Most emerging countries have experienced a rapid process of liberalization since the 1980s. In this process, inequality has become one of the most crucial problems for them. As mentioned above, the relationship between financial development and income inequality has become a central ambiguous topic in the relevant literature. However, the rapid financialization process has created new inequality relationship-financial development and wealth inequality- it has received less attention. Thus, this study investigates the impact of financial development on wealth inequality in the top ten emerging countries, i.e., Brazil, China, India, Indonesia, Malaysia, Mexico, Philippines, South Africa, Thailand, and Turkey, from 1995 to 2020.
The empirical findings of the paper present that financial development has a positive impact on wealth inequality for the panel sample. In the long run, an increase of 1% in financial development causes rising of 0.126% in wealth inequality for the panel group. In addition, the impact of financial development on wealth inequality is statistically significant in Brazil, China, Mexico, and the Philippines. If financial development increases by 1%, it leads to a rise in wealth inequality by 0.111%, 0.131%, 0.436%, and 0.536 in Brazil, China, Mexico, and the Philippines, respectively. These findings comply with the findings of Shin and Lee (2019), Jauch and Watzka (2016) and contradict the studies of Hasan et al. (2020), Frost et al. (2022), Park and Mercado (2015), and Zhou et al. (2011). Although these countries have lived through rapid integration into financial globalization, most still need to establish an inclusive financial system. Moreover, since wealth tax rates are lower than income taxes, it impedes obtaining benefits from the financial market for the poor.
Other empirical results show that economic growth positively influences wealth inequality for the panel group. Although likewise, the impact of financial development, the impact of economic growth varies as well. For example, an increase of 1% in economic growth sparks wealth inequality by 0.278%, 0.384%, 0.532%, and 0.716% in China, India, Indonesia, and South Africa, respectively, contrary to reduces wealth inequality by -0.090% and − 0.280% in Malaysia and Turkey, respectively. The increasing impact of economic growth on wealth inequality can be explained with a striking mechanism: Wealth accumulation increases in the case of economic growth. Because it eases increasing savings; thus, wealth accumulation increases through savings. Suppose the income obtained by wealth is higher than that generated by labor; wealth inequality increases among rich and poor people (Chesters, 2016). In contrast, in Piketty’s (2014) formula[1], a country’s high savings rate and a lower growth rate cause an increase in capital accumulation and wealth inequality in the long run.
The last findings show that increasing trade openness causes a rise in wealth inequality in the panel group, implying that integration into the world economy via liberalizing trade policies has yet to provide the expected situations in terms of reducing inequality. Impacts of trade openness on wealth inequality presents. In sub-samples, it is concluded that a rise of 1% in trade openness leads to an increase of 0.239%, 0.127%, 0.138%, 0.119%, 0.243%, and 0.215% in China, India, Indonesia, Malaysia, Mexico, and the Philippines, respectively. Our findings are consistent with the argument of Ezcurra and Rodríguez-Pose (2014), in which they argue that high-level trade openness causes to decrease in the gross domestic product in poor regions and consequently increases inequality level. In comparison, our results contrast with Das’s (2022) and Kuevibulvanich’s (2016) findings. The Dumitrescu and Hurlin test results prove a feedback causality relationship between wealth inequality-financial development, wealth inequality-economic growth, and wealth inequality-trade openness.
[1] Piketty (2014), in his famous book Capital in the Twenty-First Century, formulates “The Second Fundamental Law of Capitalism” as a: β = s/g (s: savings rate, g: growth rate). Hence, if s increases and g decreases, it causes a rise in capital accumulation.