Income inequality in developing countries: fiscal policy’s role amid uncertainty

Figures & data

Table 1. Definition of variables.

Variables	Definition	Unit	Source
Income inequality	Gini coefficient.	Index	World Bank
World Uncertainty	World Uncertainty index.	Index	Ahir et al. (2022)
Economic Policy Uncertainty	Economic Policy Uncertainty index	Index	Baker et al. (2016)
Trade Policy Uncertainty	Trade Policy Uncertainty index	Index	Caldara et al. (2020)
Income (log)	GDP per capita in constant prices	USD	World Bank
Assistance (log)	Net official development assistance and official aid received.	USD	World Bank
Education	School enrolment, tertiary (% gross).	Ratio	World Bank

Source: Authors.

USD constant prices.

Figure 1. Evolution of income inequality in developing countries, 2000–2020.

Figure 2. Evolution of world uncertainty index, developing countries.

The WUI is computed by counting the percent of the word “uncertain” (or its variant) in the Economist Intelligence Unit country reports. The WUI is then rescaled by multiplying by 1,000,000. A higher number means higher uncertainty and vice versa. For example, an index of 200 corresponds to the word uncertainty accounting for 0.02 percent of all words, which means about 2 words per report.

Figure 3. World uncertainty and income inequality in developing countries (average 2000–2020).

Figure 4. Uncertainty and income inequality according to the country’s fiscal position (average 2000–2020).

Table 2. Baseline results.

Explanatory variables	Models
	Model 1 (with fiscal deficits)	Model 2 (with fiscal surpluses)
Intercept	-11.448***	-2.353***
	(1.711)	(0.266)
Income inequality (one lag)	1.004***	0.960***
	(0.015)	(0.005)
World Uncertainty	3.163***	3.231***
	(0.285)	(0.160)
Fiscal deficit ($\mathit{Dumm}{y}^{\mathit{Deficit}}$)	0.312**
	(0.131)
World Uncertainty $\times$ Fiscal deficit ($\mathit{Dumm}{y}^{\mathit{Deficit}}$)	0.366
	(0.408)
Fiscal surplus ($\mathit{Dumm}{y}^{\mathit{Surplus}}$)		-0.163***
		(0.018)
World Uncertainty $\times$ Fiscal surplus ($\mathit{Dumm}{y}^{\mathit{Surplus}}$)		-2.241***
		(0.107)
Income (log)	3.847***	1.472***
	(0.623)	(0.099)
Assistance (log)	-0.041***	-0.028***
	(0.006)	(0.001)
Education (%)	-0.083***	-0.042***
	(0.009)	(0.002)
Observations	472	472
Number of instruments	52	52
Diagnostic tests
Sargan test (p-value)	0.148	0.428
Hansen test (p-value)	0.661	0.506
Arellano-Bond: AR (1) in first difference	-4.16	-4.01
	[0.000]	[0.000]
Arellano-Bond: AR(2) in first difference	-0.69	-0.60
	[0.491]	[0.548]

Lagged values dated 2 to 5 periods of the dependent variable (-1), World Uncertainty index, Fiscal deficit ($\mathit{Dumm}{y}^{\mathit{Deficit}}$), World Uncertainty index $\times$ Fiscal deficit ($\mathit{Dumm}{y}^{\mathit{Deficit}}$) [column 1]; Fiscal surplus ($\mathit{Dumm}{y}^{\mathit{Surplus}}$), World Uncertainty index $\times$ Fiscal surplus ($\mathit{Dumm}{y}^{\mathit{Surplus}}$) [column 2]; and Tertiary education are used as instruments. Lagged variables dated 1 to 12 periods of the other variables (Income per capita and Official Development Assistance) are used as instruments. (.) Robust standard deviation. *** p$<$0.01; ** p$<$0.05; * p$<$0.1. [.] p-values.

Source: Authors’ estimates.

Table 3. Robustness test: baseline results considering economic policy uncertainty.

Explanatory variables	Models
	Model 1 (with fiscal deficits)	Model 2 (with fiscal surpluses)
Intercept	-12.271***	-5.066***
	(0.346)	(0.566)
Inequality (one lag)	0.916***	0.924***
	(0.003)	(0.002)
Economic Policy Uncertainty	0.002***	0.006***
	(0.0001)	(0.0004)
Fiscal deficit ($\mathit{Dumm}{y}^{\mathit{Deficit}}$)	0.141**
	(0.061)
Economic Policy Uncertainty $\times$ Fiscal deficit ($\mathit{Dumm}{y}^{\mathit{Deficit}}$)	0.004***
	(0.0005)
Fiscal surplus ($\mathit{Dumm}{y}^{\mathit{Surplus}}$)		-0.174***
		(0.084)
Economic Policy Uncertainty $\times$ Fiscal surplus ($\mathit{Dumm}{y}^{\mathit{Surplus}}$)		-0.003***
		(0.005)
Income (log)	5.442***	2.885***
	(0.106)	(0.188)
Assistance (log)	-0.0501***	-0.035***
	(0.003)	(0.001)
Education (%)	-0.111***	-0.067***
	(0.001)	(0.002)
Observations	472	472
Number of instruments	52	52
Diagnostic tests
Sargan test (p-value)	0.294	0.276
Hansen test (p-value)	0.658	0.536
Arellano-Bond: AR (1) in first difference	-3.97	-3.94
	[0.000]	[0.000]
Arellano-Bond: AR(2) in first difference	-0.17	-0.26
	[0.866]	[0.792]

Lagged values dated 2 to 5 periods of the dependent variable (-1), World Uncertainty index, Fiscal deficit ($\mathit{Dumm}{y}^{\mathit{Deficit}}$), World Uncertainty index $\times$ Fiscal deficit ($\mathit{Dumm}{y}^{\mathit{Deficit}}$) [column 1]; Fiscal surplus ($\mathit{Dumm}{y}^{\mathit{Surplus}}$), World Uncertainty index $\times$ Fiscal surplus ($\mathit{Dumm}{y}^{\mathit{Surplus}}$) [column 2]; and Tertiary education are used as instruments. Lagged variables dated 1 to 12 periods of the other variables (Income per capita and Official Development Assistance) are used as instruments. (.) Robust standard deviation. *** p$<$0.01; ** p$<$0.05; * p$<$0.1. [.] p-values.

Source: Authors’ estimates.

Table 4. Robustness test: baseline results considering trade policy uncertainty.

Explanatory variables	Models
	Model 1 (with fiscal deficits)	Model 2 (with fiscal surpluses)
Intercept	-5.440***	-3.242***
	(0.585)	(0.837)
Inequality (one lag)	0.964***	0.938***
	(0.002)	(0.005)
Trade Policy Uncertainty	0.002***	0.003***
	(0.0002)	(0.0005)
Fiscal deficit ($\mathit{Dumm}{y}^{\mathit{Deficit}}$)	0.162***
	(0.020)
Trade Policy Uncertainty $\times$ Fiscal deficit ($\mathit{Dumm}{y}^{\mathit{Deficit}}$)	0.005***
	(0.0004)
Fiscal surplus ($\mathit{Dumm}{y}^{\mathit{Surplus}}$)		-0.219**
		(0.110)
Trade Policy Uncertainty$\times$ Fiscal surplus ($\mathit{Dumm}{y}^{\mathit{Surplus}}$)		-0.002**
		(0.001)
Income (log)	2.472***	2.109***
	(0.173)	(0.248)
Assistance (log)	-0.022***	-0.016***
	(0.001)	(0.002)
Education (%)	-0.060***	-0.052***
	(0.002)	(0.004)
Observations	472	472
Number of instruments	52	52
Diagnostic tests
Sargan test (p-value)	0.183	0.182
Hansen test (p-value)	0.569	0.739
Arellano-Bond: AR (1) in first difference	-3.93	-3.95
	[0.000]	[0.000]
Arellano-Bond: AR(2) in first difference	-0.37	-0.37
	[0.715]	[0.714]

Lagged values dated 2 to 5 periods of the dependent variable (-1), World Uncertainty index, Fiscal deficit ($\mathit{Dumm}{y}^{\mathit{Deficit}}$), World Uncertainty index $\times$ Fiscal deficit ($\mathit{Dumm}{y}^{\mathit{Deficit}}$) [column 1]; Fiscal surplus ($\mathit{Dumm}{y}^{\mathit{Surplus}}$), World Uncertainty index $\times$ Fiscal surplus ($\mathit{Dumm}{y}^{\mathit{Surplus}}$) [column 2]; and Tertiary education are used as instruments. Lagged variables dated 1 to 12 periods of the other variables (Income per capita and Official Development Assistance) are used as instruments. (.) Robust standard deviation. *** p$<$0.01; ** p$<$0.05; * p$<$0.1. [.] p-values.

Source: Authors’ estimates.

Ahir, H., Bloom, N., & Furceri, D. (2022). The world uncertainty index. Working paper No. w29763. National bureau of economic research.

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Baker, S. R., Bloom, N., & Davis, S. J. (2016). Measuring economic policy uncertainty. Quarterly Journal of Economics, 131(4), 1593–1636. https://doi.org/10.1093/qje/qjw024

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Caldara, D., Iacoviello, M., Molligo, P., Prestipino, A., & Raffo, A. (2020). The economic effects of trade policy uncertainty. Journal of Monetary Economics, 109, 38–59. https://doi.org/10.1016/j.jmoneco.2019.11.002

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