Skip to main content

Advertisement

SpringerLink
Log in

Economic Growth, Financial Development, and Income Inequality in BRICS Countries: Does Kuznets’ Inverted U-Shaped Curve Exist?

  • Published:
Journal of the Knowledge Economy Aims and scope Submit manuscript

Abstract

This paper aims to examine the causal relationships between economic growth, financial development, and income inequality in BRICS countries, namely, Brazil, Russia, India, China, and South Africa, using annual panel data covering the period 1990–2015. We construct the financial development index for each country by applying the principal component method on the main four proxies of financial development, i.e., domestic credit provided by banking sector, domestic credit provided to private sector, broad money supply, and stock market capitalization. Our empirical findings provide evidence supporting Kuznets’ inverted U-shaped hypothesis on economic growth and income inequality linkage. We find that the linear term of per capita GDP growth has positive sign and squared term has negative sign and statistically significant at the 1% significance level in all specifications. Moreover, our findings lend support for Kuznets’ inverted U-shaped relationship between financial development and income inequality. We find that the linear terms of all financial development proxies have positive signs and squared terms have negative signs and statistically significant at the 5% significance level in all specifications. Further, the Granger causality test results confirm a unidirectional causality running from all financial development proxies to income inequality and a bidirectional causal relationship between inflation and income inequality is found, while a unidirectional causality running from income inequality to economic growth is found, indicating that income inequality negatively affects economic growth in BRICS countries.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

References

  • Agnello, L., & Sousa, R. M. (2012). How do banking crises impact on income inequality? Applied Economics Letters, 19(15), 1425–1429.

    Google Scholar 

  • Ahluwalia, M. S. (1976). Inequality, poverty and development. Journal of Development Economics, 3(4), 307–342.

    Google Scholar 

  • Ahmed, A. D. (2007). Potential impact of financial reforms on savings in Botswana: An empirical analysis using a VECM approach. The Journal of Developing Areas, 41(1), 203–220.

    Google Scholar 

  • Ang, J. B. (2010). Finance and inequality: The case of India. Southern Economic Journal, 76(3), 738–761.

    Google Scholar 

  • Arellano, M., & Bond, S. (1991). Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. The Review of Economic Studies, 58(2), 277–297.

    Google Scholar 

  • Baligh, N., & Piraee, K. (2012). Financial development and income inequality relationship in Iran. Middle-East Journal of Scientific Research, 12(7), 906–914.

    Google Scholar 

  • Batuo, M., Mlambo, K., & Guidi, F. (2010). Financial development and income inequality: Evidence from African Countries. MPRA Paper No 25658. http://mpra.ub.uni-muenchen.de/25658. Accessed 11 October 2010.

  • Beck, T., Demirguç-Kunt, A., & Levine, R. (2007). Finance, inequality and the poor. Journal of Economic Growth, 12(1), 27–49.

    Google Scholar 

  • Bittencourt, M. (2010). Financial development and inequality: Brazil 1985–99. Economic Change and Restructuring, 43(2), 113–130.

    Google Scholar 

  • Blundell, R., & Bond, S. (1998). Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics, 87(1), 115–143.

    Google Scholar 

  • Clarke, G. R., Xu, L. C., & Zou, H.-F. (2006). Finance and income inequality: What do the data tell us? Southern Economic Journal, 72(3), 578–596.

    Google Scholar 

  • Clarke, G., Xu, L. C., & Zou, H.-F. (2013). Finance and income inequality: Test of alternative theories. Annals of Economics and Finance, 14-2(A), 493–510.

    Google Scholar 

  • Daisaka, H., Furusawa, T., & Yanagawa, N. (2014). Globalization, Financial Development and Income Inequality. Pacific Economic Review, 19(5), 612–633.

    Google Scholar 

  • Deininger, K., & Squire, L. (1996). A new data set measuring income inequality. The World Bank Economic Review, 10(3), 565–591.

    Google Scholar 

  • Delbianco, F., Dabús, C., & Caraballo, M. A. (2014). Income inequality and economic growth: New evidence from Latin America. Cuadernos de Economia, 33(63), 381–398.

    Google Scholar 

  • Granger, C. W. J. (1969). Investigating causal relations by econometric models and cross-spectral methods. Econometrica, 37(3), 424–438.

    Google Scholar 

  • Greene, W. H. (2000). Econometric analysis. Upper Saddle River: Prentice Hall.

    Google Scholar 

  • Greenwood, J., & Javanovic, B. (1990). Financial development, growth and distribution of income. Journal of Political Economy, 98(5), 1076–1107.

    Google Scholar 

  • Hansen, L. (1982). Large sample properties of generalized method of moments estimators. Econometrica, 50(4), 1029–1054.

    Google Scholar 

  • Hausman, J. A. (1978). Specification tests in econometrics. Econometrica, 46(6), 1251–1272.

    Google Scholar 

  • Herzer, D., & Vollmer, S. (2012). Inequality and growth: Evidence from panel cointegration. Journal of Economic Inequality, 10(4), 489–503.

    Google Scholar 

  • Hoi, L. Q., & Hoi, C. M. (2013). Financial sector development and income inequality in Vietnam: Evidence at the provincial level. Journal of Southeast Asian Economies, 30(3), 263–277.

    Google Scholar 

  • Hye, Q. M. A. (2011). Financial development index and economic growth: Empirical evidence from India. The Journal of Risk Finance, 12(2), 98–111.

    Google Scholar 

  • Hye, Q. M. A., & Islam, F. (2013). Does financial development hamper economic growth: Empirical evidence from Bangladesh. Journal of Business Economics and Management, 14(3), 558–582.

    Google Scholar 

  • Im, K. S., Pesaran, M. H., & Shin, Y. (2003). Testing for unit roots in heterogeneous panels. Journal of Econometrics, 115, 53–74.

    Google Scholar 

  • IMF. (2007). Globalization and inequality (pp. 31–65). Washington, DC: World Economic Outlook.

    Google Scholar 

  • Jalil, A., & Feridun, M. (2011). Long-run relationship between income inequality and financial development in China. Journal of the Asia Pacific Economy, 16(2), 202–214.

    Google Scholar 

  • Jeffrey, M. W. (2009). Introductory econometrics: A modern approach. Canada: South-Western Cengage Learning.

    Google Scholar 

  • Jones, J. D. (1989). A comparison of lag-length selection techniques in tests of Granger causality between money growth and inflation: Evidence for the US, 1959-86. Applied Economics, 21(6), 809–822.

    Google Scholar 

  • Kao, C. (1999). Spurious regression and residual-based tests for cointegration in panel data. Journal of Econometrics, 90(1), 1–44.

    Google Scholar 

  • Kuznets, S. (1955). Economic growth and income inequality. American Economic Review, 45(1), 1–28.

    Google Scholar 

  • Law, S. H., & Tan, H. B. (2009). The role of financial development on income inequality in Malaysia. Journal of Economic Development, 34(2), 153–168.

    Google Scholar 

  • Levin, A., Lin, C. F., & Chu, C. S. (2002). Unit root tests in panel data: Asymptotic and finite-sample properties. Journal of Econometrics, 108(1), 1–24.

    Google Scholar 

  • Levine, R. (1997). Financial development and economic growth: Views and agenda. Journal of Economic Literature, 35(2), 688–726.

    Google Scholar 

  • Levine, R., Beck, T., & Loayza, N. (2000). Financial intermediation and growth: Causality and causes. Journal of Monetary Economics, 46(1), 31–77.

    Google Scholar 

  • Li, H., Squire, L., & Zou, H. F. (1998). Explaining international and intertemporal variations in income inequality. The Economic Journal, 108(446), 26–43.

    Google Scholar 

  • Malinen, T. (2012). Estimating the long-run relationship between income inequality and economic development. Empirical Economics, 42, 209–233.

    Google Scholar 

  • Mansur, M., Azleen, R. (2017). What is the link between financial development and income inequality? Evidence from Malaysia. MPRA Paper No 79416. http://mpra.ub.uni-muenchen.de/79416. Accessed 27 May 2017.

  • McKinnon, R. I. (1973). Money and capital in economic development. Washington, DC: Brookings Institution Press.

    Google Scholar 

  • Mookherjee, D., & Ray, D. (2003). Persistent inequality. The Review of Economic Studies, 70(2), 369–393.

    Google Scholar 

  • Nikoloski, Z. (2013). Financial sector development and inequality: Is there a financial Kuznets curve? Journal of International Development, 25(7), 897–911.

    Google Scholar 

  • OECD. (2008). Growing unequal? Income distribution in OECD countries. Paris: OECD Publishing.

    Google Scholar 

  • OECD. (2015). The metropolitan century: Understanding urbanisation and its consequences. Paris: OECD Publishing.

    Google Scholar 

  • Papanek, G., & Kyn, O. (1986). The effect on income distribution of development, the growth rate and economic strategy. Journal of Development Economics, 23(1), 55–65.

    Google Scholar 

  • Park, D., & Shin, K. (2015). Economic growth, financial development and income inequality. ADB economics working paper series No. 441. Asian Development Bank. http://hdl.handle.net/11540/5099.

  • Pedroni, P. (1999). Critical values for cointegration tests in heterogeneous panels with multiple regressors. Oxford Bulletin of Economics and Statistics, 61(S1), 653–670.

    Google Scholar 

  • Piketty, T., & Saez, E. (2003). Income inequality in the United States, 1913–1998. The Quarterly Journal of Economics, 118(1), 1–41.

    Google Scholar 

  • Rehman, H., Khan, S., & Ahmed, I. (2008). Income distribution, growth and financial development: A cross countries analysis. Pakistan Economic and Social Review, 46(1), 1–16.

    Google Scholar 

  • Satti, S. L., Mahalik, M. K., Bhattacharya, M., & Shahbaz, M. (2015). Dynamics of income inequality, finance and trade in Kazakhstan: Empirical evidence from a new transition economy with policy prescriptions. Monash Business School, Department of Economics Discussion Paper, No. 36/15.

  • Sehrawat, M., & Giri, A. K. (2015). The relationship between financial development indicators and human development in India. International Journal of Social Economics, 41(12), 1194–1208.

    Google Scholar 

  • Shahbaz, M., & Islam, F. (2011). Financial development and income inequality in Pakistan: An application of ARDL approach. Journal of Economic Development, 36(1), 35–58.

    Google Scholar 

  • Shahbaz, M., Loganathan, N., Tiwari, A. K., & Sherafatian-Jahromi, R. (2015). Financial development and income inequality: Is there any financial Kuznets curve in Iran? Social Indicators Research, 124(2), 357–382.

    Google Scholar 

  • Shahbaz, M., Bhattacharya, M., & Mahalik, M. K. (2017). Finance and income inequality in Kazakhstan: Evidence since transition with policy suggestions. Applied Economics, 49(52), 5337–5351.

    Google Scholar 

  • Shaw, E. S. (1973). Financial deepening in economic development. New York: Oxford University Press.

    Google Scholar 

  • Stewart, R., & Moslares, C. (2012). Income inequality and economic growth: The case of Indian states 1980–2010. Cuadernos de Economia, 31(57), 41–64.

    Google Scholar 

  • Stiglitz, J. E. (2012). The price of inequality: How today’s divided society endangers our future (p. 2012). New York W.W. Norton & Company.

    Google Scholar 

  • Westley, G. D. (2001). Can financial market policies reduce income inequality? Technical paper series, no. MSM-112. Washington, D.C.: Inter-American Development Bank.

    Google Scholar 

  • World Bank. (2016). World Development Indicators. Washington: The World Bank, Available online: http://worldbank.org/data-catalog/world-development-indicators. Accessed 1 Feb 2016.

  • Zhang, Q., & Cheng, R. (2015). Financial development and income inequality in China: An application of SVAR approach. Procedia Computer Science, 55, 774–781.

    Google Scholar 

Download references

Acknowledgements

We would like to thank the editor and reviewers for very insightful feedback and direction throughout the review process.

Author information

Authors and Affiliations

  1. Unit of Research in Development Economics, Faculty of Economics and Management, University of Sfax, Street of Airport, LP 1088, 3018, Sfax, Tunisia

    Moheddine Younsi

  2. Unit of Research in Competitiveness, Commercial Decision and Internationalization, Faculty of Economics and Management, University of Sfax, Sfax, Tunisia

    Marwa Bechtini

Authors
  1. Moheddine Younsi
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Marwa Bechtini
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Moheddine Younsi.

Ethics declarations

Conflict of Interest

The authors declare that they have no conflict of interest.

Appendix

Appendix

Table 9 Description of the included variables
Full size table
Table 10 Construction of financial development index for Brazil, China, India, Russia, and South Africa
Full size table

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Younsi, M., Bechtini, M. Economic Growth, Financial Development, and Income Inequality in BRICS Countries: Does Kuznets’ Inverted U-Shaped Curve Exist?. J Knowl Econ 11, 721–742 (2020). https://doi.org/10.1007/s13132-018-0569-2

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s13132-018-0569-2

Keywords

Search

Navigation