Rural-urban income inequality under financial development and trade openness in Pakistan: The econometric evidence

Abstract

Pakistan is a developing economy, which has adopted a Structural Adjustment Programme (SAP) in the form of economic reforms initiated in early 1990s. The objective of such reforms was to improve the welfare of society but these reforms did not lead to improvement in all sections of the economy. The present paper explores the understanding between financial deepening, trade-openness, and rural-urban income inequality in Pakistan. We utilised DF-GLS and Ng-Perron to examine the order integration and modified ARDL co-integration along with the Johanson Technique for robustness of long-run association between the said actors. Our empirical analysis suggests that improvements in financial performance decline the rural-urban income inequality in the case of Pakistan. In contrast, economic growth widens the rural-urban income gap in the long span of time. Openness in foreign capital and trade worsen rural-urban earnings situation in Pakistan. Finally, low inflation is associated with a high rural-urban income gap in the country. © The Pakistan Development Review.