Symmetric and asymmetric effects of financial deepening on income inequality in South Africa

ABSTRACT

The aim of this study is to examine the financial development-inequality nexus in South Africa from 1980 to 2017, specifically if financial deepening reduces income inequality. The initial results indicate a positive association between financial deepening and income inequality. On further exploration, we find evidence that the Greenwood and Jovanovich hypothesis holds for South Africa. We observe an inverted non-linear relationship between financial deepening and income inequality in the long-run. The results suggest that at early stages of financial development, income inequality increases, but gradually starts to decrease as the financial sector becomes more established in the long-run. The findings highlight the need for policymakers to focus on inclusive financial sector reforms in the early stages of financial development.

KEYWORDS:

• Financial deepening
• income inequality
• ARDL
• South Africa

JEL CODES:

• C22
• D63
• G20
• O55

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 https://www.worldbank.org/en/news/press-release/2018/09/21/south-africas-efforts-to-improve-financial-stability-and-inclusion-boosted.

2 We also run estimations for FMOLS, DOLS and CCR with the institutions variable included. The results for the non-linear effects remain consistent across the models. The results are available on request.

3 We also perform unit root tests on the financial inclusion measure based on ADF and PP models. We find that the variable is stationary at levels. The inclusion of the institutions variable does not attenuate the non-linear effects. The results are available on request.