Do Financial and Economic Development Have an Impact on Income Inequality? A Study on Bangladesh

Abstract

This research attempts to determine why individuals are unable to achieve their fundamental necessities despite increased financial and economic growth by investigating the relationship between financial and economic development with income disparity.Alternatively, this paper examines, from the viewpoint of Bangladesh, the implications of the Financial Kuznets Curve hypothesis, a theory established in three phases based on Kuznets’s seminal 1955 work. The time series data of nine elements over the 28 years from 1993-94 to 2020-21 has been used in the study. The study employs the Autoregressive Distributed Lag method (ARDL)and Granger Casualty Test to identify the effect of financial and economic development on income inequality in Bangladesh. Principal Component Analysis (PCA) has been used to develop indicators for financial development and economic development. The study reveals that financial and economic development affect income inequality in Bangladesh; in fact, they increased income inequality over the years in this country. This indicates that the FKC hypothesis holds in Bangladesh, as FKC states that Financial and economic development constitutes a converse U-shaped relationship with income inequality, meaning that income inequality increases during the primary phase and continues in the medium phase of development. As Bangladesh is going through a development phase, income inequality is increasing.

Keywords: Gini Index, Financial Development, Economic Development, Financial Kuznets Curve, Principal Component Analysis.

Notes on Contributor
Mohammad Salahuddin Chowdhury, Associate Professor, Department of Finance, University of Dhaka, email- suddin@du.ac.bd, Md. Ohidur Rahman, Research Associate, Data Analytics Lead, ThinkTank Consultancy, Dhaka, email-mdohid158@gmail.com