Also, important inferences can be drawn from empirical studies for a single country, considering the country’s income level. Evidence of the credit markets imperfections channel for Vietnam motsepe trading platform as a lower-middle-income economy (Le & Nguyen, 2019) shows the importance of the developed financial system in low-income countries. If poor individuals have the opportunity to invest in their human capital, economic growth will increase. This result may also be due to the tertiary education indicator used to represent the education level.

Income Inequality and Economic Growth

In countries with relatively high income and inequality due to the increase in the income of the wealthiest population, inequality positively affects growth through fiscal policy. The negative effect of inequality on economic growth is due to increased social protection expenditures. Therefore, it can be said that the specific characteristics of the countries are also important for the validity of the analysed channel.

Method and Dataset

On the other hand, although inequality does not have significant effects directly on political instability, it can still harm economic growth as it negatively affects investment (Nel, 2003). Therefore, although we do not find direct empirical evidence, it can be concluded that the negative impact of income inequality on economic growth through the socio-political instability channel may be more important in low-income countries. In summary, the relationship between income inequality and economic growth is not very clear and further investigation is needed to understand this relationship more clearly. Although the robustness of the results is controlled by using panel estimation techniques and different indicators, there are also some limitations of this study. Especially in low and lower-middle income countries, there may be missing observations regarding the selected variables. https://www.bidvestbank.co.za/ Data limitations prevent detailed analysis using different variables or methods, especially in these countries.

The Relationship Between Income Inequality and Economic Growth: Are Transmission Channels Effective?

Lastly, it is observed that the coefficients are significantly negative in all models where the direct effects of the inequality and the channel effect are examined. The results of the credit markets imperfection channel in Table 11 are similar to the results in LLMC. The effect of inequality and credits on education is significantly negative (except column 2) and positive (except columns 6 and 10), respectively. These results provide evidence of the validity of the first stage of the credit markets imperfections channel. On the other hand, the effect of inequality on human capital (columns 1–4) shows that the positive channel stated in theory does not apply here as in LLMC.

2 The Effect of Income Inequality and Channel Variables on Economic Growth

The study results indicate that the relationship between income inequality and economic growth is quite complex. Although there is evidence that greater inequality has detrimental effects on economic growth, it appears that this inference cannot be generalised when countries’ income levels are taken into account. According to the estimation results, regardless of the income level of the countries, while inequality increases the fertility rate, it affects human capital negatively, both directly and through credit market imperfections.

Therefore, the sample could not be divided into more sub-groups such as low-income, lower-middle-income, upper-middle-income and high-income. Similarly, the Gini coefficient, used as an indicator of income inequality, is preferred because it is the largest dataset available recently. Due to data limitation, this relationship could not be tested using a different proxy for income inequality. When the results are evaluated, it can be said that for policymakers, it is becoming more challenging to control income inequality and achieve sustainable growth. Finally, future studies can be extended to consider the effects of the more recently discussed the COVID-19 pandemic (Chen et al., 2021) on income inequality. Table 3 presents the results of the political stability, political economy and fertility channel in low and lower-middle-income countries.

Trade openness can stimulate economic growth by increasing total factor productivity through technological expansions and increased competition (Grossman & Helpman, 1991; Rivera-Batiz & Romer, 1991). There are explanations about positive effects (Tobin, 1965), negative effects (Stockman, 1981) or no effects (Sidrauski, 1967). Inflation is also preferred as the explanatory variable of growth in empirical studies examining the impact of income inequality on economic growth.

The Impact of Income Inequality on Economic Growth Through Channels in the European Union

  • In summary, although the validity of many channels is theoretically mentioned, only one or a few of the channels are tested in the empirical literature.
  • The result of the control variables in the growth estimates for UHC is slightly different from LLMC.
  • Similarly, although there are no direct effects on growth, economic growth improves in low-income countries due to the positive impact of developed financial systems on human capital.
  • On the other hand, Ciegis and Dilius (2019) reveal that the impact of inequality on economic growth through fiscal policy varies according to countries’ income and income inequality levels.

This study aims to explain whether the positive and negative channels expressed in the theory on the effect of income inequality on economic growth play a significant role in different income group countries. Therefore, the purpose of this study is to emphasise that income inequality might have an indirect effect on economic growth depending on the income level of countries, rather than identifying the direct effect of income inequality https://www.coronation.com/ on economic growth. The first stage estimates how income inequality affects the proxies of channel variables, and the effects of these variables on economic growth are examined in the second stage.

The result of the control variables in the growth estimates for UHC is slightly different from LLMC. Unlike LLMC, trade openness has a significant positive effect on economic growth in the former country group. Trade openness is more likely to stimulate technology and increase total factor productivity in developed countries than developing countries, so the positive impact on economic growth is not surprising. The estimates for the inflation rate are similar to those of LLMC, and the effect of the inflation rate on economic growth is significant and negative in all models.

Literature Review

Considering that low-income countries have relatively high levels of inequality, it can be said that the results support Blanco and Grier (2009) study, as these countries may have exceeded this threshold. The relationship between inequality and redistribution in these countries is motsepe investment platform significantly positive (except column 6). These results show that the relationship depends on the development level of the countries, and the first stage of the political economy channel is supported at UHC (Gründler & Scheuermeyer, 2018). The effect of income inequality on fertility is significantly positive in all estimates, so the prerequisite for the validity of the bi fertility channel supports the Kremer and Chen (2002) study for both country groups. The sensitivity analysis results for political instability and political economy channel at UHC are presented in Table 10.

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