THE NEXUS BETWEEN FINANCIAL DEVELOPMENT AND INCOME INEQUALITY IN PAKISTAN

Abstract

The study examines the nexus between financial development (FD) and income inequality in Pakistan captured by the Gini coefficient. On the basis of 1990–2020 data and the ARDL-ECM approach, the findings reveal that FD raises income inequality, where a 1% increase raises the Gini coefficient by 0.16% (long-run) and 0.17% (short-run). Trade openness (TO), foreign direct investment (FDI), and gross national income (GNI) reduce inequality. An increase of 1% in FDI reduces the Gini index by 0.005%, whereas TO and GNI reduce it by 0.05% and 0.04%, respectively. The findings suggest that FD can be enhanced by increasing exports and improving access to the financial market to close income disparities. Policymakers must counterbalance inequality with FD by adopting policies of inclusive growth.