AN ANALYSIS OF THE IMPACTS OF FINANCIAL INCLUSION ON INCOME INEQUALITY IN THE FRAGILE FIVE COUNTRIES

Abstract

The equitable distribution of income is a very important problem in the economies of the past and present. In this sense, this study aims to investigate the relationship between financial inclusion and income inequality in the fragile five countries (Colombia, Mexico, South Africa, Turkey, Indonesia). For this purpose, a comprehensive index of financial inclusion was constructed for the Fragile Five Countries. A panel data set from 2005 to 2008 was used for the study. The econometric methods used are Principal Component Analysis (PCA), Parks-Kmenta Estimator and Dumitrescu and Hurlin Panel Granger Causality test. The results show that there is a negative relationship between financial inclusion and income inequality. There is a statistically significant “inverse-U” shaped relationship between GDP per capita and income inequality in the fragile five countries. However, there is a statistically significant and negative relationship between internet usage and income inequality. In this regard, the findings of this study imply that fair growth and financial inclusion together help to reduce income inequality.