Financial Sector Development and Open Economy for Income Inequality Reduction: A Panel Fixed Model Analysis

This study utilizes a panel fixed model to analyze the impact of financial sector development and commercial openness on income disparity of 40 developing countries over the period between 1995 and 2016. The empirical results suggest that there is a relationship between financial sector development, trade openness and income inequality. We establish that, in Latin America, the financial sector development increases income inequality while in Subsaharian Africa, we show the existence of an inverted U-shaped relationship between financial development and income inequality. Trade openness increases income inequality in the 40 selected countries. The increasing of 1 percent of trade openness leads the rise of 0,077 and 0,068 percent of income inequality in Latin America and Subsaharian Africa respectively. To alleviate income inequality, the government should (1) more develop financial sector and socially wide-ranging over period, important to welfares for both the rich and poor, and (2) diversify its commercial and industrial base beyond primary products in order to export high value-added products to generate more resources, better distribute them between rich and poor, and create more job opportunities.