Does Financial Development Reduce Income Inequality and Poverty? Evidence from Emerging Countries

Abstract

The objective of this paper is to examine whether bank and stock market development contributes to reducing income inequality and poverty in emerging countries. Using dynamic panel data methods with an updated dataset for the period 1987–2011, we assess the finance–inequality–poverty nexus by taking the separate and simultaneous impacts of banks and stock markets into account. Mixed explanatory findings on panel studies suggest that although financial development promotes economic growth, this does not necessarily benefit those on low-incomes in emerging countries. For the finance–poverty link, we find that neither banks nor stock markets play a significant role in poverty reduction.

Keywords: Income inequality, Poverty reduction, Stock markets, Banks, Principal component, System GMM

JEL Classification: O11, O16, G00, N20