Inequality: What Do the Data Tell Us?," Southern Economic Journal, Southern Economic Association, vol. 72(3), pages 578-596, January.
    4. Robert G. King & Ross Levine, 1993. "Finance and Growth: Schumpeter Might Be Right," The Quarterly Journal of Economics, Oxford University Press, vol. 108(3), pages 717-737.
    5. Muhammad Tariq MAJEED, 2010. "Inequality, Trade Openness And Economic Growth In Asia," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 10(2).
    6. La Porta, Rafael & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1997. " Legal Determinants of External Finance," Journal of Finance, American Finance Association, vol. 52(3), pages 1131-1150, July.
    7. Levine, Ross, 2005. "Finance and Growth: Theory and Evidence," Handbook of Economic Growth,in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 12, pages 865-934 Elsevier.
    8. Majeed, Muhammad Tariq & MacDonald, Ronald, 2010. "Corruption and the Military in Politics: Theory and Evidence from around the World," SIRE Discussion Papers 2010-91, Scottish Institute for Research in Economics (SIRE).
    9. Ahluwalia, Montek S, 1976. "Income Distribution and Development: Some Stylized Facts," American Economic Review, American Economic Association, vol. 66(2), pages 128-135, May.
    10. Banerjee, Abhijit V & Newman, Andrew F, 1993. "Occupational Choice and the Process of Development," Journal of Political Economy, University of Chicago Press, vol. 101(2), pages 274-298, April.
    11. Philippe Aghion & Patrick Bolton, 1997. "A Theory of Trickle-Down Growth and Development," Review of Economic Studies, Oxford University Press, vol. 64(2), pages 151-172.
    12. Oded Galor & Joseph Zeira, 1993. "Income Distribution and Macroeconomics," Review of Economic Studies, Oxford University Press, vol. 60(1), pages 35-52.
    13. MacDonald, Ronald & Majeed, Muhammad Tariq, 2010. "Distributional and Poverty Consequences of Globalization: A Dynamic Comparative Analysis for Developing Countries," SIRE Discussion Papers 2010-62, Scottish Institute for Research in Economics (SIRE).
    14. repec:hrv:faseco:30728041 is not listed on IDEAS
    15. Majeed, M Tariq, 2011. "Trade, Poverty and Employment: Empirical Evidence from Pakistan," MPRA Paper 45077, University Library of Munich, Germany.
    16. Majeed, Muhammad Tariq & MacDonald, Ronald, 2011. "Corruption and Financial Intermediation in a Panel of Regions: Cross-Border Effects of Corruption," SIRE Discussion Papers 2011-67, Scottish Institute for Research in Economics (SIRE).
    17. Thorsten Beck & Asli Demirgüç-Kunt & Ross Levine, 2007. "Finance, inequality and the poor," Journal of Economic Growth, Springer, vol. 12(1), pages 27-49, March.
    18. Papanek, Gustav F. & Kyn, Oldrich, 1986. "The effect on income distribution of development, the growth rate and economic strategy," Journal of Development Economics, Elsevier, vol. 23(1), pages 55-65, September.
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    1. Majeed, Dr. Muhammad Tariq, 2013. "Inequality, Trade and Development: Evidence from Developing Countries," MPRA Paper 50337, University Library of Munich, Germany.

    More about this item


    Inequality; Financial Development; Government; Developing Countries;

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • H10 - Public Economics - - Structure and Scope of Government - - - General

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