Increasing inequality in low-income countries does not provide incentives for education. In Table 6, the dependent variable tertiary is used for the credit market imperfections channel and human capital channel, and it is approved that the results are robust. Table 19 shows the effects of human capital (from column 1 to 2a) and financial development (from column 3 to https://personal.nedbank.co.za/ 4a) on the economic growth for UHC. Empirical evidence shows that proxies used as both human capital and financial development indicators do not significantly affect economic growth. Although the first stage of the credit markets imperfections channel is confirmed in these countries, unlike LLMC, the validity of the channel cannot be proven because these variables do not have a significant effect on economic growth.

1 The Effect of Income Inequality on the Channel Variables

These results support studies suggesting that the strength of the relationship may be different in developed and developing countries (Berg et al., 2018; Castelló-Climent, 2010; Kremer & Chen, 2002). Lastly, it is observed that the coefficients are significantly negative in all models where the direct effects of the inequality and the channel effect are examined. The results of the credit markets imperfection channel in Table 11 are similar to the results in LLMC.

• On the other hand, Ciegis and Dilius (2019) reveal that the impact of inequality on economic growth through fiscal policy varies according to countries’ income and income inequality levels.
• For this reason, as the financial market develops in developing countries, if individuals use credit opportunities to invest in their human capital, economic growth will increase.
• Although the findings provide evidence that high inequality adversely affects economic growth, it can be stated that this inference cannot be generalized when countries’ income levels are taken into account.
• Table 16 presents the effects of human capital (columns 1–2a) and financial markets (coulmns 3–4a) on growth in LLMC.
• This situation negatively affects investment by increasing coups, revolutions, and acts of violence in society, or more generally, political uncertainty and by threatening the property rights of individuals.

Method and Dataset

Especially in low and lower-middle income countries, there may be missing observations regarding the selected variables. Data limitations prevent detailed analysis using different variables or methods, especially in these countries. Therefore, the sample could not be divided into more sub-groups such as low-income, lower-middle-income, upper-middle-income and high-income. Similarly, the Gini coefficient, used as an indicator of income inequality, is preferred because it is the largest dataset available recently. Due to data limitation, this relationship could not be tested using a different proxy for income inequality. When the results are evaluated, it can be said that for policymakers, it is becoming more challenging to control income inequality and achieve sustainable growth.

Income Inequality and Economic Growth

The effects of the other two control variables on growth are not clear, and the data scarcity problem in low-income countries limits forecasts. However, control variables do not change in either the sign of the income inequality or the channel variables, so when the results are evaluated together with the reduced model, more correct inferences can be made by considering the bad control problem. Table 20 presents the impact of innovation on growth, the positive channel for UHC from column (1) to column (2a). The impact of patents and R&D on economic growth (except column 1)Footnote 27 is positive. Thus, income inequality in UHC promotes economic growth even if it does not positively affect innovation. Even so, the positive channel is not valid as first-stage conditions are not achieved.

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However, when these results are evaluated together with the findings from the channel estimates for LLMC (Table 3), it can be considered that the political instability channel is not valid, even if there is evidence for the second stage. It is seen that significant coefficients are positive in estimates for redistribution from columns (3) to columns (4a). These results, which lend support to Paul and Verdier (1996), who oppose the political economy channel, can be explained by the fact that redistribution can increase economic growth as it allows the poor to invest in human capital.

As seen in Table 14, while the results are robust for the innovation channel, the negative effect of fixed capital variable on income inequality does not support the Classical approach. While many studies in the literature examine the direct relationship between relevant variables, some focus only on bilateral relationships such as income inequality-channel variable or channel variable-economic growth. Studies that determine whether the effect of income inequality on economic growth occurs through a channel focus mainly on some of the negative channels stated in theory.

Literature Review

Finally, future studies can be extended to consider the effects of the more recently discussed the COVID-19 pandemic (Chen et al., 2021) on income inequality. Table 3 presents the results of the political stability, political economy and fertility channel agc investment in low and lower-middle-income countries. Contrary to expectations, it is observed that the effect of inequality on the political stability index is positive in all estimations. The effect of inequality on the redistribution variable is insignificant except for the pooled OLS estimate. These results indicate that inequality in low-income countries does not significantly affect redistribution as theoretically stated (Le & Nguyen, 2019; Odedokun & Round, 2004). It can be argued that low-income countries do not have the level of democracy to support the median voter theory, so the results are not surprising.

Although the increase in the fertility rate negatively affects economic growth in both country groups, this effect is more significant in LLMC. agc investment south africa Families should focus on investing more in their human capital by having fewer children instead of having more children. Therefore, especially in low-income countries, governments can raise awareness of families with various education policies.

The Impact of Income Inequality on Economic Growth Through Channels in the European Union

Therefore, the finding that human capital supports economic https://www.tradingview.com/ growth, as illustrated here, indirectly supports the credit markets imperfections channel. For this reason, as the financial market develops in developing countries, if individuals use credit opportunities to invest in their human capital, economic growth will increase. The first control variable explaining economic growth is school enrolment, which represents human capital. According to theoretical models, the coefficient of proxies used for human capital is expected to have a positive sign. Investment is used both as a determinant of growth and as a channel variable in this study. In the Solow (1956) model, while the economy is in steady-state, an increase in investment rate causes a new steady-state with higher per capita capital and income.

Although the effect of political instability on economic growth is negative for both country groups, its relation to income distribution is different. When the two group estimates are interpreted together, the results imply that the relationship may not be linear, as Blanco and Grier (2009) stated. Considering that low-income countries also have relatively high levels of inequality, it can be said that these countries may have exceeded this threshold. The policies used to overcome the adverse effects of income inequality on political stability are not independent of those proposed by other transmission channels.