## conclusions of the analysis and possible policy implications

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### III. Stylized facts and literature context
- Sample and data:
  - Sample period coverage: 2000 to 2014.
  - Sample definition: countries with population of less than 1.5 million.
  - Sample size: 31 countries (covering the Caribbean, Africa and the South Pacific); small states with high income (e.g., large oil exporters and principalities) excluded.
  - Inequality metrics sourced from Harvard University’s Standardized World Income Inequality Database (SWIID).
  - Two primary metrics used:
    - Gini at market income (pre-taxes/pre-transfers).
    - Absolute redistribution = Gini at market income − Gini at disposable income.
- Key literature linkages considered: economic development, globalization (trade openness, capital account openness, FDI), public (fiscal) policy, public debt, socio-demographic factors (education, health, gender, crime).
- Data limitations emphasized:
  - SWIID time series for many small states are based on just a few historical points and show scarce variability and wide confidence intervals.
  - Given limited time-series, analysis focuses on cross-country (between-effects) associations rather than causal identification.

### IV. Quantitative analysis — data and specification
- General econometric specification (between-effects model) estimated on averages since 2000; dependent variables:
  - Gini at market income (0-100).
  - Redistribution Δ(Gini) = Gini market − Gini disposable (absolute redistribution).
- Main independent variables included: GDP per capita, health spending, years of schooling, fiscal policy indicators, public debt, trade and financial openness, terms of trade, governance, demographics.
- Note: results are associations (not causal estimates); country-level idiosyncrasies (especially in the Caribbean) remain important.

### IV.C. Empirical results — associations with inequality (Gini at market income)
- Preferred specification: between-effects model for 31 countries (2000–2014), capturing 63 percent of total variance (R-Squared = 0.63; F-Stat = 4.16).
- Main statistically significant associations (Table 1 coefficients and statistics preserved):
  - Financial Openness: Coef. -2.82; P-value 0.00; Standardized Beta -0.58.
    - Interpretation examples: one-standard deviation higher level of financial openness is linked to lower inequality levels by about 3 points (scale 0-100).
  - Caribbean Dummy: Coef. -11.54; P-value 0.02; Standardized Beta -0.77.
  - Public Debt/GDP: Coef. -0.11; P-value 0.00; Standardized Beta -0.59.
  - Public Debt/GDP * Caribbean: Coef. 0.10; P-value 0.04; Standardized Beta 0.60.
    - Context: public debt appears associated with lower inequality generally, but the beneficial relationship is muted or reversed in Caribbean countries with high debt.
  - Domestic Public Health Expenditure/GDP: Coef. -3.10; P-value 0.09; Standardized Beta -0.48.
    - Interpretation examples: an additional 1.0 percent of GDP assigned to health expenditure is associated with a Gini index 3.1 points lower.
  - FDI/GDP: Coef. -0.40; P-value 0.06; Standardized Beta -0.37.
    - Interpretation examples: an increase of 1.0 percentage points of GDP in FDI inflows is associated with a Gini coefficient 0.4 points lower.
  - Government Effectiveness: Coef. 10.17; P-value 0.03; Standardized Beta 0.94.
  - Government Effectiveness * Caribbean: Coef. -10.34; P-value 0.01; Standardized Beta -0.45.
  - Constant: 77.37; P-value 0.00.
- Additional contextual figures:
  - Caribbean average public debt: 76 percent of GDP.
  - Other small states average public debt: 55 percent of GDP.
- Summary of associations for inequality:
  - Lower inequality associated with higher FDI, higher financial openness, and higher public health expenditure.
  - Higher public debt is associated with lower inequality only up to moderate sustainable levels; in highly indebted Caribbean countries the beneficial association is muted.
  - The link between government effectiveness and inequality is positive for non-Caribbean small states but not significant for Caribbean countries.

### IV.D. Empirical results — associations with redistribution (absolute redistribution)
- Preferred specification: between-effects regression for absolute redistribution; sample: 28 observations; model fit: F-Stat = 30.23; R-Squared = 0.85.
- Main coefficients (Table 3 preserved):
  - Caribbean Dummy: Coef. -3.59; P-value 0.00; Standardized Coefficient -0.88.
  - Public Debt/GDP: Coef. -0.01; P-value 0.09; Standardized Coefficient -0.15.
    - Example interpretation: an increment of 10 percent of GDP in public debt is associated with less redistribution equivalent to a Gini coefficient 0.1 percentage points lower.
  - Domestic Public Health Expenditure/GDP: Coef. -0.20; P-value 0.10; Standardized Coefficient -0.15.
    - Example interpretation: countries with health expenditure 1.0 percent of GDP higher are associated with less redistribution by about 0.2 percentage points.
  - Log of Real GDP per capita: Coef. -0.55; P-value 0.07; Standardized Coefficient -0.28.
    - Example interpretation: small states with a GDP per capita 10 percent higher are expected to have lower redistribution by 0.05 percentage points (interpretation noted in source).
  - Years of schooling: Coef. 0.31; P-value 0.10; Standardized Coefficient 0.33.
    - Example interpretation: one additional year of education is linked to an increase in redistribution (i.e., reduction of inequality) of about 0.3 percentage points.
- Summary of associations for redistribution:
  - Higher education levels associated with more redistribution (greater reduction in inequality).
  - Higher public health expenditure associated with less redistribution (possible supply-side fiscal space effect and demand-side reduced need for transfers).
  - Higher GDP per capita and higher public debt are associated with less redistribution, although magnitudes are modest.
  - Caribbean countries redistribute less than other small states; the Caribbean dummy remains important in explaining redistribution variation, indicating unobserved idiosyncratic factors.

### V. Conclusions and policy implications (preserving caveats and main recommendations)
- Methodological caveats:
  - Results reflect association, not causation.
  - Inequality levels in Caribbean countries are not fully explained by the included controls, suggesting other idiosyncratic elements.
  - Cross-country analysis used due to limited and sparse time-series microdata.
- Principal conclusions:
  - Caribbean countries exhibit lower levels of market income inequality compared to other small states, but also lower absolute redistribution; disposable income inequality is relatively or marginally higher in the Caribbean than in other small states.
  - Expenditure variables (especially health and education) matter more than revenue/tax policy variables in explaining redistribution patterns in the sample.
  - Openness and FDI are associated with lower inequality in many small states—likely via employment-intensive sectors such as tourism in the Caribbean.
  - High and unsustainable public debt (as in many Caribbean countries) constrains fiscal space and is associated with higher inequality dynamics.
- Policy implications emphasized:
  - Prioritize efficient and targeted social sector expenditure policies (health and education) to improve social indicators (e.g., years of schooling) and support redistribution.
  - Strengthen public financial management systems to ensure effective, targeted delivery of social spending that can lower inequality.
  - Pursue policies to increase openness and attract FDI, especially where external capital finances labor-intensive sectors (e.g., tourism), as these can help reduce inequality.
  - Adopt credible medium-term macroeconomic frameworks aligned with long-term debt targets and implement structural reforms to strengthen potential growth; this will help place economies on a downward debt-to-GDP trajectory and create fiscal space for targeted social spending to reduce inequality.
  - Improve data collection: coordinated efforts to collect and make available microdata from country-level anonymized household budget surveys are needed to enable deeper empirical analysis and better targeted policies.
- Final synthesis:
  - Increased openness and deeper economic integration including financial openness are associated with lower inequality in the sample.
  - Elevated debt levels limit fiscal space and are associated with higher inequality dynamics in highly indebted countries.
  - Well-targeted social sector spending and improved education indicators would support increased redistribution and lower inequality.

*Italic: Source — conclusions of the analysis and possible policy implications (wpiea2021036-print-pdf).*

### conclusions of the analysis and possible policy implications.

### conclusions of the analysis and possible policy implications

### III. Stylized facts and literature context
- Sample and data:
  - Sample period coverage: 2000 to 2014.
  - Sample definition: countries with population of less than 1.5 million.
  - Sample size: 31 countries (covering the Caribbean, Africa and the South Pacific); small states with high income (e.g., large oil exporters and principalities) excluded.
  - Inequality metrics sourced from Harvard University’s Standardized World Income Inequality Database (SWIID).
  - Two primary metrics used:
    - Gini at market income (pre-taxes/pre-transfers).
    - Absolute redistribution = Gini at market income − Gini at disposable income.
- Key literature linkages considered: economic development, globalization (trade openness, capital account openness, FDI), public (fiscal) policy, public debt, socio-demographic factors (education, health, gender, crime).
- Data limitations emphasized:
  - SWIID time series for many small states are based on just a few historical points and show scarce variability and wide confidence intervals.
  - Given limited time-series, analysis focuses on cross-country (between-effects) associations rather than causal identification.

### IV. Quantitative analysis — data and specification
- General econometric specification (between-effects model) estimated on averages since 2000; dependent variables:
  - Gini at market income (0-100).
  - Redistribution Δ(Gini) = Gini market − Gini disposable (absolute redistribution).
- Main independent variables included: GDP per capita, health spending, years of schooling, fiscal policy indicators, public debt, trade and financial openness, terms of trade, governance, demographics.
- Note: results are associations (not causal estimates); country-level idiosyncrasies (especially in the Caribbean) remain important.

### IV.C. Empirical results — associations with inequality (Gini at market income)
- Preferred specification: between-effects model for 31 countries (2000–2014), capturing 63 percent of total variance (R-Squared = 0.63; F-Stat = 4.16).
- Main statistically significant associations (Table 1 coefficients and statistics preserved):
  - Financial Openness: Coef. -2.82; P-value 0.00; Standardized Beta -0.58.
    - Interpretation examples: one-standard deviation higher level of financial openness is linked to lower inequality levels by about 3 points (scale 0-100).
  - Caribbean Dummy: Coef. -11.54; P-value 0.02; Standardized Beta -0.77.
  - Public Debt/GDP: Coef. -0.11; P-value 0.00; Standardized Beta -0.59.
  - Public Debt/GDP * Caribbean: Coef. 0.10; P-value 0.04; Standardized Beta 0.60.
    - Context: public debt appears associated with lower inequality generally, but the beneficial relationship is muted or reversed in Caribbean countries with high debt.
  - Domestic Public Health Expenditure/GDP: Coef. -3.10; P-value 0.09; Standardized Beta -0.48.
    - Interpretation examples: an additional 1.0 percent of GDP assigned to health expenditure is associated with a Gini index 3.1 points lower.
  - FDI/GDP: Coef. -0.40; P-value 0.06; Standardized Beta -0.37.
    - Interpretation examples: an increase of 1.0 percentage points of GDP in FDI inflows is associated with a Gini coefficient 0.4 points lower.
  - Government Effectiveness: Coef. 10.17; P-value 0.03; Standardized Beta 0.94.
  - Government Effectiveness * Caribbean: Coef. -10.34; P-value 0.01; Standardized Beta -0.45.
  - Constant: 77.37; P-value 0.00.
- Additional contextual figures:
  - Caribbean average public debt: 76 percent of GDP.
  - Other small states average public debt: 55 percent of GDP.
- Summary of associations for inequality:
  - Lower inequality associated with higher FDI, higher financial openness, and higher public health expenditure.
  - Higher public debt is associated with lower inequality only up to moderate sustainable levels; in highly indebted Caribbean countries the beneficial association is muted.
  - The link between government effectiveness and inequality is positive for non-Caribbean small states but not significant for Caribbean countries.

### IV.D. Empirical results — associations with redistribution (absolute redistribution)
- Preferred specification: between-effects regression for absolute redistribution; sample: 28 observations; model fit: F-Stat = 30.23; R-Squared = 0.85.
- Main coefficients (Table 3 preserved):
  - Caribbean Dummy: Coef. -3.59; P-value 0.00; Standardized Coefficient -0.88.
  - Public Debt/GDP: Coef. -0.01; P-value 0.09; Standardized Coefficient -0.15.
    - Example interpretation: an increment of 10 percent of GDP in public debt is associated with less redistribution equivalent to a Gini coefficient 0.1 percentage points lower.
  - Domestic Public Health Expenditure/GDP: Coef. -0.20; P-value 0.10; Standardized Coefficient -0.15.
    - Example interpretation: countries with health expenditure 1.0 percent of GDP higher are associated with less redistribution by about 0.2 percentage points.
  - Log of Real GDP per capita: Coef. -0.55; P-value 0.07; Standardized Coefficient -0.28.
    - Example interpretation: small states with a GDP per capita 10 percent higher are expected to have lower redistribution by 0.05 percentage points (interpretation noted in source).
  - Years of schooling: Coef. 0.31; P-value 0.10; Standardized Coefficient 0.33.
    - Example interpretation: one additional year of education is linked to an increase in redistribution (i.e., reduction of inequality) of about 0.3 percentage points.
- Summary of associations for redistribution:
  - Higher education levels associated with more redistribution (greater reduction in inequality).
  - Higher public health expenditure associated with less redistribution (possible supply-side fiscal space effect and demand-side reduced need for transfers).
  - Higher GDP per capita and higher public debt are associated with less redistribution, although magnitudes are modest.
  - Caribbean countries redistribute less than other small states; the Caribbean dummy remains important in explaining redistribution variation, indicating unobserved idiosyncratic factors.

### V. Conclusions and policy implications (preserving caveats and main recommendations)
- Methodological caveats:
  - Results reflect association, not causation.
  - Inequality levels in Caribbean countries are not fully explained by the included controls, suggesting other idiosyncratic elements.
  - Cross-country analysis used due to limited and sparse time-series microdata.
- Principal conclusions:
  - Caribbean countries exhibit lower levels of market income inequality compared to other small states, but also lower absolute redistribution; disposable income inequality is relatively or marginally higher in the Caribbean than in other small states.
  - Expenditure variables (especially health and education) matter more than revenue/tax policy variables in explaining redistribution patterns in the sample.
  - Openness and FDI are associated with lower inequality in many small states—likely via employment-intensive sectors such as tourism in the Caribbean.
  - High and unsustainable public debt (as in many Caribbean countries) constrains fiscal space and is associated with higher inequality dynamics.
- Policy implications emphasized:
  - Prioritize efficient and targeted social sector expenditure policies (health and education) to improve social indicators (e.g., years of schooling) and support redistribution.
  - Strengthen public financial management systems to ensure effective, targeted delivery of social spending that can lower inequality.
  - Pursue policies to increase openness and attract FDI, especially where external capital finances labor-intensive sectors (e.g., tourism), as these can help reduce inequality.
  - Adopt credible medium-term macroeconomic frameworks aligned with long-term debt targets and implement structural reforms to strengthen potential growth; this will help place economies on a downward debt-to-GDP trajectory and create fiscal space for targeted social spending to reduce inequality.
  - Improve data collection: coordinated efforts to collect and make available microdata from country-level anonymized household budget surveys are needed to enable deeper empirical analysis and better targeted policies.
- Final synthesis:
  - Increased openness and deeper economic integration including financial openness are associated with lower inequality in the sample.
  - Elevated debt levels limit fiscal space and are associated with higher inequality dynamics in highly indebted countries.
  - Well-targeted social sector spending and improved education indicators would support increased redistribution and lower inequality.

*Italic: Source — conclusions of the analysis and possible policy implications (wpiea2021036-print-pdf).*

### ANNEX 1: COUNTRY SAMPLE – 31 COUNTRIES

### ANNEX 1: COUNTRY SAMPLE – 31 COUNTRIES

### Country sample
- Caribbean small states (13): Antigua and Barbuda, Barbados, Belize, Dominica, Grenada, Guyana, Jamaica, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Suriname, The Bahamas, Trinidad and Tobago
- Other small states (18): Botswana, Cabo Verde, Comoros, Djibouti, Equatorial Guinea, Gabon, Guinea-Bissau, Kiribati, Lesotho, Maldives, Mauritius, Micronesia, Namibia, São Tomé and Principe, Seychelles, Swaziland, The Gambia, Vanuatu

### Sample selection note
- "Initially, we followed the IMFs criteria for small developing states, that is for states with populations under 1.5 million. However, data availability was an issue and some countries had to be omitted. To compensate for this  “similar small states” were added to the sample with populations around 2 million."

### References (as listed)
- Barro, R (2000), “Inequality and Growth in a Panel of Countries”, Journal of Economic Growth Vol 5, pp5-32
- Bellony, A., Hoyos, A., and Hugo Ñopo (2010), “Gender Earnings Gaps in the Caribbean: Evidence from Barbados and Jamaica”, IDB WP 210
- Berg, A. and J.D. Ostry (2011). “Inequality and Unsustainable Growth: Two Sides of the Same Coin?” IMF Staff Discussion Note 11/08, International Monetary Fund, Washington D.C.
- Bogliaccini, J. and Patrick J.E. Egan (2017), “Foreign Direct Investment and Inequality in Developing Countries: Does Sector Matter?” Economics and Politics 29, pp209-236
- Caribbean Development Bank (2016), “The Changing Nature of Poverty and Inequality in the Caribbean: New Issues, New Solutions”, Caribbean Development Bank
- Cevik, S and Carolina Correa-Caro (2015), “Growing (Un)equal: Fiscal Policy and Income Inequality in China and BRIC+”, IMF Working Paper 15/68
- Cevik, S and Carolina Correa-Caro (2020), “Taking Down the Wall: Transition and Inequality”, IMF Working Paper 20/32
- Frederic Solt (2019), “Measuring Income Inequality Across Countries and Over Time: The Standardized World Income Inequality Database”
- Furceri, D., Loungani, P., and Jonathan Ostry (2017), “The Aggregate and Distributional Effects of Financial Globalization: Evidence from Macro and Sectoral Data”
- Goldberg, P. and Nina Pavcnik (2007), “Distributional Effects of Globalization in Developing Countries”, Journal of Economic Literature, Vol. XLV, pp39-82
- Grigoli, Francesco & Evelio Paredes & Gabriel Di Bella, 2016."Inequality and Growth; A Heterogeneous Approach," IMF Working Papers 16/244, International Monetary Fund.
- Grigoli, Francesco and Robles, Adrian, (2017), Inequality Overhang, No 2017/076, IMF Working Papers, International Monetary Fund.
- International Monetary Fund (2017), “Tackling Inequality”, Fiscal Monitor October 2017, Chapter 1
- Jaumotte, F., Lall, S., and Chris Papageorgiou (2013), “Rising Income Inequality: Technology, or Trade and Financial Globalization”, IMF Economic Review Vol. 61, No.2, pp 271-309
- Leandro Medina & Friedrich Schneider, 2018. "Shadow Economies Around the World: What Did We Learn Over the Last 20 Years?" IMF Working Papers 2018/017, International Monetary Fund.
- Martinez-Vazquez, J., Vulovic, V., and Blanca Moreno-Dodson (2012), “The Impact of Tax and Expenditure Policies on Income Distribution: Evidence from a Large Panel of Countries”, Review of Public Economics, 200-(4/2012): 95-130
- Messina, J. and Joana Silva (2018), “Wage Inequality in Latin America: Understanding the Past to Prepare for the Future” World Bank
- Ostry, J.D, A. Berg, and C. Tsangarides (2014). “Redistribution, Inequality and Growth” IMF Staff Discussion 14/02, International Monetary Fund, Washington D.C.
- Ramos, C; Alvargonalez Rodriguez, M and Moreno, B, (2018), “Determinants of Income Inequality Reduction in the Latin American Countries” CEPAL Review, December 2018 (pp. 79-98).
- Sandy Brian Hager (2016), “Public Debt, Inequality, and Power: The Making of a Modern Debt State”, University of California Press
- Simon Kuznets (1955), “Economic Growth and Income Inequality,” American Economic Review, Vol.45, pp.1-28
- Thomas Piketty (2014), “Capital in the Twenty-First Century”, Harvard University Pres

*Source: ANNEX 1: COUNTRY SAMPLE – 31 COUNTRIES (wpiea2021036-print-pdf)*

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_Source: https://www.imf.org/-/media/files/publications/wp/2021/english/wpiea2021036-print-pdf.pdf_