Financial Development, Inequality and Poverty: Some International Evidence

IMF Working Papers, February 19, 2016

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The paper examines the link between financial development and income distribution across several dimensions: financial access, efficiency, stability, and liberalization.
Each dimension is represented by two indicators: one related to financial institutions and the other to financial markets.
Using a sample of 143 countries from 1961 to 2011, the paper finds that four of the five dimensions of financial development can significantly reduce income inequality and poverty; financial liberalization is the exception and tends to exacerbate inequality and poverty.
Banking sector development tends to provide a more significant impact on changing income distribution than stock market development.

Sample: 143 countries.
Time period: 1961 to 2011.
Dimensions analyzed: financial access, efficiency, stability, liberalization (each with one institutions indicator and one markets indicator).

Findings are consistent with the view that macroeconomic stability and reforms are needed to ensure financial development and liberalization support reductions in poverty and income inequality.
Specific reform areas highlighted:
- Strengthening creditor rights.
- Improving contract enforcement.
- Enhancing financial institution regulation.

Subject: Financial sector development, Income distribution, Income inequality, Poverty, Stock markets
Keywords: income, price index, WP

Source: IMF Working Papers — "Financial Development, Inequality and Poverty: Some International Evidence" by RuiXin Zhang (February 19, 2016).