The impact of financial development on income inequality and poverty

Abstract

The Turkish economy has undergone a structural transformation with impressive economic performance during 2002–2018 and then a slowdown. The implementation of policies on the financial markets results in a significant capital inflow, which leads to an increase in the volume of domestic credit. Despite improvements in Türkiye, income inequality and poverty are still relatively high. While much of the literature shows that financial development accelerates growth, there is no consensus on its clear impact on poverty and inequality. While some studies stress that financial development improves inequality and combats poverty by increasing the ability of advantage of new investment opportunities, and by improving the allocation of capital, others point out that the beneficial impact of financial development depends on whether the overall population or the upper-income groups benefit or not. Therefore, this paper aims to empirically investigate the impact of financial development on inequalities and poverty during the 2002–2017 period when Türkiye relatively has been prosperous. According to simultaneous equation regression findings, the widening of the financial sector leads to more equal income distribution and poverty alleviation.