Investigating the Relationship Between Financial Development and Income Inequality in Developed and Developing Countries: An Application of Canonical Correlation Analysis
Çiğdem Yılmaz ÖzsoyThis paper investigates the relationship between the variables of financial development and income inequality using a canonical correlation analysis for 41 developed and developing countries in 2017. Financial develop consists of the four subdimensions of access to finance, efficiency, stability, and external liberalization, which are respectively explained by the number of ATMs per 100,000 adults, net interest margin, ratio of regulatory capital to risk-weighted assets, and ratio of consolidated foreign claims of BIS (Bank for International Settlements) Reporting Banks to GDP. Meanwhile, income inequality consists of the variables of Gini coefficient and poverty gap index. As a result of the canonical correlation analysis, a highly correlated relationship was found between financial development and income inequality, with the common variance shared among the data being 45%. To test the reliability of this result, Mardia’s multivariate normal distribution test was applied, and the dataset of the variables was determined to not be normally distributed. Therefore, the study only considered structural correlations. As a result of the structural correlations, the Gini coefficient’s contributions to the income inequality dataset can be said to be more significant than what the poverty gap index contributes. Net interest margin explains the subdimension of financial efficiency, and its contribution was observed to be more important than the other proxy measurements that express access to the subdimensions of finance, stability, and external liberalization. Therefore, positive developments in the net interest margin will be able to positively affect financial development thus increasing the income of the poor and the use of economic opportunities, as well as narrowing income inequality in both developed and developing countries.
Finansal Gelişme ve Gelir Eşitsizliği Arasındaki İlişkinin Gelişmiş ve Gelişmekte Olan Ülkeler İçin Araştırılması: Kanonik Korelasyon Analizi Uygulaması
Çiğdem Yılmaz ÖzsoyBu çalışmada, Finansal Gelişme ile Gelir Eşitsizliği arasındaki ilişki Kanonik Korelasyon Analizi kullanılarak araştırılmıştır. Gelişmiş ve gelişmekte olan 41 ülke için yapılan çalışmada Finansal Gelişme değişken seti finansal erişim, finansal verimlilik, finansal istikrar ve dışsal serbestleşme’den oluşan dört farklı boyut ile açıklanmıştır. Bu boyutlar ise sırasıyla “100.000 Kişi Başına Düşen ATM Sayısı, Net Faiz Marjı, Düzenleyici Sermayenin Risk Ağırlıklı Varlıklara Oranı ve BIS Raporlama Yapan Bankaların Konsolide Dış Alacaklarının GSYİH’ya Oranı” değişkenleri ile tanımlanmıştır. Gelir Eşitsizliği değişken seti ise, Gini Katsayısı ve Yoksulluk Açığı Endeksi (günde 3,20 ABD Doları) değişkenlerinden oluşmuştur. 2017 yılı verileri kullanılarak yapılan Kanonik Korelasyon analizi sonucunda, Finansal Gelişme ve Gelir Eşitsizliği değişken setleri arasında yüksek düzeyde ilişki olduğu saptanmıştır. Bu sonucun güvenilirliğinin test edilmesi için Mardia Çok Değişkenli Normal Dağılım testi uygulanmış ve değişkenlere ait veri setinin normal dağılmadığı saptanmıştır. Bu nedenle çalışmada sadece yapısal korelasyonlar dikkate alınmıştır. Yapısal korelasyon sonucunda ise, Gini Katsayısı'nın Gelir Eşitsizliği veri setine katkısının Yoksulluk Açığı Endeksi'nin katkısından daha önemli olduğu; ayrıca finansal etkinlik boyutunu temsil eden Net Faiz Marjı'nın katkısının, finansal erişim, finansal istikrar ve dış serbestleşme boyutlarını ifade eden diğer değişkenlere göre Finansal Gelişime değişken seti için daha önemli olduğu sonucuna ulaşılmıştır. Elde edilen tüm bu sonuçlar birlikte değerlendirildiğinde, özellikle Net Faiz Marjı değişkeninde meydana gelecek olumlu gelişmelerin finansal gelişmeyi hızlandırarak yoksulların gelirlerini arttırabileceğini, ekonomik fırsatların daha fazla kullanılabileceğini ve gelir dağılımını sıkılaştırarak gelir eşitsizliğinin ortadan kaldırılmasına katkı sunabileceğini göstermiştir.
As stated in the World Bank (2020) report, financial development involves the development of the size, efficiency, and stability of financial markets, with increased access to financial markets having many economic advantages. Basically, developing the financial sector involves overcoming the costs that arise in the financial system. One important aspect of financial development is to ensure that poor and vulnerable groups have access to finances. Thus, risk management is facilitated by reducing the vulnerability these groups have to shocks as a result of financial expansion, with poverty and inequality being reduced by increasing investments and productivity that result in higher incomes. In this context, financial development is an important economic concept. Since the 2007-2008 financial crisis in particular, income inequality has increased in many countries. This situation has also prompted governments to seek alternatives in fiscal policies and to increase the interest in financial development. New approaches have emerged on this subject as a result of all these developments. Naceur and Zhang (2016) stated the main innovation to be how financial development can be explained through the subdimensions of access, stability, depth, liberalization, and efficiency, which represent different aspects and have important effects on income inequality.
This paper aims to investigate the relationship between the variable sets for financial development and income inequality by using these subdimensions and to identify the variables in both sets that contribute the most to the inter-set correlations for 41 developed and developing countries (i.e., Argentina, Brazil, Chile, Costa Rica, Dominical Republic, Ecuador, El Salvador, Mauritius, Myanmar, Panama, Paraguay, Peru, Thailand, Turkey, Uruguay, Austria, Belgium, Cyprus, Czech Republic, Denmark, Spain, Estonia, Finland, France, Croatia, Hungary, Luxembourg, Malta, Netherlands, Norway, Poland, Portugal, Romania, Sweden, Slovenia, Switzerland, Iceland, Canada, Italy, Ireland, United Kingdom) using a canonical correlation analysis. The reasons for using a canonical correlation analysis are its important place among statistical analysis methods and its ability to reveal the relationship between two datasets. As mentioned earlier the paper determined which proxy variables express financial development and income inequality based on Naceur and Zhang’s (2016) study. In addition, financial development was initially intended to be explained through the five subdimensions of access, depth, efficiency, stability, and external liberalization. However, the depth subdimension was excluded from the study due to insufficient data from 2017. The remaining subdimensions are explained respectively through the number of ATMs per 100,000 adults, net interest margin, ratio of regulatory capital to risk-weighted assets, and ratio of consolidated foreign claims of BIS (Bank for International Settlements) reporting banks to GDP. The variables of Gini coefficient and poverty gap index are used to explain income inequality. The data for 2017 were obtained from the International Monetary Fund (IMF) Financial Access Survey, Global Financial Development Database, and World Development Indicators, and the data published on these sites were decisive in determining which year to study.
The results from the study show financial development to be highly related to income inequality. However, according to the results from the Mardia multivariable normality test, the datasets for the variables are not normally distributed. Therefore, the study has only taken into consideration structural correlations. As much as is currently known, this study contributes to the existing empirical literature in how it explains the relationship between financial development and income inequality through the use of a canonical correlation analysis. Furthermore, the Gini coefficient has been noted to be the most significant indicator of income inequality variable set. In addition, net interest margin is seen to have a greater effect on financial development than the other variables. As noted in Angori et al.’s (2019) study, net interest margin is seen to measure both bank health and efficiency regarding traditional deposit storage and lending activities. As a result, positive developments in the net interest margin will also positively affect financial development, thus increasing the income of the poor and the use of economic opportunities, as well as narrowing income inequality in both developed and developing countries.
