Financial development, poverty and rural-urban income inequality: evidence from South Asian countries

Abstract

This paper attempts to examine the relationship between financial development, rural–urban income inequality and poverty reduction in south Asian economies by using panel data from 1990 to 2013. The stationary properties of the variables are checked by LLC and IPS panel unit root tests. Pedroni’s panel co-integration test is used to examine the long run relationship and panel dynamic ordinary least squares (PDOLS) is employed to estimate the coefficients of co-integrating equation. The short term and long run causality is examined by panel Granger causality. Evidence confirms the existence of long-run equilibrium relationship among the variables. The results of PDOLS indicate that financial development and economic growth reduces poverty in south Asian countries, whereas rural–urban income inequality aggravates poverty. The empirical findings of panel Granger causality indicate the presence of short-run causality running from rural–urban income inequality and financial development to poverty reduction variable and from economic growth to inequality. The study recommends that policies geared towards increasing financial development and economic growth should be adopted in order to reduce the high level of poverty currently prevailing in south Asian economies.