Financial Development, Economic Growth, and Income Inequality in South Asian Region: Does the Kuznets Inverted U-Shaped Curve Exist?

Abstract

Income inequality remains a major concern across time and nations as it affects and is affected by many other dimensions of inequality, which all affect social wellbeing negatively. Efforts for reducing inequality, therefore, have gained momentum around the globe. This study examines the financial Kuznets curve relation in six South Asian countries, using panel data over the period 1980-2018. The study explicitly accounts for interactions between GDP growth and financial development, as well as endogeneity issues. Empirical findings provide evidence for the Kuznets inverted U-shaped relationship between financial development and income inequality. Regarding the growth–inequality nexus, economic growth is found to negatively affect income inequality, hence the results do not lend support to the Kuznets inverted U-shaped hypothesis in South Asian countries. However, the interaction between economic growth and financial development in reducing income inequality is found to be significant for the sample countries. Further, the study finds that educational attainment plays a significant role in reducing income inequality, while greater trade openness intensifies inequality in these countries. The findings of the study provide insights to policymakers for framing suitable economic policies and undertaking necessary financial reforms to reduce income inequality in South Asian countries.