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Income inequality, financial flows and political institution: sub-Saharan African financial network

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Abstract

Using firm-level loan contracts, we generate aggregate measures of financial connections and examine how these indices relate to income inequality in sub-Saharan African (SSA) countries. The results reveal that more connectedness is not beneficial for these economies as shown by the degree and the eigenvector indices. Betweenness centrality worsens income inequality such that the act of intermediation in the provision of financing remains detrimental to net and market income inequalities. Independent access to funding has no significant effect on income inequality. While accounting for the influence of political instability, the results reveal that financial connectedness is beneficial in reducing income inequality.

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Notes

  1. Some of these studies include von Peter (2007) and Hale (2012).

  2. Some supporting and opposing views can be seen in Demirgüç-Kunt and Levine (2008) and Claessens and Perotti (2007). Crespo Cuaresma et al. (2017) re-examine the relationship between income inequality and aggregate consumption.

  3. The measures of financial development have been used in (Bhattacharya et al. 2018a).

  4. See Papageorgiou et al. (2008) on international financial market and welfare performance. Studies in international financial flows include. The link between finance and welfare is also present in the literature (see for example, Inekwe 2015).

  5. The relationship between FDI and income inequality is examined in Deng and Lin (2013).

  6. Roe and Siegel (2011) reveal the importance of political instability in financial development and income inequality.

  7. An explanation on how inequality index should be aggregated is provided in Gobbin et al. (2007). Hartog (1983) examines income distribution relative to income tax.

  8. For more description visit http://www.wider.unu.edu/research/WIID3-0B/en_GB/wiid/.

  9. These and more complex measures of network are described in Newman (2010).

  10. This is not the system GMM.

  11. The borrowers and lenders are identified by following Ivashina (2009) and Inekwe et al. (2018a).

  12. Hub centrality is scaled by 10,000, betweenness and eigenvector indices are scaled by 1000, and closeness centrality is scaled by 1,000,000,000.

  13. These are similar to the determinants of financial integration as listed in Bhattacharya et al. (2018b).

  14. The relationship between income inequality and democracy is explored in Islam (2016).

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Author information

Authors and Affiliations

  1. Department of Applied Finance, Centre for Financial Risk, Macquarie University, Sydney, Australia

    John Nkwoma Inekwe

  2. Research Institute of Economics and Management, Southwestern University of Finance and Economics, Chengdu, China

    Yi Jin

  3. Queensland Productivity Commission, Centre for Efficiency and Productivity Analysis, University of Queensland, Brisbane, Australia

    Maria Rebecca Valenzuela

Authors
  1. John Nkwoma Inekwe
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  2. Yi Jin
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  3. Maria Rebecca Valenzuela
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Corresponding author

Correspondence to John Nkwoma Inekwe.

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Appendix

Appendix

See Figs. 1, 2 and Tables 7, 8.

Fig. 1
figure 1

Financial integration of sub-Saharan African economies (2008–2009). This is produced using the Stata package developed by Miura (2012). This presents the visualization of the network. We graph the period of the global financial crisis (GFC: 2008–2009), and the network formation is extremely scanty. This corresponds with the findings of Hale (2012) who show that the GFC period is marked by a reduction in the integration of the global markets as evident in the reduction of loan syndication. Firms are used in this representation, and their names are abbreviated

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Fig. 2
figure 2

Loan amount for sub-Saharan Africa

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Table 7 Rank of countries by their various connectedness
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Table 8 The correlation matrix of network indices
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Inekwe, J.N., Jin, Y. & Valenzuela, M.R. Income inequality, financial flows and political institution: sub-Saharan African financial network. Empir Econ 58, 2635–2665 (2020). https://doi.org/10.1007/s00181-019-01634-3

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