Income Inequality, World Uncertainty and Developing Countries’ Self-Financing Capacity

This paper examines the effect of uncertainty on income inequality on a dataset of 66 developing countries over the period 2000-2020. The generalized method of moments is used to address the problems of simultaneity and endogeneity. Our robust results show that uncertainty, approximated by the World Uncertainty Index, increases income inequality. However, this effect is not robust and depends on the capacity of a country to finance public spending with its own resources. Indeed, world uncertainty exacerbates income inequality in developing countries during periods when they need financing. However, during periods when countries are in a situation of self-financing capacity, the amplifying effect of uncertainty on income inequality is mitigated. Indeed, the improvement in the capacity of a country to finance public spending with its own resources contributes to reducing income inequalities. These results confirm the socio-economic stabilizing role that fiscal policy management could play during periods of uncertainty.