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Financial deepening and income inequality: is there a financial Kuznetz curve in Latin America?

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Abstract

We investigate whether financial deepening improves income distribution and whether there exists a financial Kuznetz curve in Latin America. A fixed effect estimation is based on a newly compiled panel for 16 major Latin American countries, including recent data from 1990 onward but excluding the pandemic. The dynamic panel estimates, based on Driscoll-Kraay robust standard errors and dynamic GMM instrumental variable methodology, reveal that financial deepening worsens income distribution by increasing the Gini coefficient. At the same token, there exists a financial Kuznetz curve for the region implying initial worsening and then improvements in the income gap as the financial sector develops. Additionally, educational attainment, economic growth and level of output contribute to a reduction in inequality. In contrast, we find that FDI, exports and poverty rate exacerbate the income gap.

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Notes

  1. For comparison, recent Ginis stand at 32.7 for France, 33.2 UK, 31 for Germany, 39.7 for Indonesia, 37.2 Russia, 35.5 for Portugal, and 41 in the US (GINI, 2019).

  2. Initially due to Kuznetz (1955), the inverse U curve relating income level and inequality has been applied beyond this original framework, for example, as the environmental Kuznetz curve (Bozoklu et al., 2020) or the financial Kuznetz curve (Nikoloski, 2010).

  3. “If the income share of the top 20 percent increases by 1 percentage point, GDP growth is actually 0.08 percentage point lower in the following five years, suggesting that the benefit do not trickle down. Instead, a similar increase in the income share of the bottom 20 percent (the poor) is associated with 0.38 percentage point higher growth” (Dabla-Norris et al., 2015).

  4. The World Bank measures it as income per person below $1.90 per day (WB, 2019).

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    Peter Mikek

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Appendix

Appendix

See Tables 2, 3, 4, 5.

Table 2 Variable description
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Table 3 Descriptive statistics
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Table 4 Estimation results for dynamic panel without time trend, dependent variable Gini coefficient
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Table 5 Driscoll-Kray SE estimation results, dependent variable Gini coefficient
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Mikek, P. Financial deepening and income inequality: is there a financial Kuznetz curve in Latin America?. Eurasian Econ Rev 13, 103–125 (2023). https://doi.org/10.1007/s40822-023-00227-x

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