Effects of Financial Development, Democracy and Human Capital on Income Distribution

Gamze Destek
Gaziantep University
Gökçen Sayar
Akdeniz University


Although there are many empirical studies examining the effects of financial development on economic growth performance of countries, the impact of the increased national income as a result of financial development on the low-income segments of society and income distribution is mostly ignored. In addition, it is also well-known fact that there are contradictory arguments about the impact of financial development on income distribution. However, according to the hypothesis called "financial Kuznets hypothesis" which has been introduced in recent years, in the initial stages of financial development, high asymmetric information and the high cost of accessing financial resources deteriorates the income distribution. Along with the maturation of the financial system, access to financial resources of the low-income segment is facilitated therefore income distribution is positively affected. To sum up, according to this hypothesis, an inverted U-shaped relationship exists between financial development and income inequality.

This study aims to examine the validity of the financial Kuznets hypothesis for the period of 1990-2013 for 23 developing countries. In this direction, it is aimed to examine the effects of economic growth, democracy, human capital and financial development on income inequality. For this purpose, panel unit root, panel cointegration, panel FMOLS long-run coefficient estimator and panel causality tests are utilized to examine the relationship between mentioned variables. As a result of the empirical analyses, it is seen that when the findings are evaluated on the basis of the panel, increasing national income, democracy level and human capital accumulation reduces income inequality. Furthermore, it is found that there is Ushaped relationship between financial development and income inequality and therefore the existence of financial Kuznets hypothesis is not confirmed.

How to cite this book

Destek, G. & Sayar, G. (2023). Effects of Financial Development, Democracy and Human Capital on Income Distribution. Özgür Publications. DOI: https://doi.org/10.58830/ozgur.pub109



May 11, 2023