Financial sector development, trade and income inequality: regional perspectives using evidence from macro and firm-specific data

Abstract

PurposeThe purpose of this study is to firstly, find out does the relationship between finance, trade and income inequality provides matching evidence using the macro- and firm-level data? Secondly, whether a causal relationship from the firm-specific data can be established.Design/methodology/approachThe authors employed a panel data fixed effect regression and two-stage least square (2sls) using key instruments. Their analysis is conducted based on a sub-sample analysis that emphasizes Latin America Region (LAR), Africa (AFR) and Asia by merging South Asia, East Asia and Pacific Regions (SEAR). These areas are characterized by an unequal society represented by a mounting gini index (Robilliard, 2020; De Rosa et al. 2020). Accordingly, the authors estimated a comparable model to unfold the impact of finance and trade. Besides, the authors exploited the interaction between their predictors with labor productivity and ownership structure to claim the difference between the results using the two data sets. The effort to establish a causal relationship from the combined firm-level data challenges the current literature that leans towards either macro or micro perspectives.FindingsThe result obtained from macro-level data shows that while financial development widens income inequality, the impact of trade on income inequality is negative. However, the estimation result from the combined firm-level data portrays that the proportion of investment financed by banks and trade widens income inequality. Given the contrasting result concerning trade, the authors test whether the firm-level evidence is causal following different identification strategies. The exercise shows that the correlation presented in the paper is causal. That challenges the current literature that falls short of providing firm-specific evidence.Social implicationsThe authors adds to a growing body of literature on finance, trade and income inequality by paying due emphasis on firms from 2006 to 2020. The authors show the private sector development effect on income inequality by linking topics from the firm and country-level data.Originality/valueThe authors extend the macro-level discussion and contribute to the existing literature by offering firm-specific evidence on the relationship between finance, trade and income inequality.