IDEAS home Printed from https://ideas.repec.org/a/gam/jsusta/v15y2023i18p13942-d1243692.html
   My bibliography  Save this article

How Much Financial Development Accentuates Income Inequality in Central and Eastern European Countries?

Author

Listed:
  • Alina Georgiana Manta

    (Faculty of Economics and Business Administration, University of Craiova, Alexandru Ioan Cuza Street, Dolj County, 200585 Craiova, Romania)

  • Gabriela Badareu

    (Faculty of Economics and Business Administration, University of Craiova, Alexandru Ioan Cuza Street, Dolj County, 200585 Craiova, Romania)

  • Inocentiu Alexandru Florea

    (Faculty of Economics and Business Administration, University of Craiova, Alexandru Ioan Cuza Street, Dolj County, 200585 Craiova, Romania)

  • Anamaria Liliana Staicu

    (Faculty of Economics and Business Administration, University of Craiova, Alexandru Ioan Cuza Street, Dolj County, 200585 Craiova, Romania)

  • Cătălin Valentin Mihai Lepădat

    (Faculty of Economics and Business Administration, University of Craiova, Alexandru Ioan Cuza Street, Dolj County, 200585 Craiova, Romania)

Abstract

Financial development is often associated with significant economic growth, but studies have shown that a high level of financial development can be the cause of deepening income inequality in many countries. The main objective of the proposed study is to identify to what extent financial development influences income inequality in Central and Eastern European Countries (CEEC). Thus, for the model specification we used as dependent variable the Gini coefficient and as independent variable the financial development index. The sample period for the analysis was from 2004 to 2019, restricted by the lack of data on the Gini coefficient in CEECs. Data on the financial development index were collected from International Monetary Fund, and data on the Gini coefficient were extracted from the World Bank’s Poverty and Inequality Platform. The study unravels several contributions. First of all, the use of quantile regression allowed for the examination of the effects of financial development across the entire distribution of income inequality. Second of all, the use of a comprehensive financial development index offered a more robust and comprehensive measure of financial development compared to single indicators. Taking into account that the Gini coefficient must be close to zero, this result was a positive one with, in essence, financial development reducing income inequality in CEECs. Thirdly, the specific focus on CEECs fills a gap in the literature. Finally, the findings of this study have important policy implications. The obtained results indicate a negative causal relationship between financial development and income inequality, emphasizing the fact that the relationship between these two components cannot be generalized for all regions. These might include measures to promote financial inclusion, improve financial literacy, and enhance the stability and efficiency of financial systems. Supporting financial development in CEECs and similar transition economies can be an effective strategy for tackling income inequality.

Suggested Citation

  • Alina Georgiana Manta & Gabriela Badareu & Inocentiu Alexandru Florea & Anamaria Liliana Staicu & Cătălin Valentin Mihai Lepădat, 2023. "How Much Financial Development Accentuates Income Inequality in Central and Eastern European Countries?," Sustainability, MDPI, vol. 15(18), pages 1-18, September.
    • Handle: RePEc:gam:jsusta:v:15:y:2023:i:18:p:13942-:d:1243692
    as

    Download full text from publisher

    File URL: https://www.mdpi.com/2071-1050/15/18/13942/pdf
    Download Restriction: no
    File URL: https://www.mdpi.com/2071-1050/15/18/13942/
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Markus Ahlborn & Joachim Ahrens & Rainer Schweickert, 2016. "Large-Scale Transition of Economic Systems – Do CEECs Converge Toward Western Prototypes?," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 58(3), pages 430-454, September.
    2. Muhammad Shahbaz & Muhammad Shafiullah & Mantu K. Mahalik, 2019. "The dynamics of financial development, globalisation, economic growth and life expectancy in sub‐Saharan Africa," Australian Economic Papers, Wiley Blackwell, vol. 58(4), pages 444-479, December.
    3. Asongu, Simplice A. & Nnanna, Joseph & Acha-Anyi, Paul N., 2020. "Finance, inequality and inclusive education in Sub-Saharan Africa," Economic Analysis and Policy, Elsevier, vol. 67(C), pages 162-177.
    4. Bogdan Dima & Oana-Ramona Lobonţ & Nicoleta-Claudia Moldovan, 2016. "Does the Quality of Public Policies and Institutions Matter for Entrepreneurial Activity? Evidences from the European Union’s Member States," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 63(4), pages 425-439, September.
    5. Hsieh, Joyce & Chen, Ting-Cih & Lin, Shu-Chin, 2019. "Financial structure, bank competition and income inequality," The North American Journal of Economics and Finance, Elsevier, vol. 48(C), pages 450-466.
    6. Annamaria Lusardi & Olivia S. Mitchell, 2014. "The Economic Importance of Financial Literacy: Theory and Evidence," Journal of Economic Literature, American Economic Association, vol. 52(1), pages 5-44, March.
    7. James B. Ang, 2010. "Finance and Inequality: The Case of India," Southern Economic Journal, John Wiley & Sons, vol. 76(3), pages 738-761, January.
    8. Montfort Mlachila & René Tapsoba & Sampawende J. A. Tapsoba, 2017. "A Quality of Growth Index for Developing Countries: A Proposal," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 134(2), pages 675-710, November.
    9. Aidis, Ruta & Estrin, Saul & Mickiewicz, Tomasz, 2008. "Institutions and entrepreneurship development in Russia: A comparative perspective," Journal of Business Venturing, Elsevier, vol. 23(6), pages 656-672, November.
    10. Gimet, Céline & Lagoarde-Segot, Thomas, 2011. "A closer look at financial development and income distribution," Journal of Banking & Finance, Elsevier, vol. 35(7), pages 1698-1713, July.
    11. Park, Cyn-Young & Mercado, Rogelio, 2015. "Financial Inclusion, Poverty, and Income Inequality in Developing Asia," ADB Economics Working Paper Series 426, Asian Development Bank.
    12. Sukiassyan, Grigor, 2007. "Inequality and growth: What does the transition economy data say?," Journal of Comparative Economics, Elsevier, vol. 35(1), pages 35-56, March.
    13. Koenker, Roger & Bassett, Gilbert, Jr, 1982. "Robust Tests for Heteroscedasticity Based on Regression Quantiles," Econometrica, Econometric Society, vol. 50(1), pages 43-61, January.
    14. George R. G. Clarke & Lixin Colin Xu & Heng‐fu Zou, 2006. "Finance and Income Inequality: What Do the Data Tell Us?," Southern Economic Journal, John Wiley & Sons, vol. 72(3), pages 578-596, January.
    15. Rewilak, Johan, 2013. "Finance is good for the poor but it depends where you live," Journal of Banking & Finance, Elsevier, vol. 37(5), pages 1451-1459.
    16. Bogdan Dima & Stefana Maria Dima & Oana-Ramona Lobont, 2013. "New empirical evidence of the linkages between governance and economic output in the European Union," Journal of Economic Policy Reform, Taylor and Francis Journals, vol. 16(1), pages 68-89.
    17. Thorsten Beck & Asli Demirgüç-Kunt & Ross Levine, 2007. "Finance, inequality and the poor," Journal of Economic Growth, Springer, vol. 12(1), pages 27-49, March.
    18. T. S. Breusch & A. R. Pagan, 1980. "The Lagrange Multiplier Test and its Applications to Model Specification in Econometrics," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 47(1), pages 239-253.
    19. Ayse Demir & Vanesa Pesqué-Cela & Yener Altunbas & Victor Murinde, 2022. "Fintech, financial inclusion and income inequality: a quantile regression approach," The European Journal of Finance, Taylor & Francis Journals, vol. 28(1), pages 86-107, January.
    20. Serhan Cevik & Carolina Correa‐Caro, 2020. "Taking down the wall: Transition and inequality," Review of Development Economics, Wiley Blackwell, vol. 24(1), pages 238-253, February.
    21. Florence Jaumotte & Subir Lall & Chris Papageorgiou, 2013. "Rising Income Inequality: Technology, or Trade and Financial Globalization?," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 61(2), pages 271-309, June.
    22. Bogdan Dima & Stefana Maria Dima & Oana-Ramona Lobont, 2013. "New empirical evidence of the linkages between governance and economic output in the European Union," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 16(1), pages 68-89, March.
    23. Siong Law & Hui Tan & W. Azman-Saini, 2014. "Financial Development and Income Inequality at Different Levels of Institutional Quality," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 50(S1), pages 21-33.
    24. Loan Thi-Hong Van & Anh The Vo & Nhan Thien Nguyen & Duc Hong Vo, 2021. "Financial Inclusion and Economic GROWTH: An International Evidence," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 57(1), pages 239-263, January.
    25. Philippe Aghion & Patrick Bolton, 1997. "A Theory of Trickle-Down Growth and Development," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 64(2), pages 151-172.
    26. Newey, Whitney K & Powell, James L, 1987. "Asymmetric Least Squares Estimation and Testing," Econometrica, Econometric Society, vol. 55(4), pages 819-847, July.
    27. Christian R Proaño & Juan Carlos Peña & Sven Schnellbacher, 2023. "How Does Financial Development Affect the Growth–Inequality Nexus? Evidence from a PCHVAR Analysis," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 32(2), pages 474-501.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Roya Taherifar & Mark J. Holmes & Gazi M. Hassan, 2023. "Does economic openness matter in the impact of financial development on income inequality?," Working Papers in Economics 23/04, University of Waikato.
    2. Ricardo Barradas & Rishi Lakhani, 2024. "The finance–inequality nexus in the era of financialisation: Evidence for Portugal," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 29(3), pages 3510-3544, July.
    3. Jatmiko, Wahyu & Ebrahim, M. Shahid & Smaoui, Houcem, 2023. "Sukūk development and income inequality," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 88(C).
    4. Carolyn Chisadza & Mduduzi Biyase, 2023. "Financial Development and Income Inequality: Evidence From Advanced, Emerging and Developing Economies," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 18(01), pages 1-27, March.
    5. Anjan K. Saha & Vinod Mishra & Russell Smyth, 2021. "Financial development and top income shares in OECD countries," Southern Economic Journal, John Wiley & Sons, vol. 87(3), pages 952-978, January.
    6. Baloch, Amdadullah & Mohd Noor, Zaleha & Habibullah, Muzafar & ,, 2018. "The Effect of the Gender Equality on Income Inequality: A Dynamic Panel Approach," Jurnal Ekonomi Malaysia, Faculty of Economics and Business, Universiti Kebangsaan Malaysia, vol. 52(2), pages 3-17.
    7. Akisik, Orhan & Gal, Graham, 2023. "IFRS, financial development and income inequality: An empirical study using mediation analysis," Economic Systems, Elsevier, vol. 47(2).
    8. Rémi Bazillier & Jérôme Hericourt, 2017. "The Circular Relationship Between Inequality, Leverage, And Financial Crises," Journal of Economic Surveys, Wiley Blackwell, vol. 31(2), pages 463-496, April.
    9. Mansor Ibrahim, 2018. "Finance And Inequality In Eight Asian Countries: Does Size Matter," Bulletin of Monetary Economics and Banking, Bank Indonesia, vol. 21(1), pages 33-56, July.
    10. Brei, Michael & Ferri, Giovanni & Gambacorta, Leonardo, 2023. "Financial structure and income inequality," Journal of International Money and Finance, Elsevier, vol. 131(C).
    11. G. P. Manish & Colin O’Reilly, 2019. "Banking regulation, regulatory capture and inequality," Public Choice, Springer, vol. 180(1), pages 145-164, July.
    12. de Haan, Jakob & Sturm, Jan-Egbert, 2017. "Finance and income inequality: A review and new evidence," European Journal of Political Economy, Elsevier, vol. 50(C), pages 171-195.
    13. Thornton, John & Tommaso, Caterina Di, 2020. "The long-run relationship between finance and income inequality: Evidence from panel data," Finance Research Letters, Elsevier, vol. 32(C).
    14. Jelson Serafim, 2021. "Financial deepening, Stock market, Inequality and Poverty: Some African Evidence," Working Papers REM 2021/0177, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    15. Blau, Benjamin M., 2018. "Income inequality, poverty, and the liquidity of stock markets," Journal of Development Economics, Elsevier, vol. 130(C), pages 113-126.
    16. Hsieh, Joyce & Chen, Ting-Cih & Lin, Shu-Chin, 2019. "Financial structure, bank competition and income inequality," The North American Journal of Economics and Finance, Elsevier, vol. 48(C), pages 450-466.
    17. Dong-Hyeon Kim & Joyce Hsieh & Shu-Chin Lin, 2021. "Financial liberalization, political institutions, and income inequality," Empirical Economics, Springer, vol. 60(3), pages 1245-1281, March.
    18. Biruk B. Ashenafi & Dong Yan, 2023. "Financial intermediation, inclusion, Fintech, and income inequality in Africa: Robust evidence from the supply and demand side data," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 52(2), July.
    19. Liton Chandra Voumik & Shohel Md. Nafi & Festus Victor Bekun & Murat Ismet Haseki, 2023. "Modeling Energy, Education, Trade, and Tourism-Induced Environmental Kuznets Curve (EKC) Hypothesis: Evidence from the Middle East," Sustainability, MDPI, vol. 15(6), pages 1-18, March.
    20. Klachkova, O. & Solonina, D., 2022. "The impact of financial development on income inequality in the Russian regions," Journal of the New Economic Association, New Economic Association, vol. 54(2), pages 94-110.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:gam:jsusta:v:15:y:2023:i:18:p:13942-:d:1243692. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: MDPI Indexing Manager (email available below). General contact details of provider: https://www.mdpi.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.