A multidimensional free market and income inequality in developing Asia: How does the quality of governance matter?

Abstract

This paper empirically examines how a free market, a governance quality (GQ) and their interaction simultaneously affect income inequality in 23 Asian developing countries over the period 2000–2019. Especially, different dimensions of a free market proxied by various components of economic freedom (EF) are analysed. Results show that the overall EF and three of its components, including labour freedom, trade freedom and investment freedom, reduce income inequality; but other components, including business freedom (BF), monetary freedom (MF) and financial freedom (FF), widen income inequality. Meanwhile, the GQ not only decreases income inequality but also intensifies the beneficial impacts of the overall EF and those respective components of EF on income equality. Notably, at certain thresholds of GQ, the detrimental impacts of BF, MF and FF on income equality turn into the advantageous ones. The findings consolidate the appropriate combination of free market with specific dimensions and the GQ in boosting the equality of income distribution in Asian developing countries.