Impact of Macroeconomic Factors on Income Inequality and Income Distribution in Asian Countries | Asian Development Bank

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Impact of Macroeconomic Factors on Income Inequality and Income Distribution in Asian Countries

Publication | March 2017
Impact of Macroeconomic Factors on Income Inequality and Income Distribution in Asian Countries

Initial increases in gross domestic product redistribute income from the poor to the rich, but long term increases redistribute income from the rich to the poor.

We examine the macroeconomic determinants of income inequality using dynamic panel data analysis based on the generalized method of moments over 1990–2013 across 33 Asian countries. In addition to the macroeconomic factors, we incorporate a series of political economic and demographic factors to provide more realistic estimates. We found an inverted U-shaped (parabolic) relationship between gross domestic product (GDP) and inequality, supporting the well-known Kuznets curve. Apart from that, official development assistance (ODA), education, and labor force participation reduce inequality while higher inflation, political risk, terms of trade, and unemployment increase inequality in Asian countries.

We further observed that an initial increase in GDP redistributes income from the bottom 20% of people to the middle class and richest groups. However, further increases in GDP redistribute the income from the top 20% to middle-income and poor groups. Similarly, inflation, unemployment, terms of trade, and ODA are also significant factors of income distribution among Asian countries. We recommend ensuring higher and steady long-term economic growth, and enhanced access to education and employment while maintaining price stability and political stability to sustain more equal income distribution followed by lower-income inequality in the region.

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