Financial Sector Development and Income Inequality in West African Economies

Abstract

The study examined the effects of financial sector development on income inequality in West African economies. The study employed secondary data collected from the World Income Inequality Database, Financial Development Database and World Bank database for the sampled West African economies from 1980 to 2020. A Panel Dynamic Ordinary Least Squares estimation technique was employed using Gini Coefficient and Atkinson Index as dependent variables and financial institution depth, financial institution access, financial institution efficiency, financial market depth, financial market access, and financial market efficiency as explanatory variables. Real effective exchange is the control variable. The study used descriptive statistics to examine the normality characteristics of the series, panel unit root test was employed to examine the stationarity features of the series. Also, the Kao residual-based cointegration test proposed by Kao (1999) was utilized to examine the cointegrating relation between financial development indicators and income inequality. The statistical software employed in conducting the statistical estimation is the EViews 10 software. Empirical findings reveal that financial market access, financial market depth and financial institution efficiency have a significant impact in reducing income inequality in the region. The study concludes that removing hindrances to accessing the financial market reduces income inequality in the West African sub-region. The study recommends among others that economies in the sub-region should increase investment in the financial sector to increase the number of financial institutions which will make available access to financial services. Also, the government of economies in this region should encourage the establishment of new financial institutions to cater to the funding needs of the economies. This will reduce the level of inequality in the income bracket in the region.