The impact of financial development, economic growth, corruption and human capital on income inequality: evidence in low and middle income countries
xiv CHAPTER 1 RESEARCH OVERVIEW. 1 1.1 Research Background. 1 1.1.1 Income Inequality in Low and Middle Income Countries. 2 1.1.2 Financial Development in Low and Middle Income Countries. 4 1.1.3 Economic Growth in Low and Middle Income Countries. 6 1.1.4 Corruption in Low and Middle Income Countries. 7 1.1.5 Human Capital in Low and Middle Income Countries. 8 1.1.6 Income Inequality: Is It Fair or Unfair? 9 1.2 Problem Statement. 13 Impact of Financial Development, Economic Growth, Corruption and Human Capital on Income Inequality Undergraduate Research Project vi Faculty of Business and Finance 1.3 Research Objective. 19 1.3.1 General Objectives..19 1.3.2 Specific Objectives. 19 1.4 Research Question. 20 1.5 Hypotheses of Study. 20 1.6 Significance of the Study. 21 1.7 Chapter Layout..22 1.8 Conclusion. 23 CHAPTER 2 LITERATURE REVIEW. 24 2.1 Theoretical Framework. 24 2.2 Review of Literature. 27 2.2.1 Financial Development and Income Inequality. 27 2.2.2 Economic Growth and Income Inequality. 30 2.2.3 Corruption and Income Inequality. 32 2.2.4 Human Capital and Income Inequality. 34 CHAPTER 3 METHODOLOGY. 37 3.1 Data Description. 37 3.1.1 Dependent Variable. 38 3.1.1.1 Income Inequality. 38 3.1.2 Independent Variable. 38 3.1.2.1 Financial Development. 38 3.1.2.2 Economic Growth. 39 3.1.2.3 Corruption. 39 Impact of Financial Development, Economic Growth, Corruption and Human Capital on Income Inequality Undergraduate Research Project vii Faculty of Business and Finance 3.1.2.4 Human Capital. 40 3.2 Data Analysis. 40 3.2.1 Econometric Model. 40 3.3 Econometric Technique. 42 3.3.1 GMM Estimator. 44 3.3.2 Difference GMM and System GMM. 47 3.4 Diagnosis Checking. 49 3.4.1 Sargan Hansen Test. 49 3.4.2 Arellano Bond Serial Correlation Test. 50 CHAPTER 4 DATA ANALYSIS. 51 4.1 Result of POLS, FE, RE Estimation. 51 4.2 Result of Difference GMM Estimation..53 4.3 Result of System GMM Estimation. 55 4.4 Diagnosis Checking. 58 4.4.1 Sargan Hansen Test. 58 4.4.2 Arellano Bond Serial Correlation Test. 59 CHAPTER 5 CONCLUSION. 60 5.1 Summary of Statistical Analyses. 60 5.2 Policy Implication. 61 5.3 Limitation and Recommendation. 63 References. 65 Appendices. 78 Impact of Financial Development, Economic Growth, Corruption and Human Capital on Income Inequality Undergraduate Research Project viii Faculty of Business and Finance LIST OF TABLES Page Table 3.1: Sources of Data 37 Table 4.1: Result of POLS, FE and RE Estimation 51 Table 4.2: Result of Difference GMM Estimation 53 Table 4.3: Result of System GMM Estimation 55 Impact of Financial Development, Economic Growth, Corruption and Human Capital on Income Inequality Undergraduate Research Project ix Faculty of Business and Finance LIST OF FIGURES Page Figure 1.1: Poverty in Low and Middle Income Countries in 2015 2 Figure 1.2: Financial Development in Low and Middle Income Countries 4 Figure 1.3: Economic Growth in Low and Middle Income Countries 6 Figure 1.4: Average Level of Corruption in Various Income Groups of Countries 7 Figure 1.5: Education Attainment in Low and Middle Income Countries 8 Figure 1.6: Average Monthly Household Income and Consumption Expenses 11 Figure 1.7: Global Adult Population and Share of Total Wealth by Wealth Group 13 Figure 1.8: Rural and Urban Inequality 14 Figure 1.9: Crime Rates and Gini Index 16 Figure 2.0: Life Expectancy by Income Level 17 Figure 2.1: Life Expectancy and Income Inequality by country, 2012 18 Impact of Financial Development, Economic Growth, Corruption and Human Capital on Income Inequality Undergraduate Research Project x Faculty of Business and Finance LIST OF ABBREVIATIONS 2SLS Two Stage Least Square AGFI Adjusted goodness of fix index AR (1) First order Autoregression Model AR (2) Second order Autoregression Model BNM Bank Negara Malaysia CPI Corruption FD Financial Development FEM Fixed Effect Model GMM General Method of Moments HC Human Capital IEQ Income Inequality LM Lagrange Multiplier MM Method of Moment OECD Organization for Economic Co operation and Development OLS Ordinary Least Square OPCD Office of Professional and Career Development PVECM Panel Vector Error Correction Model REM Random Effect Model RGDP Economic Growth Impact of Financial Development, Economic Growth, Corruption and Human Capital on Income Inequality Undergraduate Research Project xi Faculty of Business and Finance SEM Structural Equation Modelling SPSS Statistical Package for Social Science Impact of Financial Development, Economic Growth, Corruption and Human Capital on Income Inequality Undergraduate Research Project xii Faculty of Business and Finance LIST OF APPENDICES Page Appendix 1.1: List of Middle Income Countries 78 Appendix 1.2: List of Low Income Countries 79 Appendix 1.3: 53 Middle Income Countries (Sample) 79 Appendix 1.4: 12 Low Income Countries (Sample) 80 Appendix 1.5: Low Income Countries and their Regions 80 Appendix 1.6: Empirical Result of Fixed Effect Estimation 81 Impact of Financial Development, Economic Growth, Corruption and Human Capital on Income Inequality Undergraduate Research Project xiii Faculty of Business and Finance PREFACE This research is submitted to partially fulfil the requirement of Bachelor of Economics (HONS) Financial Economics. This research is supervised by Ms. Vivien Wong Zi Wen. The income inequality has been getting serious and increasing over the time. Therefore, the gap between the income distributions must be concerned and the factors that influence the income inequality must be investigated. This research will determine the relationship between the financial development, economic growth, corruption and human capital with income inequality. This research also provides a result showing the effect of the variables (financial development, economic growth, corruption and human capital) on income inequality in low and middle income countries. Impact of Financial Development, Economic Growth, Corruption and Human Capital on Income Inequality Undergraduate Research Project xiv Faculty of Business and Finance ABSTRACT The purpose of this research is to determine the income effect of financial development, economic growth, corruption and human capital on income inequality in 65 selected low and middle income countries (included 53 middle income countries and 12 low income countries) from the year 1980 to 2015. This study applies GMM estimator to capture the dynamic effect of data and deal with endogeneity problem. System GMM estimator is applied to run the empirical test in this research. The results summarized that RGDP and FD are significant to the income inequality while the HC and CPI are insignificant related to the income inequality. Impact of Financial Development, Economic Growth, Corruption and Human Capital on Income Inequality Undergraduate Research Project Page 1 of 80 Faculty of Business and Finance CHAPTER 1: RESEARCH OVERVIEW 1.1 Research Background Global integration and technology modernization appears to be unstoppable forces of nature that accelerate the improvement of a nation's economic condition. Products, services, and factors of production become mobile in the presence of freemarket ideology and consolidation of advancement in transportation and communication. This phenomenon has brought enormous profit to investors and entrepreneurs due to higher production efficiency and lower transportation cost. According to World Inequality Report 2018, the concentration of income is rising around the world due to globalization and technology modernization and the finding exhibits that the riches