The role of financial development in the relationship between income inequality and economic growth in Iran

Document Type : Original Article

Authors

1 Assistant Professor of Economics, Department of Economics, Semnan University, Semnan, Iran

2 Ph.D. Student in Economics, Department of Economics, Semnan University, Semnan, Iran

Abstract

The aim of this paper is to investigate the effect of financial development on the relationship between income inequality and economic growth in Iran using data from 1984 to 2020. To achieve this goal, real GDP per capita and Gini coefficient are used as indices of economic growth and income inequality, respectively. The results of the cointegration analysis based on the autoregressive distributed lag (ARDL) approach reveal that in the long run, there is an inverted U relationship between economic growth and income inequality, thus confirming the Kuznets curve hypothesis. Additionally, the findings indicate that higher financial development lowers the per capita income level at which income inequality reaches its maximum. In other words, an increase in financial development causes a leftward shift of the Kuznets curve. Also, according to the results government size and trade openness increases income inequality, while the effect of urbanization rate on income inequality is negative.

Keywords


Abdullah, A. J., Doucouliagos, H. and Manning, E. (2015) ‘Is there any Kuznets' Process in Southeast Asia?’, The Singapore Economic Review, 60 (2),1-22.
Adelman, I. and Robinson, S. (1988) ‘Macroeconomic Adjustment and Income Distribution: Alternative Models Applied to Two Economies’, Journal of Development Economics, 29 (1), 23-44.
Afonso, A., Schuknecht, L. and Tanzi, V. (2010) ‘Income Distribution Determinants and Public Spending Efficiency’, The Journal of Economic Inequality, 8(3), 367- 389.
Afshari, Z. and Beykzadeh, S. (2017) ‘Financial Development, Income Inequality and Poverty in Iran’, Biannually Iranian Economic Development Analyses, 5(1), 9-28. (In Persian)
Ahluwalia, M.S. (1976a) ‘Income Distribution and Development: Some Stylized Facts’, The American Economic Review, 66(2), 128-135.
---------- (1976b) ‘Inequality, Poverty and Development', Journal of Development Economics, 3(4), 307-342.
Akan, Y., Köksel, B., & Destek, M. A. (2017). The financial Kuznets curve in European Union. EconWorld2017 Rome Proceedings, 25-27.
Aleemran, R., & Shokohi Fard, S., (2017). Analysis of the Financial Sector on Income Distribution: (Dynamic Panel Data Approach). Journal of Development Economics and Planning, 5(2), 43-74. (In Persian)
Ali, I.M.A. (2023) ‘Income inequality, economic growth, and structural changes in Egypt: new insights from quantile cointegration approach’, Economic Change and Restructuring, 56(1), 379-407.
Ali, I.M.A., Attiaoui, I., Khalfaoui, R. and Tiwari, A.K. (2022) ‘The effect of urbanization and industrialization on income inequality: an analysis based on the method of moments quantile regression’, Social Indicators Research, 16(1), 29-50.
Azam, M., & Raza, S. A. (2018). Financial Sector Development and Income Inequality in ASEAN-5 Countries: Does Financial Kuznets Curve Exists? Global Business and Economics Review20(1), 88-114.
Baiardi, D. and Morana, C. (2016) ‘The Financial Kuznets Curve: Evidence for the Euro Area’, Journal of Empirical Finance, 39(11), 265-269.
Baiardi, D. and Morana, C. (2018) ‘Financial Development and Income Distribution Inequality in the Euro Area’, Economic Modelling, 70, 40-55.
Banerjee, A. V. and Newman, A. F. (1993) ‘Occupational Choice and the Process of Development’, Journal of Political Economy, 101(2), 274-298.
Barro, R.J. (2008) Inequality and Growth Revisited’, Working Paper Series on Regional Economic Integration No. 11, Asian Development Bank.
Bourguignon, F. and Morrisson, C. (1990) ‘Income Distribution, Development and Foreign Trade: A Cross-sectional Analysis’, European Economic Review, 34(6),1113-1132.
Bradford, D.F., Fender, R.A, Shore, S.H. and Wagner, M. (2005) ‘The environmental Kuznets Curve: Exploring a Fresh Specification’, Contributions to Economic Analysis & Policy, 4(1),1 -28.
Brown, R. L., Durbin, J. and Evans, J. M. (1975) ‘Techniques for testing the constancy of regression relationships over time’, Journal of the Royal Statistical Society: Series B (Methodological), 37(2), 149-163.
Campano, F. and Salvatore, D. (1988) ‘Economic development, income inequality and Kuznets' U-shaped hypothesis’, Journal of Policy Modeling, 10(2), 265-280.
Castaldo, A. and De Bonis, V. (2023) ‘Exploring the Existence of a Short-Run Kuznets Curve: Does the Fourth Industrial Revolution Affect Income distribution?’, The BE Journal of Economic Analysis & Policy, 23(2), 515-524.
Chebli, M. and Saidi, M. (2018) ‘Education, poverty, inequality and economic growth relationship: Fresh evidence from developing countries using a simultaneous equation model’, Conference paper at 10th edition of International Finance Conference IFC10. https://www.researchgate.net/publication/324896947.
Chenery, H.B. and Syrquin, M. (1975) Patterns of Development, 1950 to 1970, Oxford University Press, Oxford.
Elmi, Z. and Ariani, F. (2014) ‘Financial Development and the Distribution of Income in Iran’, Iranian Journal of Trade Studies (IJTS), 18(69), 133-158.
Farahati, M. and Salimi, L.  (2022) ‘An Empirical Test of the Financial Kuznets Curve Hypothesis for Iran’, Journal of Economic Modelling, 16(57), 67-85. (In Persian)
Huynh, C. M. (2022) ‘Economic freedom, economic development and income inequality in Asia: an analysis from the Kuznets curve perspective’, Journal of the Asia Pacific Economy [online].
Jaberi Khosroshahi, N., Mohamadvand Nahidi, M. R., & Noroozi, D. (2012). The Effect of Financial Development on Income Inequality in Iran. Journal of Economic Growth and Development Research, 2(6), 173-208. (In Persian)
Jalilian, H. and Kirkpatrick, C. (2002) ‘Financial Development and Poverty Reduction in Developing Countries’, International Journal of Finance and Economics, 7, 97-108.
Jha, S.K. (1996) ‘The Kuznets Curve: A Reassessment’, World Development, 24(4), 773-780.
Kamalu, K., & Ibrahim, W. H. B. W. (2023). The Effect Of Islamic Financial Development And Human Development On Income Inequality: Does Islamic Finance Kuznets Curve Valid In The Oic Countries?. Journal of Islamic Monetary Economics and Finance9(4), 661-684.
Kavya, T.B. and Shijin, S. (2020) ‘Economic Development, Financial Development, and Income Inequality Nexus’, Borsa Istanbul Review, 20(1), 80-93.
Khatatbeh, I. N., Al Salamat, W., Abu-Alfoul, M. N., & Jaber, J. J. (2022). Is there any financial kuznets curve in Jordan? a structural time series analysis. Cogent Economics & Finance, 10(1), 2061103.
Kuznets, S. (1955) ‘Economic Growth and Income Inequality’, The American Economic Review, 8(3), 1-28.
Lewis, W.A. (1954) ‘Economic Development with Unlimited Supplies of Labour’, The Manchester School, 22, 3-42.
Lin, S.-C., Huang, H.-C. and Weng, H.W. (2006) ‘A Semi-parametric Partially Linear Investigation of the Kuznets' Hypothesis’, Journal of Comparative Economics, 34(3), 634-647.
Lindert, P.H. and Williamson, J.G. (1985) ‘Growth, Equality, and History’, Explorations in Economic History, 22(4), 341-377.
Maneejuk, P., Pastpipatkul, P. and Sriboonchitta, S. (2016) ‘Economic growth and Income Inequality: Evidence from Thailand’. In Integrated Uncertainty in Knowledge Modelling and Decision Making: 5th International Symposium, IUKM 2016, Da Nang, Vietnam, November 30-December 2, Proceedings 5, 649-663.
Martínez-Navarro, D., Amate-Fortes, I. and Guarnido-Rueda, A. (2022) ‘The Kuznets Curve Hypothesis Checked Out on Up-To-Date Observations in African Countries’, Journal of Asian and African Studies, 57(4), 819-840.
Mehmet, A. D., Avik, S.,Samuel, A. S. (2020). The Relationship between Financial Development and Income Inequality in Turkey. Journal of Economic Structures, 9(11), 1-14.
Mehregan, N., Mousaei, M. and Keyhani Hekmat, R. (2008) ‘The Economic Growth and Income Distribution in Iran’, Social Welfare, 7(28), 57-77. (In Persian)
Nikoloski, Z. (2013) ‘Financial Sector Development and Inequality: Is There a Financial Kuznets Curve?’, Journal of International Development, 25(7), 897-911.
Ogwang, T. (1994) ‘Economic Development and Income Inequality: A Nonparametric Investigation of 'Kuznets' U-Curve Hypothesis’, Journal of Quantitative Economics, 10,139-153.
Öndes, H. & Kızılgöl, Ö. (2024) ‘Financial Development and Income Inequality in Newly Industrialized Countries: Does Financial Kuznets Curve Exists? ‘. Journal of the Knowledge Economy, 1-34.
Ota, T. (2017) ‘Economic Growth, Income Inequality and Environment: Assessing the Applicability of the Kuznets Hypotheses to Asia’, Palgrave Communications, 3(1), 1-23.
Papanek, G.F. and Kyn, O. (1986) ‘The Effect on Income Distribution of Development, the Growth Rate and Economic Strategy’, Journal of Development Economics, 23(1), 55-65.
Park, D., and Shin, K. (2017) ‘Economic growth, financial development, and income inequality’, Emerging Markets Finance and Trade, 53(12), 2794-2825.
Pesaran, M.H., Shin, Y. and Smith, R.J. (2001) ‘Bounds testing approaches to the analysis of level relationships’, Journal of Applied Econometrics, 16, 289–326.
Ram, R. (1988) ‘Economic Development and Income Inequality: Further Evidence on the U-curve Hypothesis’, World Development, 16(11), 1371-1376.
Rehman. H., Khan, S. and Ahmed, I. (2008) ‘Income Distribution, Growth and Financial Development: A Cross Countries Analysis’, Pakistan Economic and Social Review, Vol. 46(1),16-1.
Rubin, A. and Segal, D. (2015) ‘The Effects of Economic Growth on Income Inequality in the US', Journal of Macroeconomics, 45, 258-273.
Saith, A. (1983) ‘Development and Distribution: A Critique of the Cross-country U-hypothesis’, Journal of Development Economics, 13(3), 367-382.
Salem, A. A., &  Arab Yarmohammadi, J. (2011). The Relationship between Financial Development and Income Distribution (A Case of Iran). Trend of Economic Research, 19(58), 127-151. (In Persian)
Shahbaz, M. (2010) ‘Income Inequality-Economic Growth and Non-linearity: A Case of Pakistan’, International Journal of Social Economics, 37(8), 613-636.
Tung, L.T. and Bentzen, J. (2022) ‘The relationship between income growth and inequality: Evidence from an Asian emerging economy’, Economics & Sociology, 15(2), 95-109.
Utari, G.D. and Cristina, R. (2015) ‘Growth and Inequality in Indonesia: Does Kuznets Curve Hold’, Journal of Modern Accounting and Auditing, 11(2), 93-111.
Velkovska, I., Trenovski, B. and Kozheski, K. (2021) ‘Is There a Link between Income Inequality and Economic Growth in the Balkans? Testing the Kuznets Hypothesis’, Revija za Socijalnu Politiku, 28(2), 227-238.
Younsi, M. and Bechtini, M. (2020) ‘Economic Growth, Financial Development, and Income Inequality in BRICS Countries: Does 'Kuznets' Inverted U-shaped Curve Exist?’, Journal of the Knowledge Economy, 11(2), 721-742.
Zhang, Q., & Chen, R. (2015). Financial Development and Income Inequality in China: An Application of SVAR Approach. Procedia Computer Science, 55, 774-781.
Volume 5, Issue 2
2024
Pages 29-57
  • Receive Date: 20 April 2024
  • Revise Date: 20 June 2024
  • Accept Date: 03 July 2024
  • First Publish Date: 03 July 2024
  • Publish Date: 01 October 2024