Finance, Inequality, and the Poor

This paper uses data from 52 developing and developed countries, over the period 1960 to 1999, to assess relationship between financial intermediary development and changes in income distribution. The authors average available data over the period 1960-1999 and utilize a regression to arrive at the real GDP per capita of the poorest income quintile in country. As per the authors, this is proportional to the private credit and a set of conditioning information. The empirical results derived from the data suggest that in countries with developed financial intermediaries:

• Income of the poorest quintile grows faster than average GDP per capita;
• Income inequality falls more rapidly;
• Infant mortality reductions are larger;
• Child enrollment in primary schools has increased.

The paper concludes that financial intermediary development is indeed pro-poor. However, it emphasizes that financial development should either raise everyones income equally or it should raise the incomes of the poor disproportionately more than that of the rich.