The Impact of Export Diversification and Financial Development on Income Inequality in Selected Developing Countries
Keywords:
panel smooth transition regression model, income inequality , export diversification , Financial developmentAbstract
Objective: The study aims to examine how export diversification and financial development affect income inequality in selected developing countries by accounting for the nonlinear and threshold-based nature of these relationships.
Methodology: The research employs the Panel Smooth Transition Regression (PSTR) method to analyze data from nine developing countries covering the period 2000–2022. Variable stationarity was tested using the Levin–Lin–Chu method, and cross-sectional independence was assessed via Pesaran’s test. After confirming nonlinearity through linearity tests, the number of threshold locations was determined using Akaike and Schwarz criteria, and the model was estimated with one threshold and two regimes.
Findings: Results indicate that financial development increases income inequality below the threshold of 0.72, while above this threshold it significantly reduces inequality. Export diversification similarly increases inequality in the initial regime but becomes a strong inequality-reducing factor once the financial development threshold is exceeded. Unemployment and inflation were found to significantly increase inequality, whereas trade openness and per capita income significantly reduced it.
Conclusion: The findings demonstrate that the effects of financial development and export diversification on income inequality are nonlinear and threshold-dependent. Policy implications highlight the need for a phased strategy, emphasizing financial sector strengthening before implementing export diversification strategies. Additionally, managing inflation, reducing unemployment, and promoting trade openness are crucial for mitigating income inequality.
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Copyright (c) 2025 Sami Kamil Abed Alattabi, Saeed Daei-Karimzadeh, Noor Abdulsattar Ibrahim Shammari, Anvar Khosravi (Author)
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